In November, Surayyah Ahmad and Sanusi Ismail announced the launch of Aduna Capital, a $20 million fund targeted at discovering and nurturing early-stage tech founders across Africa, with a keen focus on the northern Nigeria startup ecosystem. For this edition of Ask An Investor, TechCabal spoke to Ahmad and Ismail about why the fund will focus on northern Nigeria, their experience in raising a fund during a VC crunch and more.

Please share a bit of background on your VC journey

Surayyah Ahmad: I’ve been a founder for almost 10 years, having started an e-commerce and fulfilment service company that was based in Abuja. Back then, I honestly didn’t like the support that I could get in the ecosystem probably because there was no ecosystem to start with. So it was quite a struggle raising funds and I ended up raising around $250,000. In 2019, I had to do an M&A deal because the economy wasn’t aligning with the company’s growth. We merged with a company that was trying to enter the same market.

After that, I started another company in the UK. That is when I accidentally got into VC, mostly due to my knowledge of the African market and serving as a venture partner to a couple of VCs in London. But what was clear at the time was that though I was sourcing deals, I couldn’t source deals from my community in northern Nigeria. There were incredible founders but the issue was that they were more technical and could not put a story together to get investors to be interested in their companies.

It struck me that I was working in the wrong environment where I wasn’t making a lot of impact. I was doing TTLabs, in the UK, as a venture partner sourcing deals for VCs. So I decided to repurpose TTLabs into something that could become an accelerator helping founders in northern Nigeria. So we would incubate them for six months, and then put them through our process to getting funded. Now, I think it was like a Pandora’s Box in that the more we did those things, the more we realised that the problem was deeper.

So Sanusi and I as well as a few other friends aligned on solving this problem. We functioned as business angels because we’ve been investing in other companies. So we thought, how about we come together as an angel syndicate and start to invest in these companies ourselves? So what started as an angel investment syndicate got a lot of traction and interest and eventually evolved into the fully-fledged fund  Aduna Capital is today.

Sanusi Ismaila: I think that all of my experience has led up to this. Firstly having started my own software company in the past and gone through the struggles, knowing where the shoe pinches at times, understanding what it is like to have a vision and want to get it done but not have people think that it’s possible.

Having seen people from a certain region with brilliant ideas that are built into products, and then seeing them struggle to raise capital, I can relate to the problems we are trying to solve as Aduna Capital.  So all of that all of that experience aligns with the firm’s mandate to take some bets that most other firms will not take. We are looking at a region that most other firms are not looking at. We know that there’s a lot of potential in northern Nigeria and we hope that by pioneering investing in the region, eventually, other firms will follow suit. 

TC: The fund will have an explicit focus on northern Nigeria startups. Please elaborate on this decision

SA: So part of what we realised was that Lagos has gotten so much traction and investor interest that although there are incredible founders in Lagos, there are also people who can get funding just because they’ve started a company with a lot of noise. I’m sure you’ve seen the recent news on founder dishonesty and whatnot going on in the ecosystem. 

Northern Nigeria is different in that it subscribes to what is called the honour system. It’s a very high-trust environment and there are a lot of founders doing some amazing things quietly. Additionally, over 60% of Nigeria’s population currently resides in the north so when people put on their pitch deck that Nigeria is a massive market, the majority of that market resides in the north. But as Nigeria is also predicted to become the fourth largest country in the world by 2050, 70% of our population will recite in the north.

SI: There is a geographical advantage in that the north is surrounded by Francophone countries, Niger, Chad, and Cameroon and a lot of trade happens between these countries. I think as other companies are focused on expanding to Ghana, Kenya, South Africa, etc, we are looking to explore the potential of expanding from northern Nigeria to other Francophone countries. It’s about looking at the other side of opportunities that not everybody is looking at.

So we see the North as a ready market to launch products and expand to other parts of Africa. We want to support outliers that are currently in this region. A lot of them have been bootstrapping and have raised small ticket funds but have not raised anything after that. And it’s not because they’re not bankable companies. When you see their books, you’ll see that they are doing very good numbers and are sustainable as well. It’s just because they don’t know how to raise and that we haven’t built an ecosystem of raising VC funding in northern Nigeria. And that’s what Aduna Capital is trying to change. 

What has been your experience raising funds in the current funding winter when LP funds are hard to come by?

SA: It’s an ongoing experience because we have not closed the fund but the good news is that we’ve gotten a fair bit more than half in commitments. One of the strongest things going for us has been our track record. We are both people that have been in this ecosystem for a while and we have shown that given whatever resources we have access to, we can show output and impact that is in several multiples.

For example, our innovation hub bootstrapped all the way and for most of its lifecycle actively turned down grant opportunities. Today, it’s probably one of the biggest sources of technical talent in Nigeria. So people knowing that track record softens the conversation. But it’s also interesting because we’re focusing the fund on an area a lot of people don’t understand. So we get a lot of questions around “Are you sure you can make multiples back?” “How can you assure us?” There is also a bit of hesitance because there are people who are like “Let’s let’s see what you do with your first fund”. To those people, what I always say is this: if this first fund goes the way it’s supposed to, we won’t need your money for a second fund. 

SI: We are indeed in a funding winter and I think it’s important to acknowledge that it’s a difficult time to raise. People might ask why we are doing this. We’re doing what we’re doing now because we believe it is the right time to do it. We’re not the only ones who have launched a fund for northern Nigeria. You might have seen another one that was launched right after us. And I think it validates the fact that we’re seeing this opportunity and we think the time is now. And whether it’s the funding winter, whether everybody’s finding it hard to raise from LPs, we think it’s time to do this now.

In terms of the disbursement of the fund, there is also a keen focus on female-founded startups. Can you expound more on that?

SA: We’re not doing a favour to female founders by deciding to fund 50% of them or deciding to allocate 50% of our fund to companies with at least one female founder. Data shows that these startups have done 64% better than companies with all-male founders. So it is a strategic thing to do because they do return more money to funds.

Part of the problem is that a lot of funds like ours that decide to allocate a significant portion to female founders sometimes don’t even find the female founders to fund. That’s where our accelerators and incubators come in to do some of the groundwork to support those female founders who want to start companies. 

At the end of the day, female founders are incredible and should be funded but there is a need to address the issue of the lack of these entrepreneurs. We need to put structures in place to support female founders to start companies. I’ve had to let go of a lot of things because I had a baby midway and a lot of female founders have had to let go of their dream because of things like this. So I think it’s not even the question of whether we should find more female founders. It’s about creating the right environment for female founders to be able to start companies and thrive.

SI: If you think about things, from just a product perspective, it doesn’t make sense, at least to me, that half the world isn’t being represented in the products that are being built and backed. And that is sure to cause some problems, whether in the near or distant future. I’m hoping that as we start to address this issue, more people will look into it. 

The fund also has a pan-Africa focus. That is always a challenge because Africa has 54 countries with varying cultures and regulatory requirements. How do you plan to traverse through this?

SA: Part of our strategy is to co-invest in rounds. That means for the rest of our deals coming from Africa, we would like to be co-investing with our trusted VC partners. But also, we have an incredible deal flow sourcing system, whereby we’re sourcing some of the best deals from a very wide range of partners across the continent.

We’re not limiting ourselves to the Big Four because our diversification strategy is partly a risk mitigation strategy. We want to ensure that we get the best deals from Africa and what we’re doing is building the network to ensure that we source very good deals. Co-investing with a local VC that is better positioned to carry out some of the due diligence is a vital part of our strategy.

SI: One of the things that we were very clear on from the onset is that in a lot of cases, we won’t be leading rounds. This is useful because if you have local partners, you are better able to address some key issues like market dynamics, regulatory requirements and business development through them. 

Throughout the funding crunch, global VCs who have over the years led cheque-writing into Africa have slowed down. Does this present a deal flow opportunity for African VCs like Aduna Capital?

SA: Our thesis is built on the idea that there are opportunities that exist that need to be unlocked but are not being unlocked. Even at the height of what many people call the zero interest rate phenomenon where money was being thrown around, there was still not a lot of investment in northern Nigeria and women startups.  We’re basically first movers in unlocking value in some of these opportunities. So in short, it is not about filling in a gap left by retreating investors but rather unlocking opportunities which have traditionally never been explored before.

