Today, capital raising is one of the most effective ways for startups to grow their businesses and expand their reach. But before you hit “send” on your fundraising request, make sure you understand how your potential capital recipients can best use it.
Ever since the advent of the internet, capital raising has become a essential tool for startups to grow their businesses and expand their reach. However, as with anything, there are grey areas and there are also potential pitfalls. In order to avoid legal hassles and other problems that can befall startups in their early days, prospective capital raisers should understand how their potential funders can best use their money. For example, do they want their money to go toward user development, marketing, or other business ventures? Are they looking for a long-term investment or one that will come to an end once the initial funds are used up? To find out how capital raising in Africa could impact capital raising in other regions, PYMNTS spoke to some of Africa’s most successful and respected startup fund managers. Here is what they had to say.
Why Africa Needs startup Fundraising
There are a number of reasons why Africa is a good place for startup fundraising. The most notable being the continent’s vast and untapped entrepreneurial potential. Africa has the highest rate of growth in the world, with an average of 7.4% per year between 1990 and 2008 – making it one of the most promising regions for corporate entrepreneurship.
Additionally, there is a large unbanked population, particularly in the South, which has the potential to be a lucrative market for startups. Finally, Africa has a large middle class, which is an important constituency to cultivate if you want to raise money from them.
Why Africa is a Good Place for Startup Fundraising
Many first time investors are put off by the high cost of starting a company in Africa. However, startup costs in Africa are largely lower than those in other regions because of the country’s young population, which has made it a fertile ground for new businesses. A study by the World Bank indicated that the average cost of funding a startup in Africa is $89,000, compared to $300,000 in the United States and $182,000 in India.
Additionally, the average age of startups in Africa is just 19. This high level of youthful freshness is what has made the continent such a productive environment for new businesses. The number of startups operating in Africa is also rising at a rapid pace. In 2012, there were 2,446 local companies with a combined capitalization of $21.9 billion. Of these, 1,708 were new companies, and 2,813 were established companies which means they had been operating for a minimum of 2 years.
How to Raise Funds for Your Startup in Africa
As mentioned above, startup funding is largely determined by the amount of money raised by the initial public offering (IPO). However, there are a number of factors that firms must take into consideration before they issue their stock. Among them are the type of offering, the intended use of the proceeds, the regulatory environment and the investor network.
There are three types of fundraising that are most commonly utilized by startups: equity, debt and equity-plus-debt. Equity-plus-debt is the most common approach taken by African startups.
Here’s how each type of fundraising works.
Equity-Only fundraising: This is the most common approach taken by startups that are raising money only from private investors. Firms will simply seek funding from a single source, and they won’t even have to disclose the identity of the investor. This type of fundraising requires less effort on the part of the firm because they aren’t marketing the deal to the general public.
Equity-and-Debt fundraising: When firms want to drum up more interest in their deal, they can issue more stock, usually with additional debt. The added debt makes the company’s balance sheet more looker, meaning the deal receives more favorable treatment from the investment banks. Debt-and-Equity crowdfunding: In this scenario, firms issue debt, but they also offer equity to the public, which is used to repay the debt. This type of fundraising is similar to equity-and-debt crowdfunding, but it’s issued in a securities market.
The Importance of a Good Fundraising Video
One of the most important things a potential funder can do is find a good fundraising video. There are a number of reasons for this: Trustworthy information: The video is the most trustworthy form of advertising, as it is the only form that isn’t tampered or altered in any way. If the video is unclear or doesn’t provide the right information, the fund-raiser will have a much harder time raising money. Experience: Fund-rasing is a highly technical field that requires expert assistance, which is why good video salespeople are so important.
PYMNTS Top Tip for Africa’s Startups: Be Proactive
A startup’s success depends on the relationship it has with its investors. It’s therefore crucial that potential fund-raisers understand the requirements for raising money in their region. A good way to start is by doing some research into your potential investors. You can find information about their personal circumstances and financial situation in your funding document or on your website. You can also talk to your bankers about what stage your company is at and what you need in order to go public. Finally, you can contact other startups in your region to learn more about their experience with fundraising.
Capital raising can be a very effective way for startups to grow their businesses and expand their reach. However, before you hit “send” on your fundraising request, make sure you understand how your potential funders can best use it. One of the most important things a startup fundraiser can do is to get in touch with their investors. Investing in a well-run company is the best way to create long-lasting value for your investors, and ultimately for your company.