African Tech, à la charnière

I caught up with my friend Linda recently. We met earlier this year and were catching up on a recent call when she used the word “charnière”. It was my first time hearing it, but it resonated with me and perfectly described how I feel about the current state of the African tech ecosystem.

On our call, I told Linda how I spoke to 3 different types of people who succinctly conveyed my feelings. My three conversations were with:

1. A series A startup that is actively looking at the diaspora as its next market of expansion

2. A revenue-generating pre-seed founder considering getting a side job while exploring emigrating options.

3. A fund actively looking for companies to invest in across Africa.

With these conversations, I want to cover three topics that portray where the African tech ecosystem stands. I don’t know where we are headed, but I want to share my observations.

The African Diaspora as the next market for expansion

If you are a founder building in Nigeria over the past two years, you have seen ‘shege’. "Shege" is a Nigerian slang term that describes unpleasant or extreme situations or circumstances. It can also refer to any physical, mental, or financial stress. The Naira has weakened, revenue is declining, and no foreign investors are willing to invest in Nigeria. Founders are leaving in droves, seeking greener pastures or returning to full-time employment. The lucky founders who remain, have a runway and are revenue-generating have realised that the 200 million-strong population of Nigeria have weak spending power and are looking outside the country to make something out of their company. Many are looking to the diaspora as their next market because this demography now has spending power and no longer earns in NGN.

If the African Diaspora were a country, it would have the highest GDP per capita out of all the African countries. The number I’ve landed on is $25,000 (an underestimation in my option). The challenge is that few businesses can pivot, but many new companies, especially online businesses, can build from scratch for this audience. I spoke with many of my peers, and many are thinking about revenue generating from day 1, which brings me to my second point.

Does pre-seed funding still exist in Africa?

My honest answer is no! Or not at the moment. While I’m not here to dash out personal opinions, I can still share them.

Over the past 18 months, I’ve been focused on building. I’ve spent little time speaking with founders for investment purposes, but I still find time to connect and learn from them. I raised a friend and family round last year and decided to do a pre-seed this year. Fundraising was probably the most challenging thing I’ve done. Needless to say, I didn’t raise any capital. I was fortunate to get a lot of feedback from the funds I spoke with, and I’m back to focus on building.

One thing that stood out throughout these conversations is that many active pre-seed funds have moved to the seed stage. I will not name any names, but many funds have raised millions for seed-stage investing. For the seed stage to exist, lots of businesses need pre-seed capital to get to seed. If no funds are invested early, how will companies get to seed and then go to series A? One obvious answer is the syndicate and the friends and family. The thing about syndicate investing is many of them often tag along funds to deploy capital. A syndicate writing a $50K check may not be much because the company will probably be back raising capital again in 6 months.

Many African tech companies have been thinking about profitability from day one because they know there is no capital to support them. If they survive and become profitable, they will not need venture capital at seed and series A. Debt capital would make sense for expansion because they have the revenue to cover interest payments. I hold a thesis about why debt capital will be necessary for African tech businesses, but this is another article in itself.

You cannot blame the funds. Many have been burned at pre-seed and will no longer touch it. The challenge is that the African tech ecosystem copied and pasted Silicon Valley-style investing but forgot to copy the power law that exists in America. Americans are comfortable investing in many tech businesses because the concept of power law is alive and well.

The power law in venture capital (VC) is **a principle that states that a small number of investments will generate the majority of returns while the rest will either break even or fail.

This concept works very well in The US and other parts of the world because they are creating new technologies that can change the course of humanity. A VC that invested in many search businesses in the early 2000s only needed Google to return its investment many times over. African tech companies are mostly tech-enabled and will probably not provide Google-type returns. This is my observation over the past few years, with tiny exceptions. This begs the question: Should African investors continue à la Silicon Valley style? American investors who dipped their toe in Africa during the ZIRP era have all retracted and returned to what they know.

Plenty of capital, no deal flow

We’ve seen all the funding announcements recently, but there are no companies to invest in. This will only get worse over time if founders stop building. It’s already worse for Series A funds because the graduation rate for seed-stage companies dropped from 25% to 3%, meaning many fewer companies are in their pipeline. The graduation rate from seed to series A has generally fallen worldwide. Over the next 12 to 18 months, fewer companies will raise seed capital because few founders are building, and the ones building are profitable from day one, reducing their reliance on venture capital. I don’t think this is necessarily a bad outcome, but what do we do with all this dry powder from funds that have raised millions?

Something needs to change if we want to continue building the African tech ecosystem. I don’t know what that is. This brings me back to the charnière, where I wonder which way we will go.

Thanks for reading