SI: The opportunity now is to invest in genuine businesses. Any company that’s able to survive in this market is likely sustainable and has a rigid business model. Valuations are more realistic and people are now building for their market which is an advantage to investors.

Anything else you would like to add?

SA: We’re looking for founders who have already built something and have some traction. We also want founders who are looking to build for the local market as well as the African market in general. In terms of teams, we’re looking for a team with at least one experienced founder with industry experience.

Additionally, we are looking for founders who aren’t necessarily building just a software product. So if you’re in manufacturing or processing and incorporating tech, we are interested in backing such ventures. In terms of our ticket sizes, we do pre-seed tickets starting from $50,000. We also do follow-on $200,000 tickets at the seed stage.

SI: We are also looking for businesses building unique products. I’ll give you an example. There’s this fantastic business that I know making animal feed from waste. And it’s it’s the most efficient use of capital and biotechnology I have seen. We are looking for people who see something random happen in nature and are trying to figure out why that thing happens and the way it happens. Businesses like that are typically what we prefer to back. I think beyond payments, there are still a lot of foundational problems that Africa has and I’d like to see more people take stabs at some of the really hard ones.

In January, Convergence Partners, a pan-African ICT investment firm, announced that it closed its Convergence Partners Digital Infrastructure Fund (CPDIF) at $296 million, surpassing its initial target by over 18%.

The fund was backed by a combination of existing and new investors, which include global and regional development finance institutions (DFIs), pension funds, and financial institutions based in Europe and Africa. The Convergence Partners Digital Infrastructure Fund is the firm’s biggest fund to date and brings its total funds under management to over $600 million.

The fund is focused on investing in digital infrastructure opportunities across sub-Saharan Africa, including fibre networks, data centres, wireless networks, towers, cloud, Internet of Things (IoT), and artificial intelligence (AI). Additionally, the fund aims to develop and support initiatives that promote access to education, financial services, healthcare, and other essential services through digital technologies.

The fund has invested in numerous companies including Yellow, 42Market, inq, SEACOM, and most recently, CSquared. In this week’s edition of Ask An Investor, Andile Ngcaba, chairman of Convergence Partners, talks to TechCabal about the importance of infrastructure investment, the company’s investment philosophy, and more.

TechCabal: Please share more information on the CPDIF

Andile Ngcaba: According to the ITU Partner2Connect Digital Coalition study, the world currently has a $428 billion digital infrastructure gap, the majority of that being in developing regions like Africa. Africa’s youthful population, the majority of whom are digital natives who require the internet to study and work, makes addressing this need more pressing.

With that in mind, the CPDIF is designed to invest capital in digital infrastructure such as optic fibres and data centres. Having closed the fund, we have started deploying capital in several companies including Yellow, 42Markets, and CSquared. It takes a lot of time to build digital infrastructure so we as Africans need to start now if we want our continent to partake in the Fourth Industrial Revolution. It is only after building the infrastructure that we can be successful in adding applications like fintech, e-commerce, and healthtech solutions on top and driving digital adoption.

How important is it that Africa builds its own digital infrastructure?

AN:  It is important to understand the macroeconomics of Africa including the demographics. The fact that we have so many people moving into the cities means they have to be connected. They need the internet and they need to be online to access education, healthcare, and agriculture services. 

We today talk about generative AI and large language models which need data centres to process huge volumes of data. But to be able to do that, we need to build our own data centres, so that African data can be in the African continent. But these data centres cannot live in isolation because they need optic fibre from the data centre to another data centre, a 5g tower or base station needs optic fibre to your home, etc. So there is a need to fund all these various infrastructure components because we understand what the future is going to look like.

The fund has invested in numerous companies so far. Please share the rationale for how you decide to invest in companies.

AN: We are an impact investor. That means we want to invest in companies that are cognizant of their environmental, social and good governance requirements. We are not only about how successful the company is but also its level of impact on society. I mean, there must be profits and generate returns to shareholders but their impact beyond that must also be clear.

They must treat staff well, look after the environment and adjacent communities, and operate within the right governance frameworks. If you take a company like Yellow, they are helping finance home solar panels in Malawi which changes the lives of people there. If you take CSQuared, they are building fibre in some of the remotest areas in countries like the DRC, Togo, and Liberia which connects those people to the rest of the world. This is what we want to see as an impact investor.

At the moment, do you think that Africa’s infrastructure is on pace to meet the continent’s innovation needs?

AN: I wouldn’t even start to say that this is enough. We need more capital in Africa because as I stated beforehand, the world has a $428 billion infrastructure gap with Africa being one of the areas with one of the leading deficits. The way technology is evolving means that we will always be playing catch up. An example is the transformer models needed to train large language models. Even developed nations are struggling with chipset shortages to go into the servers which train these models. And these countries have been building infrastructure way before us. 

There have been supply chain problems in the world so in Africa, we need to secure our supply chain. Basically, we need to build data centres and put servers for AI and machine learning in those data centres and much more. Unfortunately, because of global macroeconomic issues affecting supply chain and chipset shortages, the world is also slowly getting behind that curve of innovation today because it takes six or seven months to access some of the servers required to run these complex processes. So what I’m saying is that Africa is not the only one impacted by such challenges. We need to rethink about supply chain and resources. 

With these challenges in mind, Africa must think about producing its own chipsets. Africa must think about how to use the rare earth elements around and be able to produce electronics and chipsets. Africa will have two and a half billion people by 2050 and we cannot be a net importer of servers, phones, computers, and the like.  To be able to do that, we need to have stronger research and development efforts.  We need to understand that we have all the rare elements needed to produce such and have to figure out how to process them.

The journey for Africa’s development into building that future digital ecosystem lies in our hands. We must think about producing ourselves. We need servers produced in Africa, we need chipsets produced in Africa, we need semiconductors produced in Africa, we need all these devices for the future of communications to come from Africa. 

The fund’s investment partners include development finance institutions. How important are these in your mission?

AN: Extremely important and their role will remain crucial into the future. Pension funds too. The capital requirements for building out digital infrastructure are extensive so it always helps to have as many partners as possible. 

As an investor, how do you help your portfolio companies traverse through the various regulatory environments as they seek out a pan-Africa presence?

AN: I think what regulators are realising across the continent is that digital connectivity is key to advancing the continent’s development ambitions. So the collaborative effort to have friendly regulatory frameworks is perhaps improving. There’s also a paper published by the Africa Free Trade Agreement which I’m confident will be applied to our industry and harmonise regulations and policies across the continent. There is no need for Africans to roam between each other and pay roaming fees. The movement of data in Africa must be free between one part of Africa and the other

The internet is also one so we should all assist in making people have access to that. And that the Internet belongs to all of us. No one has a claim over this part or that part of the internet because it belongs to all of us. There must be a multi-stakeholder model and that is why you will also see that there is what is called a global internet governance model. These come out of the internet community to make sure that this resource must be protected and preserved because it belongs to all of us. So each country anywhere in the world needs to understand this context. It’s an important issue that we as practitioners must communicate all the time to regulators and policymakers.

Vula is a fundraising assistant that automates the fundraising process for founders. Users input their website URL and the AI-powered platform will craft an application for selected funding opportunities. Founded by Nicholas Rawhani and Alex Goff in 2022, Vula seeks to transform the fundraising process for the continent’s startups and SMEs at a time when raising funds is proving to be tough.

In this episode of Ask An Investor, TechCabal talked to co-founder and CEO of Vula, Nicholas Rawhani, to get more details on how the platform works, what convenience it brings to the fundraising process, and what role platforms like Vula can play in boosting fundraising on the continent.

TechCabal: Please share how Vula works.

Nicholas Rawhani: Vula seeks to answer the question of how we can enable locally-owned African companies access to capital which will enable them to scale up. 

