What funders are looking for in African startups

As economic growth has started to show consistent trends across Africa over the past 10 to 15 years, the continent is finally experiencing decreasing levels of poverty, increased lifespans, improved living conditions, and a brighter future in general.  In order to continue to see this trend improving over the next 50 years, three key elements need to be in place: stable political environments, improved education and greater access to capital for both individuals and private companies.  Should these three elements be present, it should likely see a marked improvement in GDP/capita, which is for me, the real economic indicator of a continent playing catch up with the rest of the world.

Within the area of access to capital, venture capital plays a vital role in ensuring that entrepreneurs are able to grow their businesses, employ greater numbers of people, and to play a strategic role in lifting the overall performance of the economy.  Thankfully this is starting to happen and over the last three years, there has been a 640 per cent increase in the number of venture capital applications from Africa.

[READ: 12 African startups to watch in 2016]

The sectors that have experienced the highest applications are in descending order: computer software, internet services, ecommerce, agribusiness, media, financial services and professional services.  Surprisingly, from these top investment categories, 40 per cent of the capital raised were for growth expansion phase and 60 per cent was for the start up phase. In terms of job creation per startup, the highest employers were agribusiness in the first position, followed by health services and then education start ups.

From a geographic perspective, the most startup applications have come from Nigeria, with Kenya receiving the most funding overall and South Africa receiving the highest average investment.  Other notable countries on the list are Ghana, Egypt, Uganda and Cameroon.  The areas falling behind and showing the least number of applications fall into the central and northern parts of the continent.

The sources of capital for African start ups have been made by a blend of pure venture capital funds, typically from outside of Africa, but this is changing as local African sources of capital are gradually increasing; this is then followed by angel investors from outside the continent, although again this is also gradually shifting to come from African sources. The final source of funding for startup ventures in Africa is from social impact funds primarily targeting the sectors of health, education, and agribusiness.  The average investment size was $130,000 in 2013, which increased to $205,000 in 2014 and is forecasted to increase to $280,000 in 2015.

When surveyed, these investors listed the following four areas that they look for in an African startup investment opportunity:  strength of management team, size of market, economic growth prospects within that market, and political stability.

Although there have been numerous success stories over the last decade in African venture capital investments, I wanted to highlight a couple of interesting stories that solve African problems in an African way.  The first is IroFit, a Nigerian mobile payment startup that received $600,000 of funding in 2014. The company was founded by Omoniyi Olawale, and has built a mobile card payment system that allows merchants to accept card payments without an internet connection.  In addition, Irofit provided addidtioanl sevices to the merchants such as CRM/loyalty services, data and sale anlytics, inventory manamgement, accouting services and payroll support.  The company as won multiple awards for its technology platform and specifically its unique ability to process card transactions without an internet connection.

Another success story is Tanzanian entrepreneur Elia Timotheo’s company, EA Fruits Farm & Co, which processes and distriburtes fresh fruit and vegetables grown by smallholder farmers.  Given the high elvels of waste in the fresh food disbtution market, Elia saw an opportunity to be an aggregator to small farmers who were unable to get the produce to market efficiently and with low wastage. EA Fruits does all the cleaning, packaging and distributing to regional marekts – and thereby adds enormous value to farmers who are unable to do these essential elements themselves in order to get their produce to market. The company received $200,000 of seed funding which has been used to build out cold staorage facilities and transportation infrastructure.  Elia believes that the compnay will need significant futher funding in order to meet the growing demand for EA Farm’s services.

As Africa continues to grow, it is these types of entrepreneurs that will build the foundations for African development over the next 40-50 years.  However improved access to capital in the form of early stage venture funding will ensure that Africa is able to rise up economically and increase both overall employment on the continent and improve the quality of lives for all Africans. This process is just only in its infancy and it needs to spread to countries and sectors that are currently falling outside of the investments made to date. Should this happen, African will have the opportunity to mature and develop  as it should during the 21stcentury.

*Chris Rolfe is a YPO member and Director at Christopher Rolfe Advisory. YPO is a global network of chief executives connected through the shared mission of becoming Better Leaders Through Lifelong Learning and Idea Exchange. Founded in 1950, YPO today counts over 24,000 peers and their families in more than 130 countries. A number of YPO members are engaged in impact-investing around the world.

As appeared on the CNBC Africa website in conjunction with YPO-WPO