The Round of Death

Happy Friday!

If you’re new here, this newsletter will get you smarter on Africa’s tech scene in under 5 minutes. Maybe 7 if you’re a slow reader 🐢

If you haven’t already, you can subscribe below.

In this edition we’ll be exploring why there are far less companies in Africa raising Series A rounds, and why we have seen the emergence of the Post Seed/Pre-Series A round on the continent.

In startups, the lines between early fundraising stages are blurred to the point of meaninglessness.

Pre-seed, Seed, Pre-Series A, Post Seed, Bridge Round, Family and Friends rounds.

Today I saw a $1m Pre-Series A.

The week before, Adam Neumann landed a $350m round for a pre-product startup.

Does that make it the biggest pre-seed round ever? 🤔

But maybe the most clear difference between startup stages is the Series A round.

Before this round, it’s all about ideas, early traction and founding team.

Series A is (hopefully) when you’ve proven the demand for your product and you’re ready to scale.

It’s where we see the biggest jump between idea to proven company and one of the most important ‘graduations’ a startup can have.

And looking at the stats, in the United States we have a 34% difference in the number of startups that make it from Seed to Series A stage.

This makes sense. 90% of startups fail, and the ones that cant prove demand for their product in the market should fail first.

But we look at Series A in Africa, we get a slightly different picture. In Africa, the difference between Seed and Series A funding is an astonishing 84%.

We call this The Round of Death. We meaning me. It’s going to catch on 🤞🏾

Why such a steep drop?

There are a few threads of inquiry we can dive into to explain the drastic difference in Seed and Series A funding.

1. Startups in Africa don’t perform as well as their western counterparts 🤷🏾‍♂️

2. We’re still early in Africa’s startup ecosystem 👼

3. There is not enough money on the continent for Series A funding 💰

1) Startups in Africa don’t perform as well as their Western counterparts 🤷🏾‍♂️

Do startups on the continent just perform worse than western counterparts?

On the ‘yes’ side of this, you could attribute it to the lack of a mature startup ecosystem on the continent.

There are less IPOs, acquisitions and success stories on the continent to see the startup ecosystem perform at the same level as the US.

And you can point to the tiny 2% of global venture capital funding that goes to African startups. The financing gap makes it harder for African founders to perform well.

But I think these constraints have the opposite effect.

Founders in Africa know that there is not as much funding in the VC world for them.

This actually forces them to be more capital efficient, proving traction and product market fit earlier on.

Let’s look at two fintech giants for comparison. One of them is (you guessed it) Chipper Cash. The other is Robinhood.

When Chipper Cash raised their Seed Round, they had used $150k in financing to acquire 70,000 users and process over 250,000 transactions.

Robinhood raised a $3m seed round pre-product, with just an idea in mind.

Now, when both companies reached Series A stage they had considerable traction.

Robinhood had a waiting list of 500,000 users when they raised their Series A, but, they had no active product launched to the public. They raised $13m USD.

Chipper Cash also raised $13m USD, but had 1.5 million users doing over $100m in volume each month.

This is one of many examples of wild differences in traction between African startups and the rest of the world.

So let’s call that one debunked.

Founders in Africa have a lot more to prove because of investor sentiment on the continent. They compensate for this with higher traction and product market fit.

Startups in Africa perform just as well, if not better, than their western counterparts.

Note: I’m conscious that this is just one example, but I couldn’t find any other public stats. If you’d like more of a rundown on traction levels vs stage of financing I’m happy to talk you through some more examples, and will probably cover this in a future newsletter.

2) We’re early in Africa’s startup story 👼🏾

The next thread is that we’re early in Africa’s startup story.

I think this one is true.

Since Africa’s last few success stories - like the minting of the last few unicorns (Flutterwave, Andela, OPay, Chipper Cash) and the last few acquisitions (Paystack, Sendwave), the number of early stage startups has only just started to grow rapidly on the continent.

The amount of seed stage funding has 10x’ed from $32m in 2016 to $375m in 2021.

So, it could just be that we’re early and startups on the continent are not at the Series A stage yet.

But recently, we have seen the emergence of the ‘Post-Seed/Seed Extension/Pre-Series A.’

Startups in Africa are ready to move past the seed stage, but aren’t quite able to land a Series A.

What’s happening here?

This leads us to Thread #3 -

3) There is not enough capital on the continent 💰

Africa’s biggest VC firms generally don’t have the capital for Series A funding, with a few exceptions.

While there are firms on the continent, they are concentrated at the pre-seed and seed stage and invest smaller cheque sizes. These rounds tend to be collaborative, and move slowly.

With not enough capital available from local investors on the continent, African founders look to global VC firms to lead their Series A.

It’s not just for the funding and clout that comes from having a global firm onboard - it’s also for the security of future financing.

Last year, we started to see global players come to town, with Tiger, SOSV, Greylock and Sequioa leading Series A Rounds in Africa.

But since the economic downturn, we’ve had to part ways with aggressive investors like Softbank and Tiger. Global firms have also been reluctant to continue investing in the continent.

So, the global Series A is on pause for most companies on the continent.

Startup that want to make sure they can keep growing while proving traction are raising Pre-Series A’s instead.

Funding the Post-Seed Stage

A few forward thinking firms are directing their eyes to this messy post-seed stage.

Zedcrest Capital, a capital management firm, launched an emergency fund called the Knight Fund.

They aim to be the funder of last resort for startups at the pre-Series A stage who need capital before their Series A fundraise.

Talk about timing, they are scooping up great deals that they thought were ‘overpriced before the downturn.’

And Launch Africa, which raised $36.3m earlier this year, sees the opportunity in Seed and Pre-Series A stage funding.

They have been a frequent funder of the Pre-Series A and Post Seed rounds on the continent.

While we have a couple players at the post-seed stage, African startups generally look globally for their Series A rounds, and have more to prove than their western counterparts.

The Round of Death

So, to wrap up, Africa has a huge gap in between Seed and Series A stage startups (aka The Round of Death).

This is not because of performance on the continent.

African startups typically perform better than their western counterparts.

This is likely because we’re early in Africa’s startup story, and many companies on the continent are still at the seed and pre-seed stage.

It’s also could be because there are not enough firms focused on the continent investing in the Series A stage, so founders are forced to look outside of Africa for funding.

This sees an opportunity at the Pre-Series A stage, and at the Series A stage for African companies. (If you want to help me start a Series A fund hit me up 👋🏾)

Now, this just is my take. And it could be plain wrong - so I want to hear from you.

Why do you think the Round of Death is so steep in Africa?

Let me know on Twitter below or flick me an email - I may do a follow up piece if I learn something new.

And that’s a wrap!

Did you learn something new? If you did, reply to this email to let me know.

If you enjoyed this and know someone else who might please share it with them - we want more people to hear about Africa’s booming tech economy.

Catch you next week!