We spoke to more than 500 founders and realised that the process of applying for financing, whether it’s for a grant, pitching to VCs, or applying for a loan, had so much friction and headache. And it takes up so much time for founders that they stop being able to focus on running their business.

So I (coming from a background of helping startups traverse through funding challenges) and my co-founder Alex (coming from this background of using big data to enable automation) started Vula. We realised that if we can start to parameterise the reality of companies and really get the information of companies to be a single source of truth, then we can train an AI for every company, and help that AI to basically be a relationship banker and investment banker for each and every company on the continent. Once it understands the company well enough, it can output what the best possible route for funding is and who can actually fund it. It also helps them apply for that funding. 

But on the other side of this funding gap are the financiers themselves. We had this assumption that development financial institutions, pan-African banks, and others would have sophisticated processes and systems for bringing in businesses and finding opportunities to finance them. But we found that that’s not the reality. So we realised that Vula needed to build for both sides of this funding gap. What makes this model amazing is that we can provide our startup and SME support tools for free to founders while making our revenues by helping these large financial institutions digitise their onboarding processes. 

How does Vula plan to catalyse investment into the continent?

NR: In the USA there’s this concept called the  Common Application where when you apply for university, you do one application, and it basically filters you out and pre-matches you to the universities that suit your profile. Vula brings that same convenience to founders. Searching for opportunities one by one, going through all these different applications, filling in the same questions, and getting the same documents, is all a schlep. We have this powerful platform that not only reduces this process but also helps them engage with financiers in the best way. We believe that by figuring out the best way to facilitate investment, we can 10x the amount of investment on the continent.

What challenges have the Vula platform faced and how have you conquered them?

NR: I’d say on the founder side, there haven’t really been challenges because we’re providing a free service that’s super futuristic to founders and, so far, they love it. I would say however that there is a bit of slowness which comes from the side of financial institutions.  You can imagine how incredible the experience would be if you log in as a founder and immediately see all of the financing opportunities that lie before you. Historically in Africa, financial institutions have been financing very large corporations in mining , telecoms, and not really SMEs and startups.

Our banks make a lot of their money just from transactional banking, but what they are starting to realise is that SME financing is extremely profitable. SME financing that takes place in Europe or in the US is the single most profitable sector of any banking segment, and our institutions are becoming more cognizant of that. So, in the short term, you’ve got banks who don’t really want to engage with SME financing that much, which slows our uptake, but then you have these really innovative banks and financial institutions who are playing the long game and seeing the value Vula adds.

On the other hand, what opportunities are Vula looking to exploit in the funding facilitation market?

NR: We have a very clear three-step plan. The first step is to enable this next generation of digital tooling for financial institutions and once we hit a critical mass of those and it basically becomes a marketplace, the amount of investment inflow will grow exponentially. In the 1950s, in the US, the way that mortgages started to become popular was that instead of the local bank handling all the mortgages, all the bank would do was package up clients who wanted mortgages, and then large institutional investors like JP Morgan would buy that package as a private equity asset. We want to be able to do the same thing for companies across Africa because they’re highly uncorrelated assets. And that’s super promising for our future. But right now, we just don’t have the tools or the data on the continent to make that a reality. So Vula also sees itself as the tool through which we can start to parameterise companies on the continent and create a united vision of what’s really going on, in order to help the very large institutional players in the US or in Europe be able to invest in African businesses as an asset class. And that’s where we’ll really start to see liquidity flow. 

What role will platforms like Vula play in the future of fundraising in Africa?

NR: I don’t think that there’s anything special about a platform in and of itself because we’ve seen many platforms in the past come and go. The idea that you can just put companies up on a platform and bring financiers to the table, and it all magically works out is a bit of an urban myth in the African financing space. So it’s not about a platform. I think it’s about properly understanding what the real barriers are for enabling financing. In reality, the biggest barriers are trust and bankability. There are too many entrepreneurs who just aren’t actually investor-ready. They have been convinced by this VC model that the only way that they can start a business is to go out and convince somebody else to give them money. And that, I think, has actually done a disservice to the continent because we have a culture of starting cash flow-positive businesses ourselves. We have a culture of hustle and grind and making it happen. 

So the future is not about any particular technology or any particular platform, but about ensuring that both financiers and entrepreneurs feel empowered and feel a sense of trust in the market. We want to make them feel that they can actually back ideas that they love, that they can actually build solutions that are going to solve problems, and that they’re going to be able to get the support that they need to continue to do that.

According to data by ChainAnalysis, Sub-Saharan Africa has the smallest crypto economy of all regions, accounting for 2.3% of global transaction values between July 2022 and June 2023. In that period, the region received an estimated $117.1 billion in on-chain value. However, in terms of volume, countries like Kenya, Nigeria, South Africa, and Tanzania had some of the highest grassroots adoptions in the world and ranked in the top 20 Global Crypto Adoption Index. Figures show that transaction volume made up of retail-sized transfers in Africa is at 7%, against the global average of 5.5%.

Despite the fact that African blockchain startups raised $474 million in 2022 to build solutions for the increasing adoption of the technology—up 429% in a year—this is still a pittance relative to the rest of the world. This is a challenge that Crypto Valley VC (CV VC) is trying to solve through their $20 million Africa Fund. The fund invests in early-stage founders across the African continent who are solving some of the emerging markets’ largest problems using blockchain technology.

To understand the history of CV VC’s Africa involvement and to get a better understanding of its investment philosophy, TechCabal caught up with Brenton Naicker, principal and head of growth of the firm’s Africa operations. As part of the Ask An Investor series, Naicker speaks on the state of crypto innovation and funding in Africa, how to accelerate adoption as well as the unique opportunities that the continent holds for crypto innovators.

Please tell us about the work you do at CV VC

Brenton Naicker: I’ve been quite privileged to be in the Web3 space for about eight years now. I was part of the industry organisations that founded the South African National Blockchain Association and the Crypto Assets Association of South Africa. I also spent two years leading business development, growth and expansion at Binance where I launched the sub-Saharan African markets including Francophone Africa.

During that time, I became passionate about the ability of blockchain technology to solve real-world problems for everyday people. And that’s what sort of led me to join CV VC (Crypto Valley Venture Capital) where I have been for two years now. 

So we started back in 2015-2016 in Zug, Switzerland, also know as the Crypto Valley. CV VC was an ecosystem business focused on creating an environment for the startups to come together and learn from each other through workshops, webinars, and industry reports. As the ecosystem started growing because the technology became very popular, there was a lot of economic value that was created. Our founders realised very quickly that unless we were investing, we weren’t participating to the highest level.

So fast forward a couple of months and we set up our first global fund out of Switzerland which was sector-agnostic and investing in companies that used blockchain technology. As the world and the industry started maturing, a lot of stuff started happening outside of the ecosystem in Switzerland and so to remain at the heart of everything, we had to start expanding our footprint out of Switzerland. So we launched our hubs in Berlin and Lisbon.

Our presence in Africa started circa 2020. We were approached by the Swiss Economic Cooperation Organisation to recreate the same Crypto Valley model in Africa and they gave us some seed funding. With a lot of support from the Swiss government and embassies in Africa, we launched in mid-2021 to create a thriving Web3 ecosystem based out of Cape Town, South Africa, with a Pan-African focus. And that’s when I joined the team. 

It became clear very soon after that that the use cases that we were seeing in Africa, as well as the maturity of the startups, were unlike anything that the global team was used to. And off the back of that, we decided that the opportunity was so great in Africa that this ecosystem warranted having a fund of its own. So we raised a $20 million Africa Fund focusing on early-stage African Web3 startups. It is paired with an accelerator program running out of Switzerland. It’s a 10-week program whose content comprises 50% MBA-type content and 50% industry-specific content. We have used our relationships and our networks in the space to bring in some of the best technical talents to come and teach about aspects of building blockchain products.

In terms of our chequewriting,  we offer $135,000 investments for 7% on a convertible note. We also do direct investments in seed, pre-Series A, and Series A but it’s very unlikely that our first ticket will be in a Series A round but rather will most likely be a follow-up. And those ticket sizes are generally anywhere between $200,000 and $500,000. Although I stated we are sector-agnostic, we tend to focus on four verticals which are fintech (remittances, micro-payments as well as SME lending and credit), infrastructure, healthcare and the creative economy which includes NFTs, the metaverse, etc.

