On April 4, 2019, Seedstars - in partnership with First Growth Ventures - announced that it was to raise a $100 million sub-Saharan fund focused on early-stage startups called Seedstars Africa Ventures. The fund will be looking to make its first investment before the close of 2019 with their ticket sizes ranging from US $250,000 to US $5,000,000.
The African continent is witnessing extraordinary growth relative to other parts of the world. In return, many investors are looking to set up on the continent to tap into the returns and potential the Continent promises. Seedstars is one of them. The organization notes that “Africa’s growth has consistently exceeded that of developed economies in the past 15 years according to the World Bank, providing numerous investment opportunities.”
Last year, according to the Digest Africa Index report, startups and technology companies across Africa raised a total of $686.4 million in funding across 336 disclosed funding rounds. However, much of the funding - 90% - went to the top 50 most funded companies who were raising later-stage or follow-on rounds.
According to Digest Africa data, in 2018, over 270 funding rounds both disclosed and undisclosed represent funding at the grant stage or seed funding that will require further seed or early/late venture funding. Furthermore, in 2019 Q1 so far, over 70 companies have raised funding with over 65% of these at the early seed stage.
This implies that there’s a need for players that are willing to write immediate follow-on cheques for startups at the late Seed and early Venture stage. Seedstars thinks that it can be that partner when you look at the ticket sizes Seedstars Africa Ventures plans to write.
“While later-stage funding is becoming increasingly available with analysts recording an increase of late-stage transactions in 2018, enterprises across the continent struggle to find long term, early-stage capital,” noted Seedstars.
According to Tamim El Zein, a Partner at First Growth Ventures, the fund is yet to close. He pointed out that “commitments have already been made and we continue to work towards our first close at the end of this year”. Details about the fund’s Limited Partners are not yet public, but Tamim notes that they “come from a variety of industries and continents”.
Like most funds targeting investments into African startups, both Seedstars and First Growth Ventures are European headquartered companies. Usually, such funds that are not headquartered on the continent go ahead and set up offices on the continent. An example is Paris-headquartered Partech Partners - which launched its Partech Africa Fund last year. The fund went ahead and set up an office in Senegal last year which it followed up with announcing the setting up of another one in Nairobi earlier this.
Seedstars, given its already existing history of operation across the continent, will instead leverage that position for its fund. “What’s important to us is that the fund is operating out of Seedstars existing hubs on the Continent, which are set-up, staffed and running,” Tamim noted.
The organization has activities in over 20 sub-Saharan Africa markets and physical hubs - called Seedspaces - in countries like South Africa, Nigeria, Ivory Coast and Tanzania.
“With activities in over 20 sub-Saharan Africa markets and physical hubs in key countries such as South Africa, Nigeria, Ivory Coast and Tanzania, the fund is being developed on strong foundations,” read the press release Digest Africa received. The only addition to the already existing hubs will be in Kenya where they are likely to open an additional location in Nairobi according to Tamim.
When funds launch on the African continent, they usually crowd in the key markets where it is easier to find more deal flow. Tamim maintains that they are looking at building a truly pan-African fund which will seek opportunities beyond the often looked at markets.
“There are scalable enterprises across sectors in a number of countries, including Senegal, Côte d’Ivoire, Ghana, Rwanda, Ethiopia and Tanzania, on top of the “usual three” - (Kenya, Nigeria and South Africa)”.
The fund will also look to invest in businesses that are beyond technology. “Currently most pan African VCs focus on tech and tech-enabled businesses only”. Instead, they will be “looking at innovation at large” which will include ventures in technology and beyond.
“Startups and scalable dynamic enterprises alike lack access to efficient capital even though they have identified the pain points of their market and have the required management capacity to scale,” noted Tamim. Some of the sectors being targeted by the fund include edtech, proptech, agtech, fintech, MedTech, cleantech, telecom, transport and Logistics as well as utilities (water, sanitation, waste).
The Seedstars Africa Ventures fund will invest primarily through equity and quasi-equity instruments. It will also “primarily lead rounds”, though Tamim adds that they are open to co-investing whenever possible.
If the emergence of funds in a market is a yardstick that can be used to measure how mature it is, then the African startup ecosystem is coming of age.
Over the past 24 months, according to Digest Africa data, over 20 funds have been announced as either “First Close”, “Second Close” or “Final Close” targeting Africa at a venture or private equity stage.
These include: Cathay Africinvest Innovation Fund ($169m), Partech Africa Fund ($143m), Proparco Africa Startup Fund ($76m), Novastar Ventures Novastar II Fund ($72.5m), KawiSafi Venture Fund ($70m), PIC Project Development Partnership Fund ($140m), Sun Funder Solar Energy Debt Fund ($42.5m), TLCom Capital Partners Tide Africa Fund ($40m), Sawari Ventures North Africa Fund I ($35m), I&P Afrique Entrepreneurs 2 Fund ($28m), Kingson Capital ($28m), Goodwell Investments Goodwell IV ($23m), VilCap Investments Fund ($17.7m) and Africa Tech Ventures ($17.5m).
Some of these funds are already starting to make investments. For example, Partech Ventures which closed its Partech Africa fund at $143 million has so far backed three companies participating in their Series A and Series B - Kudi, Yoco and Trade Depot.
Private equity players are also slowly moving downstream and taking part in more early stage and riskier deals than before. As highlighted above, AfricInvest and Cathay closed a $169 million fund - $69 million more than anticipated. The fund will focus on African tech startups. Once closed, the Seedstars Africa fund will also be one of the larger early-stage funds on the continent.