The Seed Valley of Death of Venture-Funded African Companies

I initially wrote the first version of this article in April 2024. I’ve sat on it for a while. I thought it was controversial, and I couldn’t come to a decent conclusion from the article. Nine months later, my views on the topic hadn’t changed, so I thought it was time to publish it. This time, I have an optimistic conclusion to the article. I would also like to preface that my view can be very narrow, and I’d take any feedback or comments. I didn’t update the original piece, so most dates tie back to April 2024.

Here it goes:

African companies that have raised venture capital tend to die at the seed stage. I have many arguments to support this hypothesis, but before we discuss them, let’s go back to 2016.

This was the year when Paystack and Flutterwave came to the forefront, raised capital and got into Y Combinator. Their subsequent Series A rounds signalled a shift, triggering a surge in venture capital inflows across the continent. A flurry of African companies went on to raise a ton of venture capital since then; and the pre-seed and seed rounds started getting bigger and bigger. We’ve even seen companies raise large series A without series A metrics. However, this influx wasn't always conducive to sustainable growth.

Between 2018 and 2021, VCs did not pay attention to the metrics. Interest rates were low, and many companies raised stupendously large rounds at super-inflated valuations. Nobody cared about the fundamentals, and growth at all costs was the motto. It’s relatively easy to sell $1 for 90 cents. Yet, a sobering reality set in as interest rates began to rise in 2022. Investors refocused on due diligence and scrutinised companies more closely, signalling a return to fundamentals.

I believe that venture-funded African companies go to die at the seed stage because of the concept of art and science in venture capital. People often wonder if fundraising is an art or a science in venture capital. The answer depends on the stage.

Pre-seed: At the pre-seed stage, companies can raise capital through great storytelling and painting a picture of the future that doesn't exist. It’s all about the founders’ ability to tell a great story and paint a great vision. This is art. Most companies at this stage don't have revenue but can raise between $250,000 and $1,000,000 at valuations between $1M and $5M.

Seed: At the seed stage, founders typically have a working product with some numbers to support the traction. They are still painting a picture of the future based on the product and the traction. This is a mix of art and science. Companies typically have revenue up to 100K MRR and can raise up to 5M at valuations topping 20 M.

Series A: At the series A stage, stories don’t mean shit (not really, but you get the vibe). Stories matter, but VCs want to see the numbers first. Companies are expected to generate anything between $200K and $500K in monthly revenue, and this revenue is growing between 20% and 30% month on month. It’s a pure numbers game. They are expected to have found product-market fit.

I hope this sets the scene for my hypothesis.

Companies are expected to raise sufficient capital at pre-seed to advance to seed and series A. This is risk capital, not debt. Sufficient is the keyword here. Venture capital does its best work here. The challenge for many African tech companies is raising sufficient capital at the pre-seed and seed stages. They either raise too much or too little.

When they raise too much at the pre-seed stage, they often need help focusing on getting out a decent product with significant traction. They throw a ton of shit at the wall (not literally, of course), hoping that something sticks. Sometimes it does, sometimes it doesn't.

Scenario 1 - When the shit sticks 

When it does, the company can get the product in the hands of their first customers, get feedback, raise more capital to add more features, grow the customer base and reach product-market fit. I am simplifying this because every founder would tell you it's not straightforward. At this stage, the company rises victorious out of the pits of the seed valley of death and can start thinking about raising more capital to grow and scale the product. They can afford to invest the capital raised to reach the right metrics, enabling a decent series A round.

EXCEPT!!!

Over the past 18 months, many African currencies have been devaluating rapidly. The Egyptian Pound has lost 75% of its value since March 2022; the Kenya shilling quickly followed suit with a 50% devaluation, and the Nigerian Naira was kept relatively steady by the government until the new government floated the currency in June 2023, resulting in a free fall of the currency from 460 to around 1,500 at the time of this writing. If you’ve raised in USD but have local currency revenue, you are stuck in some no man’s land. Your local currency revenue may grow steadily, but because of devaluation, your converted USD revenue is either flat or decreasing. This means that while you have the right metrics to raise a series A, the currency devaluation makes your company uninvestable, especially in the eyes of foreign investors.

Scenario 2 - When the shit doesn't stick 

When it doesn’t, companies spend 18 to 24 months tossing around, looking for that sticky product for the right customer. A company that has raised 2M can afford to do this for a couple of years, but after burning 75% of this capital, they start cutting staff, getting lean and trying to stretch the remaining $500K for as long as possible. This goes on for another two years, but when they finally land on the product that works, there is not enough capital to scale it to reach the series A numbers, and they are stuck there. Some become profitable and can survive perpetually, while others die despite having decent products and customer bases.

For companies that don't have sufficient capital, scenario 2 happens to them reasonably quickly.

—The end.

I wrote this article to clarify my hypothesis and share it. The most important question is where we go from here, knowing what we know now. I don't know the answer, so if you know of a working model, please share it with me.

Some answers

October 2024

I was in Dakar for the Big Angel Day Summit and watched a fireside chat by Tidjane of Partech Africa and Hany of Flat6Labs. They brought up another interesting point: essentially, there are two valleys: the first at the seed and the other post-series B. Their point was that there isn’t sufficient capital when companies reach series B.

One of the answers I took for this fireside chat was that we need to grow the African ecosystem significantly so that more companies can exit these valleys. When the ecosystem gets bigger, more investors will emerge with new models that we cater to companies in scenario two, enabling them to exit the seed valley of death of venture-funded African companies.

The second is more of a question than an answer. Does the traditional VC model truly work for Africa? List to OO and Uwem discuss it in this great podcast below:

Thank you for reading.

I’m currently building Borderless, the infrastructure for diaspora investment communities, for which I’m raising a pre-seed. I also co-founded HoaQ, the largest network of African diaspora angel investors, and helped launch Diaspora House, a community of diaspora real estate investors. I’m active on LinkedIn, so let’s connect there.