To date, we’ve made 14 African investments. Six of those were before we actually had the Africa Fund and eight of them are from the Africa Fund with six being via our accelerator, and two of them being direct investments.

What would you say is the state of Web3 innovation in Africa at the moment?

BN: In terms of the maturity and depth of the Web3 space in Africa, I think it’s almost a tale of a two-edged sword in the sense that the grassroots adoption of the technology is very significant. Although the total aggregate volumes are not the same as in US or European markets, if we look at it from a population penetration perspective, crypto as a technology is far more popular in most African countries than it is in most of the big developed markets. 

The problem we are seeing from the venture side is twofold at the moment. One is the macro environment challenges which have seen a massive slowdown in crypto and Web3-specific VCs deploying capital. The lack of availability of capital is a big hindrance to startups being able to go from zero to one, which is the core process to get them to mature. The second problem is that a lot of the capital in the space sits in those developed markets that I spoke about. Those investors don’t understand the African continent and because of that, they are very hesitant to invest in early-stage startups here. Additionally, because of bad actors in incidents like FTX, Voyager, and Celsius, even the traditional VCs, incubators and accelerators who were traditionally open to this technology have now become a little bit sheepish because of the sentiment and the perception around the industry at the moment. The other issue is also a need for more regulatory clarity on crypto which makes adoption by corporates a bit of an issue.

In terms of the challenges facing blockchain innovators and investors on the continent, which ones would you say are the most prominent?

BN: I think they are on two fronts. One is that certain soft skills aren’t quite as common as they are out in the developed markets. And I think this is just a function of entrepreneurship education. So in the developed markets, the resources, the knowledge, and the education are there. But in Africa, when it comes to sort of things like putting together a pitch deck, understanding unit economics, and financial and business models, there is still a long way to go.

And this is where the importance of programmes like incubators, accelerators, and open-source education are key. The second factor is the hype created by low interest rates which saw massive investment inflow that led to the overvaluation of some businesses which have now crumbled.  This has created an almost sour taste and a poor sentiment for foreign investors which led to capital drying up. And that’s really unfortunate because we don’t have a mature enough ecosystem yet in Africa to fund our innovators. 

On the other hand, what opportunities would you say are available in the Web3 space on the continent?

BN: The biggest opportunity is the resilience of African founders. While everybody else is shouting doom and gloom with the current situation, African founders have always had to do more with less. So this environment is not new to them. We’ve seen that they are still progressing with gaining traction and onboarding users, and they’re able to pivot and change their models quite effectively. So they’re able to face adversity much better than their global counterparts. 

But the biggest opportunity unique to Africa is the willingness to adopt new technologies which significantly improve lives. The perfect example is Africa skipping the whole fixed-line telco and going straight to mobile. And the reason is that people don’t have pre-existing functional legacy infrastructures to hold onto. The existing solution is so bad that people are welcoming to new technologies which is great news for innovators.

What else can you share about what CV VC is up to?

BN: We’ve got the next cohort for the accelerator coming up and it will kick off in March, and applications close at the end of November. And what’s great about that is we want that same sort of YCombinator benefit where you’ve got this global alumni network that you can lean on. The accelerator is a global cohort with a couple of the first weeks being based out of Switzerland. I think this is an unrivalled opportunity for African founders, specifically in the crypto space where they might feel sort of underserved. We also have a massive ecosystem hub that’s based out of Cape Town at the V&A Waterfront so if you’re looking to connect with like-minded people in the space, come through!

Interview has been edited for length and clarity.

In this episode of Ask An Investor, TechCabal caught up with Francois Malan, the incubator CEO at South Africa-based venture capital firm, Savant. Founded in 2004, Savant makes investments in hardware and deeptech startups in South Africa.

Savant was founded on the need to bridge the funding gap which existed for technology businesses. It initially started offering incubation support for startups, and in 2019 added a venture investment element after it raised its first fund.

With over 20 portfolio companies, Savant has invested in sectors ranging from agritech to spacetech , with a keen focus on also providing technical support via an in-house advisory incubator in addition to the capital injection. The firm has so far raised one fund, the Savant Venture Fund I, which is almost fully deployed. A second fund worth R500 million is in the pipeline.

Please share more about Savant

Francois Malan: Savant was founded in 2004, by Nick Allen and Kate Turner Smith who were, at the time, coming out of the government-funded Life Sciences incubator and realising they were very limited in their abilities to really help technology businesses. So we started off as an incubator and operated as an incubator up to 2019. 

By that time, we were also managing a seed fund on behalf of the Technology Innovation Agency and finding funding for our companies otherwise. We then established the Savant Venture Fund I based on the pipeline that we had available, with support from the SA SME fund, the IDC and TIA   along with additional LPs. So we’ve got various components to surround the venture fund, one being the incubator where we build businesses and then also an investment readiness programme, which we launched for the first time in 2022. We’ll be running a second iteration of that in the coming year.

Can you please expound more on the fund and the type of investments it makes?

FM: We have approximately R155 million (~$8 million) in assets under management in this component of funding available to us. We have invested in 23 businesses over the last four and a half years, varying in stages from pre-seed to seed and pre-Series A. We invest in hardware and deeptech-focused businesses solving real-world problems with strong science and engineering innovations. Our portfolio has startups in agritech, healthtech, cleantech, and much more. We are in the process of investing in a semiconductor startup based in Pretoria. We have found a range of really fantastic innovators and scientists and engineers in the local market who are doing really fantastic  work and that’s where we like to play.

You recently made an investment in a startup called BurnStar. Can you please share more details on that

FM: BurnStar is an early-stage business in the hydrogen space. They make clean hydrogen which is extremely cost-competitive and carbon-friendly. It is a world-leading technology in the renewable energy space not only as an energy carrier but also to replace dirty hydrogen in other applications like steel manufacturing and industrial processing. It was founded by Johan Brand about four years ago based on his PhD research and we bought into the novelty of the technology and the commercial application of it.

What would you say is your investment strategy?

FM: The Savant Fund 1 strategy is focused on finding South Africa-developed science and engineering innovations, based on strong science and engineering technologies. Although developed by SA teams, we are also looking for businesses that we can take into other markets, whether that’s across the continent or into other parts of the world. 

We’re looking for companies that have innovative solutions to real problems. Companies that understand who their customer is, and what problem they’re solving for that customer. Those are  really the key understandings. We want to see differentiation. We try not to invest in businesses that are doing B2B solutions. We like to see strong technical teams with a component of business understanding. 

We have now almost fully deployed Fund 1, having committed the fund we had available. And we’re now in the process of raising Savant Fund II which will be a green economy-focused fund. We are targeting R500 million (~$26 million)  with a keen  focus  on South African startups. We will also be targeting other regions on a 70:30 ratio so as to play to our strengths which is our experience in the SA market.

What challenges have you faced in your operations?

FM: I would have expectations in terms of valuations. We’ve been very thorough and conservative in our valuation approaches. The opportunities haven’t gone away in the market but expectations of significant valuations have changed over time particularly when you move from one round to another. There have been some scenarios where people went in at valuations that were unsustainable in the long run, and perhaps have been burnt a little bit. 

We did see a number of deals that we really liked over the last couple of years that we didn’t invest in because their valuations, in our opinions, were out of sync with what we felt those companies should be. But I think by and large, the investments that we have made have been well-valued. And we expect that when we go into the next rounds, we do expect reasonable significant upticks in our valuations. So I think we’ve done well to weather the challenges and I think playing in a niche has kind of insulated us a little bit. Playing in the hardware and deeptech space means that we have been a bit insulated from a lot of the hype in other industries.

What would you say is the future of hardware and deeptech innovation in South Africa?

FM: Savant was founded on the back of a realisation and acknowledgement that there’s a significant amount of innovation taking place in South Africa. Particularly, a significant amount of innovation was taking place but just didn’t reach the market because it didn’t have the right kind of support or funding. So we’ve always been extremely bullish on the opportunities available.

