LelapaFund African Small Business Report – 2017 Edition

Written by LelapaFund Co-Founder Jerry Crossan

Two and a half years into LelapaFund we have now analyzed 700+ businesses from 30+ African countries who have submitted a combined €133mn in funding proposals. From Kenyan Luxury Handbags to Cameroonian Video Games to Tunisian Electric Cars to a Ghanaian Livestock Health Tracking App, we can now safely say we have seen it all. We once again thank our networks in the pan-African entrepreneurial ecosystem that bring us our vast pipeline.

In this year’s report we will revisit the metrics we tracked in our 2015 Report  as well as introducing some new metrics we’ve been following. In which regions are the biggest deals hiding? What do East African entrepreneurs consider their secret sauce? Read on to find out!

We have now added an additional dimension to our annual report – geographic regions:

EAC: East African Community

NGA: Nigeria

ZAF: South Africa

ANG: Anglophone West Africa ex- Nigeria

FRC: Francophone Africa

SOU: Southern Africa ex- South Africa

EUR: Europe

Today’s LelapaFund pipeline is dominated by Consumer Goods, followed by ICT and Consumer Services. In the last few years we have seen a surge of homegrown FMCG products ranging from Organic Hair Care products to Gourmet Deli products to Yoga Wear enter the African market, giving multinational brands a run for their money. From the ICT world we have seen a spike in Agri-Tech and Fin-Tech pipeline, with Entrepreneurs solving problems related to soil health, animal husbandry, remittances, insurance and more. Finally, in the Consumer Services space we have seen increased interest from the pan-African Film, Education and Logistics industries.

Is there a trend or sector that we are missing out on? Please let us know in the comments below and we will add it to our sourcing strategy.

Just under half of the entrepreneurs signing up on our platform are raising under €100,000, staying consistent with what we have seen over the last two and a half years. In most entrepreneurial ecosystems, €50,000 can provide enough runway for a tech-startup to cover their tech stack, co-working space and basic expenses while they develop their MVP. Not surprisingly, South Africa and Nigeria led the pack with an above-average percentage of deals over €1mn. Notable big-ticket raises coming out of South Africa and Nigeria include Flying Ambulance Services, Mobile Insurance Platforms, and Healthy Beverage Bottlers.

Launching a new brand of drinkable yoghurt for kids, switching to a revolutionary biodegradable packaging material or buying a juice pasteuriser that rapidly decreases manufacturing time are all examples of product development-related funding asks that come through our platform. Entrepreneurs addressing their marketing needs might need funding to launch a series of radio and door-to-door ads to target their off-grid demographics. Funding asks from an expansion/export perspective include modernising an existing production facility to meet international certification standards, or building out an organic farmer supply chain to meet the rising demand for organic produce.

Regardless of what an entrepreneur is asking for, LelapaFund taps its broad network to see how it can get them technical assistance to help them effectively utilise capital catalysing their growth.

A full 83% of companies that submit a proposal to LelapaFund for more than €500,000 have launched at least one product on the market. LelapaFund includes company stage & traction as one of the pillars of its screening process. While LelapaFund rarely considers idea-stage or prototype-stage companies for follow-up due diligence, management teams with an extensive entrepreneurial track record are encouraged to apply.

Entrepreneurs across Africa are successfully taking their products to markets across the globe. Notable examples include Ongair which started in Kenya and now has a Hong Kong office and boasts 800 clients all over the world. Marini Naturals, a Kenyan based haircare company now sells their products on three continents.

For the following charts, we define SMEs as companies older than 3 years with at least one sales cycle under their belts, and startups as companies younger than 3 years.

Startups across Africa continue to take on very little debt and favour raising money from angel investors and donations from the ever-faithful Friends, Family & Fans (FFFs) in their networks. The limited debt we have seen startups take on is primarily through informal Savings and Credit Cooperatives. While LelapaFund initially started as a startup-centric funding platform, in the short-medium term we are focusing on getting SMEs funded while we develop startup-appropriate investment instruments.

On the SME side, thanks to innovations in financial technology such as mobile invoice factoring & debt-crowdfunding platforms, we see a greater use of debt by the established SMEs in our pipeline. Other initiatives such as the Kiva Direct to Social Enterprise program allow for SMEs with a track record to raise up to $50,000 in zero-interest rate loans from backers around the world. Combined with positive shifts in banking laws facilitating SME lending, we believe there is a positive outlook for SME access to credit.

When most entrepreneurs approach LelapaFund, it is their first time considering an equity raise from a non-angel source. Previously, LelapaFund would hold free investment readiness workshops in Nairobi to prepare entrepreneurs for the long journey of fundraising. All of that information is now available free in our LelapaFund Entrepreneurs Guide. Email hello@lelapafund.com for your free copy today!

We’re curious about the way age correlates with funding ask and success. The graph above shows that entrepreneurs above age 35 tend to dominate larger ticket sizes (60%). Does a tech-startup made up of undergraduate students have a better chance of success than a team of experienced professionals? We would love to hear your thoughts on the topic!

On the whole, entrepreneurs solving Africa’s greatest problems believe that their idea is their greatest competitive advantage. This is a 6x increase from when we last did this report. The team at LelapaFund recognizes the importance of having a strong idea, but puts a greater weight on the company’s ability to capitalise on that idea through an amazing finished product, team, technology stack or distribution channel.

