There is an estimated US$11 billion financing gap for agribusinesses in Africa, with innovators in Sub-Saharan Africa facing several challenges in their investment-raising journey. From the business’s perspective, obstacles include fluctuating exchange rates, poor infrastructure, governance issues, and high interest rates. From the investors’ perspective, businesses may be viewed as not yet commercially sustainable/viable and needing more traction (i.e., just being in the ideation stage) as the costs to investors to facilitate the transactions, costs of underwriting transaction structuring and due diligence, give them negative returns at those stages. In many sub-Saharan markets, the absence of businesses with significant scale creates an inherent gap in the investment system. To bridge this gap, technical assistance and brokering support units play a crucial role in tandem with other ecosystem partners. By providing expert guidance and facilitating connections between investors and promising ventures, these ecosystem players can help unlock the potential of sub-Saharan markets and drive sustainable economic growth.

Southern and Central Africa Communications and Knowledge Management Specialist, Tebogo Masombuka, spoke to Investment Facilitator, Kahembi Mukuwa, to dispel some myths about investment raising and how innovators can capitalize on investment opportunities in the region. 

What are some of the misconceptions about raising investment?

Timelines: A few things need to be clarified about raising investment, primarily revolving around timelines. Businesses have an assumption that once you find your ‘perfect’ investor who loves the business idea, the funds will be received instantaneously, forgetting about the due diligence process and contract negotiations, which, from experience, can take well over half a year (depending on the type of financing) until the first cash disbursement—leading to a level of uneasiness and frustration for business owners.

Only needing a pitch deck: Many startups and businesses often believe that a good pitch deck is the only thing they need to secure funding from potential investors. While a pitch deck or investor teaser is necessary, it is not the only element needed —it is merely a portion of the package needed to support your investor discussions. Providing comprehensive materials and transparency throughout the investment process can increase your chances of securing funding for your business.

Loss of ownership: Businesses assume, particularly around equity investment, that there will be a significant loss of control of their entity. In several instances, equity investors intend to be independent of the companies and have an exit strategy to sell their stake within a set period.

What are the more common types of investment that innovators raise, and why?

We find in the market that grants, debt, equity, a blend of financing, and fund investment opportunities are the more common types of capital raised by innovators. This is primarily due to the region’s tremendous upside potential, rapid urbanization, effective technology absorption, and growing labor force. Additionally, businesses may be small to medium-sized and, as such, have limited access to heavier and more complex financing opportunities. Fund investment opportunities are being driven by development financial institutions and impact investors looking to have tangible impacts within the region and are more willing to take on businesses that may traditionally be viewed as higher risk due to a variety of factors.

What trends should innovators look out for regarding investment?

Agritech: The African agri-tech space has seen a steady increase in funding over the years. In Sub-Saharan Africa, there are over 400 agritech solutions and startups. Africa’s agriculture sector remains a crucial contributor to the continent’s GDP, accounting for approximately 35% and engaging over 70% of the labor force. However, despite this, the continent still imports billions of dollars worth of agricultural products each year. To bridge this gap, we are witnessing a rapid increase in investments in agrifood tech, with a total of US$482.3 million invested so far, 61% of which went to midstream technologies. In 2020 alone, startups in this sector raised an impressive US$185 million. 

Green investment: Sub-Saharan Africa is seeing a growing interest in green finance. Close to 70% of banks in the region see green finance as an attractive lending opportunity. However, only 2% of global investments in renewable energy in the last two decades were made in Africa, indicating a significant chance for financiers and businesses alike.

What can innovators do to become more investment-ready?

Here are a few high-level steps that innovators can take to become investment-ready:

• Assemble a Strong Management Team: The first step towards becoming investment-ready is having a strong management team. This team should seamlessly blend industry-specific knowledge, leadership capabilities, and functional expertise. It is this unique combination that enables the successful execution of a business plan.
• Maintain Comprehensive Internal Documentation: Maintaining extensive internal documentation is another critical step. This includes management accounts, audited statements, market assessments, management bios, by-laws, registration documents, and operations manuals. Such documentation not only helps investors see evidence of progress and traction but also indicates a degree of professionalism and preparedness.
• Prepare Investor Material: Having investor material at hand is also essential. Investors need to see a comprehensive material package that thoroughly explains your business plan, financial projections, marketing strategy, and team credentials. These materials can include executive summaries, business plans, financial models, market research reports, and due diligence documents. These materials provide potential investors with a snapshot of your business and its growth potential.
• Match needs with capital and investors: Finally, businesses should match their needs with the type of capital and investors they seek. For instance, an early-stage company should look for grants or blended equity, while a mature business might be more suited to debt financing as it is more likely to absorb the credit terms.

By following these steps, innovators can confidently and clearly navigate the path to investment readiness.