From a market perspective, we believe where there’s a need, there’s a way. As the energy crisis grips the country, for example, we see more and more innovation popping up to resolve that particular challenge. So there’s a huge amount of innovation that keeps going on and we are very fortunate to see a lot of it at a very early stage.

According to reporting by Harvard Business Review, black founders receive roughly 1% of VC funding. The publication further states that one of the reasons for this is that venture capital investors, who are largely white, aren’t good at recognising and developing black entrepreneurs. This is a problem that I’M IN Accelerator is trying to address.

Founded in 2015 and based in South Africa, I’M IN Accelerator focuses on launching black-founded, high-growth start-ups into the African technology sector by providing opportunities to technically apt founders with limited access to resources. 

The accelerator, through its programmes, partners with entrepreneurs to build technology-enabled solutions, facilitating access to various early-stage funding vehicles in conjunction with business development support and one-on-one mentorship from industry specialists.

For this episode of Ask An Investor, TechCabal caught up with Palesa Tabai, programme lead at the accelerator, to get more information on its acceleration strategy, challenges and opportunities in South Africa’s early-stage startup ecosystem and much more!

Please share more about the work that you do at I’M IN Accelerator.

Palesa Tabai: I’M IN Accelerator was established in 2015. One of the co-founders realised that most startups in South Africa were not investment-ready. What we do is that we partner with black tech startups in South Africa with limited resources to help them become investment-ready when they go into the market for fundraising.

We engage our in-house fund managers and investors to identify sectors where there are pertinent problems which can be solved via technology. We then identify startups in those sectors and bring them for acceleration and pre-seed funding where we write cheques up to R2 million (~$106,000).

We also host various events as part of our pipeline development. During these seminars, we identify potential portfolio companies. We also do calls for applications each year. 

Why is the sole focus on just black startup founders?

PT: What we’ve seen from the research we have conducted is that less than 2% of venture capital goes towards black-owned, and women-owned tech startups because investors deem them not investment-ready. So no one wants to take a risk with these startups. So that’s why that demographic is our main focus.

How exactly does the accelerator take a startup to a point of investment readiness?

PT: We have outlined criteria for startups to be part of our programme. Tantamount to that criteria is that we focus solely on accelerating black South African startups which have some significant traction. By traction, I mean that we need to see that they actually have customers who bring in some revenue. We don’t take anyone who does not have a tried and tested product because we need to have an idea of whether the problem you are trying to solve does exist and is worth solving from a business sense.

The acceleration programme itself is 10 months. Initially, after the vetting process, we engage in an intensive due diligence process where we partner with technology experts, market experts, and business experts and take a deep dive into each business to ensure whether this business actually has the possibility to scale. 

During the acceleration, we have a template called the “Growth Strategy Template”. This actually highlights everything about the businesses; the weaknesses, the strengths, and the plan of what they need to do to actually convince investors to put money into their business.

We also have seasoned and matured startups which we pair with mentors or give them the interventions that align with  where they are in their lifecycle. For instance, we actually just worked with a startup which graduated and went on to raise R7 million. So the kind of acceleration services that you’d give that particular startup would be completely different from the ones that you’re given to those who are still very new. 

You stated that you provide up to R2 million (~$106,000) in funding. How much equity do you take for this investment?

PT: What we do is use convertible notes with our portfolio startups. So how a convertible note works is that we’re giving you money today, seen as a loan, then after five years, we can convert that loan into equity. So we don’t take equity right away.

How much traction have you garnered in your eight years of operations?

PT: Since we have been in the market, we have accelerated over a hundred tech startups. So accelerated doesn’t necessarily mean that you are going to get funding. It just means that we have given you the resources to help build your business to be market-ready. So out of those hundred, about 50 of those startups were able to get the pre-seed investment from IDF Capital. The minimum check we’ve given over the years is a minimum of R1 million (~$53,000) and a maximum of R2 million (~$106,000). Out of those 50 startups, 30% were able to raise additional follow-on funding to a combined total of R67 million (~$3.5 million).

From your operations, what challenges and opportunities have you identified in the South African tech ecosystem?

PT: The challenge we have seen is that we have a lot of tech startups in the ecosystem, but there aren’t as many tech accelerators that are able to help them. Also, there aren’t as many fund managers who are willing to actually deploy capital in these startups. 

In terms of opportunities, we are in discussions with different corporates to give us as much money as they can so that we can deploy it into these tech startups. We have spoken to the likes of Telkom, PwC, FutureMakers, IDC and many more who have been receptive to our mission. We have also closed a deal with JPMorgan which wants us to go to universities without that much entrepreneurial activity. We are to identify with women entrepreneurs to spot viable ideas and help them from the ideation stage to proof of concept and then MVP. 

What do you think is the future of the startup ecosystem in South Africa, especially for marginalised demographics?

PT: I’m still very much hopeful, and I think that the work that we do is important in the ecosystem. Technology is the best next thing for us as a society, as a country and as the world at large. For us, it’s just about how we go about the interventions that we offer these startups. Also, I think, what’s important is corporates, fund managers as well as accelerators and incubators coming together to have a conversation on how we can support these startups to the best of our abilities.

Interview has been edited for length and clarity.

Madica, which stands for Made In Africa, is an investment program launched in December 2022 by global venture capital firm Flourish Ventures. Focused on backing pre-seed-stage startups, the program offers funding, technology support and mentorship to underrepresented founders across the continent.

To achieve this mandate, the program is looking to invest $6 million in up to 30 African startups, each receiving up to $200,000 in exchange for equity, availing the much-needed funding. The initial investment phase is scheduled to run for three years.

Some of Madica’s requirements for interested founders include having to be working on their idea full-time, having a minimum viable product, and having received little or no institutional funding.

To understand more about the program’s investment philosophy, on this episode of Ask An Investor, TechCabal caught up with the program’s head of portfolio success to get more insights into the workings of Madica.

TechCabal: Please share more background on how you ended up in the VC industry.

Brenda Wangari: My journey started around ten years ago at Co-Creation Hub while I was part of the AIESEC Nigeria team. I was immersed in the vibrant ecosystem and had the opportunity to work on many exciting projects, including an idea challenge in partnership with Sussex University, targeting university students with ideas on solving education and unemployment challenges in Nigeria. 

Once back in Kenya, I dabbled in tech reporting. I was an operator at two startups and pivoted to being a supporter for five years at Village Capital and now a venture capitalist. I have always been curious about how investors make investment decisions, so to answer this question, my career journey is a natural progression.  

What does your role at Madica encompass?

BW: Madica offers a 12-18 months structured support program for all companies we invest in. I take care of the day-to-day running of this. My role involves keeping a pulse on what our portfolio companies are up to and providing them access to resources they need as they build their businesses. Being a founder can be a lonely journey, so I am always keen to maintain an active community of support that our portfolio can tap into.

As an early-stage investor, what is Madica’s investment strategy?

BW: We care about supporting African founders who have traditionally been overlooked and under-represented in the venture capital funding space. They would typically be considered risky investments based on their sector choice, gender, geographical location, and education status.

Has the current VC downturn in any way altered this investment strategy?

BW: We recognise that the market downturn hasn’t been easy, especially for founders looking for investment capital to keep their lights on. While our strategy has not changed, we are keen to back founders who can efficiently use investment capital to build resilient businesses. 

From the early stage pitch decks you receive, what would you say are the constant lacking elements? 

BW: I will distil this into three things. At the stage at which Madica invests, the team composition is most important to us. While we have seen some very good decks, we’ve also come across some with little to no information on the team to convince us that they have the expertise and understand the problem they are trying to solve. 

Secondly, it’s supply and demand. What is the real problem the company is trying to solve, and is it important enough that customers are willing to pay for it?  At the very early stage, showing some traction is essential evidence, especially if entrepreneurs believe the market is big enough to provide an investor with good returns.

Thirdly, the unique selling proposition (USP) is essential. What makes the company exciting? Is there enough in the product to make people interested and willing to pay for it? The harsh reality is that some ventures are simply not venture-backable. They might be too similar to what already exists or even require a different type of funding that’s not venture capital.