With the rise of alternative exchanges such as the Nairobi Growth Enterprise Market Segment, combined with listing support, floating an SME on a public exchange is becoming more accessible.

Every entrepreneur that goes through the LelapaFLOW due diligence process is taken through an exit strategy module. All equity investments eventually need to exit and LelapaFund works with entrepreneurs to chart that path.

We hope you enjoyed reading and look forward to hearing any comments and questions about this publication.

To learn more about using LelapaFund for your small business, please sign up on www.lelapafund.com – we’d love to hear from you! 

If you are an institutional investor looking to gain exposure to African Startups & SMEs, don’t hesitate to reach out to hello@lelapafund.com to see if our pipeline is right for you.

Not ready yet? Stay in the loop by visiting our Facebook and Twitter pages.

Your Hype-Free Guide to Angel Investing in Africa in 2017

Two years ago, LelapaFund embarked on a project that had been brewing for some time: opening access to investments in African start-ups. African start-ups were the hottest deals on the frontier markets horizon, and our plan was to give small investors like ourselves a chance to buy shares in them. This would involve a new regulatory framework, a slick online marketplace supporting distance investing, and, of course, a community of top-notch entrepreneurs and investors.

The project’s guiding rationale was that using technology to reduce deal transaction costs would catalyse equity investments in the sub $1mn investment space. Famously known amongst development economists as the “missing middle”, this deal size is too big for microfinance, too small for private equity, and, as we like to add, too weird for banks.

Fast forward to today, and that end goal has not changed. Our approach to investing in Africa has, however, been flattened and rebuilt several times through interactions with over 500 small businesses. We grappled with tough questions, like knowing what balance to strike between quality and quantity of deals, whether we should be imposing European venture capital standards on lesser developed local markets, and how we could, or should, reconcile the goal of broad financial inclusion with the exigencies of equity capital.

Somewhere between coaching groups of sixty entrepreneurs in our living room in Nairobi on equity finance basics, and stuffing our suitcases with products to gauge investor interest in Paris, we defined our role as an intermediary. In parallel, we spearheaded the development of a regulatory framework for equity crowdfunding in East Africa, so that African angels may invest in local businesses with appropriate risk awareness, protection and shareholder rights.

This process led us to build cost-efficient products that focus not only on deal execution, but on the pre-deal work required to get companies structured so that financial and impact returns are maximised. Small funds, which we call Venture Partners, can now access opportunities where significant due diligence has already been undertaken by our team, and drive further in-depth analyses using our collaborative tool, LelapaFLOW. Small investors will be able to access deals anchored by a Venture Partner through our syndication platform at www.lelapafund.com.

Whereas other platforms focus on high volumes of lightly vetted deals, LelapaFund sources high-potential companies that are most likely to raise several rounds of capital on its platform. The flexibility of LelapaFLOW allows development finance institutions and investors, be they impact or finance-oriented, to share the burden of rigorous due diligence while ensuring blended returns outcomes aligned with their respective mandates.

If that was too much jargon for you, here are a few tips for investing at the “coalface of risk” in early-stage African ventures:

  • Tech start-ups are not as hot as you think. The vast majority are not investable, leaving you to fight your way into overpriced, overhyped deals. Look towards value-adding agribusinesses, and consumer goods/services companies tapping into new consumer habits. Many of them are solving inefficiencies in their supply chains and distribution channels just to get their product to market, at times leveraging new technologies such as mobile payments to enable or enhance their operations.
  • Know how much you’re willing to pay to play. Ask an angel investor or small fund what the total transaction cost of their last deal was, and you might be hard-pressed to find an answer. For VCs entering the small deal space, making a first $500k investment can easily cost 15%-25% of that amount. For angels, the need to pay attention to your sourcing, due diligence and legal costs is far greater. Consider investing through a platform or angel network to split those costs.
  • Co-invest to learn faster. You will often be told to “co-invest to share risk”, but what does that really mean? For first-time investors, it means that you learn about actual and perceived risks by comparing and analyzing many companies within and across sectors, instead of picking one company and focusing all your time on trying to de-risk it perfectly. In addition, leveraging the trusted networks and primary data of a local partner will ensure you don’t burn all your cash – and motivation – on your first deal. 
  • Your skills and networks are worth more than your money. As with any early-stage investment, creating value is an all-hands-on-deck job. Small funds and angel investors are likely to have minority stakes, but this must not discourage active participation of shareholders, from giving product feedback, helping find and hire talent, to giving tutorials where there is a skills gap in the management team. Crucially, shareholders must hold companies to account, so that good governance distinguishes them from competitors when it comes to exit opportunities.

In practice, none of the above is particularly straightforward. Investors must also heed the usual advice of avoiding over reliance on data, reducing exposure to government corruption and limiting the use of local courts for dispute settlement. Getting your first deal done is likely to take twice or three times as long as expected, and it is important that first-time funds’ operations are as lean as possible through that first deal cycle.

On the flip side, helping build young companies in such fast-moving economies is terrifically rewarding on a personal level, and for many individual investors is a refreshing change from the low-impact positions they might hold in large financial institutions, corporates or consultancy firms.

Thanks to new regulations and technology, many more investors can now experience being a shareholder in an African venture. Such an opportunity perhaps provides as much value through insight into the genesis of markets established on different cultural norms and capitalistic models as it does through its potential for high financial returns. We hope that you will derive both in 2017.

Wishing you a brave new year,

The Lelapa Team