How can startups address those to position themselves to be attractive for VC investment?

BW: We see many founders treat talent as an administrative function instead of a strategic one. How a founder positions their team is critical to how an investor evaluates them. What makes the team the best at solving the problem? Do they have lived experience of the problem? Do they have differentiated skill sets? Do they have a deep understanding of your product and the value chain?

A strong team from the onset will help build investor confidence, especially if their skills align with your business milestones. 

What would say are the things that early-stage startups get right in Africa?

BW: Startups on the continent are very clear about the challenges in their communities and regions. They are in touch with the gaps and are aware of the transformative power of technology to provide leapfrog solutions.

Whether it is access to medical care and professionals, solving supply chain gaps for SMEs, or providing educational materials to youngsters in distant places using low-tech solutions, there is a thirst and an eagerness that startup founders on the continent possess. 

That willingness to learn means that when provided with information and the right resources, these founders can grow their solutions exponentially.

What is the future of early-stage investing in Africa?

BW: There is still a bright future ahead for early-stage investment in Africa. With venture capital and private equity still relatively new on the continent and backing some fascinating tech innovations, it proves there is promise. 

With Madica playing its part, we will unearth gems across sectors on the continent with solid and viable solutions that more investors will find worth investing in.

What role does Madica hope to play in that future?

BW: Madica sees itself as a catalyst in the African ecosystem. We see ourselves not solely as investors but as ecosystem propagators working with other private equity, venture and ecosystem support organisations to ensure more African startups build the global solutions we genuinely know the continent can provide. 

Anything you would like to add?

BW: The continent is rich with ingenious founders with transformative tech innovations. It is essential that founders take the time to perfect their minimal viable products (MVPs), ensure their solution has potential scale, and they do genuinely understand their customers and build strong teams. These are vital things investors look for, among other areas, to back startups. Startups must learn more about what draws investors to back their solutions to ensure they can realise their dreams.

Madica means Made in Africa, so we won’t deviate from our role of unearthing Africa’s best investment opportunities. We hope our work will draw more investors to consider alternative regions and sectors across the continent.

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With a decade of experience in the South African startup ecosystem, Amina Patterson’s work has seen her engage and collaborate with over 60 startups. In her role as head of business operations at AlphaCode, one of the country’s leading accelerators, she acquired hands-on and first-hand experience in the challenges facing startups.

From that experience and insights, she has continued her ecosystem-building work as founder of Solve4x, a firm focused on helping corporates efficiently support startups. She is also an entrepreneur-in-residence at the Allan Gray Orbis Foundation, assisting startups with business model validation and commercial resource accumulation as well as facilitating market, funding introductions, and ecosystem progression.

On this episode of Ask An Investor, TechCabal caught up with Patterson to learn more about her work as well as the state of the early-stage startup ecosystem in South Africa.

TechCabal: Please share more about your journey in the SA startup ecosystem

AP: Over the past decade, my journey in the South African startup ecosystem has been a dynamic and transformative one. I’ve had the privilege of designing innovative solutions for corporates aimed at supporting and empowering small and medium-sized businesses. This experience has allowed me to witness first-hand the immense potential and creativity that startups bring to the market.

At the core of many ground-breaking solutions are startups that possess an unwavering dedication to addressing the most pressing challenges faced by their customers, all while maintaining a strong client-centric focus. It’s this spirit of innovation and tenacity that has consistently inspired me throughout my career.

In 2018, I took a pivotal step in my journey by becoming deeply involved with the AlphaCode Incubate Programme. This decision marked a turning point in my career, as it allowed me to immerse myself in the world of startups more intimately than ever before. Since then, I’ve never looked back. Working closely with AlphaCode and its startups has been an incredibly enriching experience.

Over the lifespan of my career, I’ve had the privilege of collaborating with more than 60 startups across various sectors. This hands-on involvement has given me valuable insights into the challenges and opportunities that startups face in South Africa’s dynamic business landscape. It’s been a journey filled with learning, growth, and an unwavering commitment to nurturing the entrepreneurial spirit that drives our nation’s innovation.

Looking ahead, I’m excited to continue my work in the South African startup ecosystem, leveraging my experience to support and mentor the next generation of visionary entrepreneurs. I firmly believe that startups are the lifeblood of innovation, and by empowering them, we can collectively contribute to the growth and success of our nation’s economy.

What motivated you to pursue a career in the ecosystem?

AP: I’ve always been deeply captivated by the world of entrepreneurship. It’s a realm that’s defined by its roller-coaster ride of highs and lows, its potential to transform communities and nations, and the unwavering mindset required to build a business from the ground up. From a young age, I found myself drawn to the stories of visionary individuals who dared to dream big and take risks.

What truly ignited my passion for the ecosystem was the realisation that being a part of it grants you access to some of the brightest minds on our continent. These entrepreneurs, driven by their boundless creativity and determination, are on a mission to tackle pivotal socio-economic challenges head-on. Their resilience and innovative thinking inspire me every day.

I chose to pursue a career in the ecosystem because I wanted to contribute to the remarkable journey of these entrepreneurs. I wanted to play a role in helping them turn their ambitious visions into reality. It’s not just about fostering economic growth; it’s about being a catalyst for positive change and progress.

Over the years, as I’ve worked closely with startups and witnessed their transformative potential, my motivation has only grown stronger. I’ve seen first-hand how nurturing and guiding these entrepreneurs can impact their businesses, the broader community, and the nation. The satisfaction of being a part of this journey and witnessing the ripple effects of their success is what drives me every day.

In essence, my career in the ecosystem is a testament to my unwavering belief in the power of entrepreneurship as a force for good. It’s a journey that keeps me inspired, motivated, and deeply committed to supporting the brilliant minds that shape our future.

What is your favourite part about the work you do? 

AP: Being exposed to exciting solutions that challenge the status quo. Meeting new entrepreneurs and working with them to overcome the hurdles in achieving product market fit and building thriving, scalable businesses.

What is the most challenging part about the work you do?

AP: The most challenging aspect of my work is witnessing promising businesses grapple with market access hurdles due to outdated corporate processes. Startups often face lengthy sales cycles as they strive to validate their concepts, significantly impacting their time-to-market. Additionally, the fragmented nature of support within the startup ecosystem, coupled with similar mandates, can create competitiveness. We need to re-evaluate the value chain of support that can be offered to growing startups. Entrepreneurs become jaded by receiving the same kind of support over and over again.

Early-stage investments are still hard to come by in SA. What do you think needs to be addressed to increase the level of pre-seed/seed investing in SA?

AP: To foster greater pre-seed/seed investing in South Africa, we must address the risk-averse nature of current investment mandates. These mandates often prioritise maximising returns and lack flexibility. A fundamental mindset shift is required among LPs (Limited Partners) and corporate sponsors, primarily institutional or international investors with limited knowledge of the South African startup ecosystem, to overcome this challenge.

More flexible, patient- and milestone-driven funding models are needed. These models should accommodate the unique market dynamics and challenges faced by startups in South Africa. By encouraging a shift in the investment landscape towards a more supportive and adaptable approach, we can create an environment that better supports early-stage ventures, ultimately driving innovation and economic growth.

What role does early-stage capital play in growing SA’s startup ecosystem?

AP: Investing in early-stage startups is investing in innovation where, globally, we can compete. Pipeline for VCs, PEs etc., would become thin in the next few years if we do not continue to invest in early-stage startups.

What role do accelerators play in ensuring that startups are investment-ready?

AP: Accelerators play a pivotal role in preparing startups to be investment-ready. Their responsibilities encompass several crucial elements:

Viability Testing: Accelerators assist startups in rigorously evaluating the viability of their business model, ensuring it can withstand scrutiny from potential investors and the market.

Founder Engagement: Accelerators facilitate essential conversations among founders, promoting alignment and clarity in their vision and roles within the startup.

Value Proposition Enhancement: They help startups refine how they articulate their offerings, ensuring they can effectively communicate their value to both investors and customers.

Competitive Advantage: Accelerators work with startups to solidify their competitive advantage, helping them differentiate themselves in the market.

Gap Identification and Resolution: They assist startups in identifying weaknesses or gaps in their business strategies, operations, or market approaches, enabling them to address these issues proactively.

Milestone Achievement: Accelerators guide startups in setting and achieving critical growth milestones, demonstrating progress and value creation to potential investors.

Capital-Raising Preparation: Accelerators prepare startups for their capital-raising efforts by refining their pitches, financial models, and investor presentations.

Accelerators serve as crucial support systems for startups, equipping them with the tools, knowledge, and readiness required to secure investment and thrive in a competitive business landscape.

Over the last two years, we have seen numerous accelerators unfortunately close up in SA. What is not working about the model and how do you think it can be addressed?

AP: The challenges faced by accelerators in South Africa over the past few years are reflective of the evolving nature of the startup ecosystem in the country. Several factors contribute to the difficulties faced by traditional accelerator models and suggest potential ways to address these issues:

Misalignment with Local Context: Many early accelerators in South Africa tried to replicate Silicon Valley models that may not have been well-suited to the unique characteristics and challenges of the emerging South African market. This misalignment could lead to unrealistic expectations and outcomes.

Solution: Adapt accelerator models to the local context, considering the specific needs, challenges, and growth trajectories of startups in South Africa. Tailor programs to address these factors effectively.

Funding Expectations: Some accelerators may have set overly aggressive growth and funding expectations for startups, which could be challenging to achieve in the local market.

Solution: Set realistic and attainable milestones and growth targets that align with the local market’s dynamics. Focus on sustainable growth rather than rapid scaling.

Evolution into Venture Studios: The transition of accelerators into venture studios and venture builders indicates a recognition of the changing needs of startups. These models may offer more comprehensive support and resources.

Solution: Embrace the evolution of accelerator models to better align with the needs of startups in South Africa. Provide a broader range of services, including funding and operational support.

Sustainability Challenge: Ensuring the self-sustainability of accelerator programs can be a significant challenge. Finding ways to cover operational costs while supporting startups effectively is crucial.

Solution: Explore sustainable funding models, such as early-stage investments in the startups that participate in the accelerator. This approach aligns the success of the accelerator with the success of the startups it supports.

In summary, the challenges faced by accelerators in South Africa can be addressed by adapting models to the local context, setting realistic expectations, evolving into comprehensive support structures, and exploring sustainable funding mechanisms. Despite the challenges, accelerators have played a vital role in advancing the South African startup ecosystem, and their continued evolution can contribute to its growth and success.

Anything else you would like to add 

AP: Let’s unite and collaborate for South Africa’s startup ecosystem! It’s time for all stakeholders – corporates, universities, government, startups, accelerators, investors, and ecosystem players – to collaborate effectively. Together, we can compete on the global stage and work towards a common cause: fostering innovation and prosperity in our nation.

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Knife Capital recently closed its $50 million expansion fund, ‘Knife Fund III.’ The VC firm will use Knife Fund III for the “expansion of African innovation-driven companies.” It will also power follow-on funding for some of Knife Capital’s portfolio companies.  TechCabal spoke to Keet van Zyl, co-founder of the Cape Town-based venture capital firm, to understand how the firm plans to deploy its new fund. get 

TechCabal: What sectors and companies will Knife Fund III focus on?

Keet van Zyl: The fund will consider investments in B2B companies that are globalising South African technologies and opportunistic investments in the rest of Africa. The specific focus will be on growth and expansion stage companies at Series A extension and Series B funding stages.

In terms of sectors, we will be looking at fintech, platform businesses, software, and tech-enabled business services. The typical investment size of the fund will be $3m to $7m as lead investor and through co-investment with other credible funders across the continent.

The investments will take the form of a subscription for shares in the investee, resulting in a significant minority position. Reasonable control will be exercised through a board seat, robust minority protections and a milestone-based investment approach.

How long did it take to close the fund and what challenges did you face in raising the fund?

KvZ: It took a really long time. About two and a half years in the end. COVID caused delays and we did pause the fundraising efforts deliberately for a while. It is actually quite complex to combine international and local funders into the same fund that has a focus on South Africa for many reasons unique to this market. 

While many funders seek exposure to South African entrepreneurial endeavours, there are macroeconomic factors to consider when investing here. It is one thing to pass due diligence but another to get several funders into the same vehicle. So we spent some time enabling that with local and offshore optionality.

How did you overcome those challenges?

KvZ: We had an initial fund close with early fund commitments, a second and final close on June 30, 2023. This allowed us to start due diligence processes and start investing before the final close. We have a group of amazingly supportive funders and they walked the journey with us. We also had great advisors through the process and it does help that some of our Knife Partners are based in the UK to enable the offshore structures with real substance.

For startups looking to raise from Knife Fund III, what are some of the factors you will be considering before writing checks?

KvZ: We look for mainly 3 broad themes: 1) An awesome product/service; 2) A large addressable market for that product/service; and 3) An entrepreneurial team with the ability to execute the growth of an awesome product/service into the large market. This naturally has many elements, but important to note that a good product/service does not necessarily equal a good company, and a good company does not automatically translate to a good VC investment. 

Knife Capital looks at many elements before writing checks, but the companies who get there show early traction, have a path to positive unit economics, are capital efficient, can demonstrate a high growth rate towards sustainability and would be acquirable by a potential exit partner universe at a financial return that makes it all worthwhile.

There has been some concern about SA startups exiting too early, with some experts citing a lack of capital for follow-on rounds as a reason. What role will Knife Fund III play in solving this problem? 

KvZ: Support to SA startups at the early growth stages is key to advancing innovation, job creation, and economic growth in the country. Despite their immense potential, promising South African startups that have managed to grow beyond the Series A funding stage often struggle to find the capital they need to scale further and take their innovations into the rest of Africa or to a global level.

Sometimes when startups try to raise growth capital, they turn to strategic investors who seize the opportunity and make a full acquisition offer. Knife Fund III will assist in closing this funding gap – but much more needs to be done to back our best businesses as they scale continuously. There is still however a massive seed funding gap in SA.

Knife Capital has a record of exits. How will this fund work in facilitating the continuation of that reputation?

KvZ: Knife Capital has a proven record of exit-centric business building and preparing South African technology startups for strategic acquisition by the likes of General Electric, Visa, Garmin and Uber Eats. It successfully divested its entire Fund I, which is a rare achievement in the African venture capital space. Fund II has started with some exits and a few more are being worked on at the moment. 

In Fund III we will use our skillset and experience in applying what we learnt in building sustainable high-growth businesses and negotiating exits, as exits rarely just happen.

South Africa dropped down the ranks of attractive VC destinations on the continent. Can Knife fund III turn around the country’s fortunes? 

KvZ: Yes for sure. I don’t really see it as a competition vs other ecosystems in terms of deploying funds or attracting huge volumes of VC. Each country has its unique environment with challenges and opportunities for entrepreneurs. Because of scarcity, South African entrepreneurs just had to be more capital efficient – a metric that is standing the local scale-ups in good stead in a global downturn.

What is the role of growth capital in helping to build a more resilient and valuable startup ecosystem in SA?

KvZ: Capital is an enabler for growth in a disruptive startup, as are other things like product, customers, team and business model. Any VC ecosystem needs it to build resilience and recycle the capital back into the ecosystem for a virtuous cycle.

In terms of deployment of the fund, what’s next?

KvZ: We are closing out on legal docs for two further investments at the moment, and there are a few concurrent due diligence exercises running. The pipeline is robust so there will be some steady deployment flows. We are also working on some exits for Fund II.

What is next for Knife Capital?

KvZ: To continue sharpening our operations as a fund manager across each pillar of our >> ‘Find, Make, Grow, Realise’ investment cycle. Ultimately, Knife Capital aims to contribute to building a credible venture capital asset class across the continent. 

And in order to do so we need to continue catalysing sustainable businesses and returning capital to investors with returns commensurate to the risk of VC. We are also looking at our structures and partnerships to evolve and innovate as a business. This includes our Grindstone Accelerator.

Interview has been edited for length and clarity.

Although he’s Sierra Leonean and was mostly raised in the United States, Efayomi Carr began his entrepreneurial journey in Nigeria. His first taste of entrepreneurship started with Transparent Nigeria, a media startup he and his friend founded. “We saw an opportunity to disrupt the media space; we saw that many young journalists and interesting reporters just didn’t have an outlet for their stories,” Carr, now a principal at Flourish Ventures, said. 

“That was when I got the bug for leveraging entrepreneurship to create interesting products and enable others to facilitate success for other people and encourage other people to have opportunities,” he continued. That bug has led Carr to work as head of marketplace at Jumia, and as chief financial officer at Lori; after which he covered Africa for Quona Capital, a venture capital firm. Between those roles, he served as an advisor to the Sierra Leone government during the height of the Ebola virus crisis. 

Carr has invested in 7 African startups at Flourish Ventures, including FairMoney and MaxAB. He also co-founded Madica, a Flourish Ventures investment programme for African startups that focuses on startups “that receive a disproportionately small share of venture funding.” Over a call with me for TechCabal, he talks about what he has learned from investing in Africa and his perspective on venture funding in Africa. 

Muktar Oladunmade: What’s Flourish Venture’s investment thesis for Africa?

Efayomi Carr: We’re a global early-stage venture capital firm headquartered in Silicon Valley, but we’ve invested in Africa for over 10 years. In Africa, we focus on the impact of our investments and how the companies we invest in engage with their end users and businesses to create solutions. We’re driven by a core thesis about creating systemic change and building fair financial systems. 

Our core mission is to invest in companies and individuals who can create financial products and services that can level the playing field and give opportunities to more people and businesses, which can generate wealth and opportunity. We have invested in everything from digital credit, challenger banks, payments, and embedded finance to achieve this.

MO: What do you look for in founders and startups before investing?

EC: For founders, one important quality that very few have is being detail-oriented. You want someone who is very detail-oriented, can get their hands dirty, and knows their numbers, customers, and product incredibly well. They should have a high-level vision that they can articulate. 

We want someone who knows where their industry and customers are going so that their business can anticipate changes and be at the forefront. It’s challenging to find a founder with those overlapping qualities of attention to detail and understanding of intricate problems that can articulate a high-level vision and motivate others as a leader. That’s the most important thing to look for in a founder, aside from the obvious things like integrity and experience. 

For businesses, we look for businesses that can affect real change. One of the unique opportunities of working in Africa is that there are a lot of problems that need solutions. We are all in a position where we can impact our communities. So we want to invest in businesses that can affect that change and create solutions. We look at these solutions that can impact people and scale so that they can impact a broad range of people over time.

MO: What red flags do you look for, and how do you perform due diligence?

EC: For founders, their track record is the most critical way to evaluate someone. When doing diligence, we talk to previous and current colleagues, bosses, and employees to understand the founder’s character, how they operate, and how they handled past challenges. 

For businesses, we use standard elements like financial, legal, and business due diligence and how businesses interact with their customers. We have an advantage over others because we have a longer track record. We have companies across six or seven African markets with a network of experts and investors that can give us quality intel.

MO: What does your ticket size look like? 

EC: We typically invest $1 million to $5 million as our first check. 

MO: Besides macroeconomic conditions, are other factors driving the decline in VC investments?

EC: People always point to the amount of capital deployed to show the success of a venture ecosystem, and that’s misleading because venture funding, like any financial asset class, is a returns-based business. It’s not a deployment-based business. If you look at the returns investors see in venture capital, they’ve gone down. We haven’t seen the expectations that investors had two or three years ago. 

Everyone needs to reassess what the overall potential is for this asset class. In Africa, every year, the amount of capital being deployed increases, yet we haven’t seen a spike in exits, substantial acquisitions, or IPOs. When we see this money coming in but don’t see investors getting returns, it means that over time, there’ll be more reluctance to deploy more capital.  

Macroeconomic conditions are a huge driver for seeing capital dry up. The other driver is that there has been a different return profile, so investors are finding that there might be less of an opportunity than they originally had. This isn’t irreversible by any means. That trend can shift, especially as exits happen over the next few years. But that’s really what the landscape looks like today.

MO: Which is more important, the pitch, the leadership, or the business model?

EC: This comes down to the stage. For me, the pitch isn’t a very important factor. It’s a good sign and can show the founder’s credibility if they can attract other investors and rally a team. 

At the early stages, leadership is most important. Do they have these qualities we look for in a founder (integrity, keen attention to detail, a high-level vision they can articulate). I look at the leadership team because the business will change as they refine their product and service over time. The early stage is about leadership; when it gets to the later stage, it’s much more about the business model. That’s because the stakes are higher. There has to be a lot more certainty around later-stage business models because, at that point, the strength of the leader or the strength of the pitch has much less effect on the overall success of the business than it does at the earlier stages when it’s determined mainly by the leadership. 

MO: What does a successful investment look like to you? 

EC: We consider some elements, such as returns and hurdle rate (the minimal rate of return required by an investor from an investment). To prove the success of this asset class, you need to have financial returns that are competitive with those of other regions or asset classes. Otherwise, there will be no more capital. If we prove that people can make money investing in African tech startups, more people will invest in African tech startups. The financial returns are important, not just for an individual firm or company, but for the ecosystem as a whole.

The second element is the structural impact on the financial system. So, as I mentioned, we invest in businesses that can fundamentally shift how people access financial products. We identify these impact themes for each sector that we can chart over time. For instance, with neobanks, we want to understand the impact of neobank investment in Africa. Does it mean that more people have bank accounts and debit cards? Are more people able to access credit? Can more people pay with methods other than cash? 

MO: What lessons have you learned from investing in Africa?

EC: There’s a broad way to talk about that and a very detailed way based on each sector we focus on. On a broad level, we’ve learned that there is massive opportunity in Africa, especially in the fintech space. This report from BCG and QED shows that vertical (upward) revenue growth will continue over the next decade or so. We’ve seen some of the original pioneers and fintechs that have made innovations that have fundamentally changed how people operate, like Flutterwave (a Flourish Ventures portfolio company) in Nigeria, which has changed how people can purchase things online.

We have seen that these investments can change people’s lives, and we’re still in the early days regarding innovation, which is encouraging. We have also learned that investments take a lot of time. People always think overnight successes exist, but we’ve been doing this for 10-plus years, and the most successful investments didn’t happen overnight. It took years for teams to solve problems daily by being super resilient, building and sustaining communities and partnerships. There are no shortcuts to success in this industry. It’s been encouraging to see how we’ve had all these amazing success stories by being more patient with our founders and not expecting everything to happen overnight.

MO: What are some trends you have noticed in the market?

EC: Fintech valuations have dropped by 50% in the public markets. That means if, at the later stages, people are expecting 50% lower returns, it will claw its way into the earlier stages, where valuations will come down. The early stages have been the least affected by the temporary market swings, but it’s still happening.

Also, because of the funding downturn, investors have shifted from growth at all costs to finding the path to profitability. Investors have shifted from expanding and worrying about it later to focusing on markets, core products, and product market fit before putting additional money in the tank. This reversion to fundamentals will create stronger and more resilient businesses in the long run. Two years ago, businesses could have bad fundamentals but attract capital because they grew quickly. In contrast, the slow-growing, strong, and resilient businesses could not attract capital. Now, resilient businesses are attracting capital, which I think is a net benefit. It means that the companies that emerge in that race today will have a higher chance of success than those that raised funds two years ago. I think it’s encouraging because it’s forcing people to focus on cash preservation, unit economics, and profitability over time instead of just growth at all costs. 

For many of us, this is our first time going through a true economic downturn or even economic instability, especially in venture markets, which have just been going up for the last 10 years. And so it’s a learning experience for all of us. We’re all participating in this. At the same time, we’re all learning these lessons and getting these scars, and it will make us more discerning in the future, which is also a positive thing. We will all be better mentors, stewards of capital, and founders if we can weather the storm. 

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