⇓ More from ICTworks

4 Technology Startup Funding Sources for African Entrepreneurs

By Wayan Vota on August 6, 2018

African Entrepreneur Investment Guide

One of the first and most important decisions that African entrepreneurs need to make when raising money is deciding what type of capital they need.

Fundraising is a crucial part of many start-ups’ journeys. While there are a few lucky entrepreneurs who can rely on funding to come from their own savings, or have wealthy friends or family members who can afford to inject capital, most business owners will need to go out of their way to raise funds from outside investors.

Sign up now to get new funding opportunities emailed to you every week!

In this guide, we cover four types: grant funding, debt and loans, shareholder equity, and a mezzanine mix of debt and equity. These four types of funding will apply to most entrepreneurs in Kenya, Tanzania, Uganda, Ghana, Nigeria, as well as other countries.

Grant Funding for ICT4D Projects

By grant funding we mean any source of capital that makes no financial claim on a business in return for providing the funds. This includes everything from grants offered by national and international organisations as well as foundations, to prizes and awards offered by start-up competitions, as well as donation-based crowdfunding campaigns.

The amounts that organisations grant to businesses vary widely – from thousands to millions of dollars. Most common grants, however, tend to be on the smaller side, typically under KSh 5m ($50k). This makes them most appropriate to ICT4D projects, early-stage start-ups and digital development entrepreneurs, or more established entrepreneurs seeking capital to ease cash flow constraints.

Typically, organisations making the grant will put out a call for applications, inviting interested start-ups to pitch their ideas – for example USAID grants. Applicants will need to show how their business or idea is relevant to the grant making organization. A judging panel narrows down the field to several finalists and the winner or winners are chosen from there.

Sign up now to get new funding opportunities emailed to you every week!

While organisations that fund grants typically do not expect any sort of financial return (i.e., a stake in the business, or a promise of repayment), they will often check on the grantees to ensure the money is being used for the intended purpose – during and after the grant has been disbursed – and ask for lessons learned during implementation. Some organisations release grant payments in stages to ensure the company is working towards its stated goals.

Advantage

  • ‘free’ money in the sense that there is no equity or interest to pay → funders have little influence in day to day operations of business

Disadvantage

  • little support besides funding – hard to grow networks or get targeted mentorship
  • long applications and long approval processes
  • post-funding reporting is sometimes extensive
  • grant makers can be inflexible in accommodating start-ups that need to pivot from one business strategy to another

Debt Financing for Startups

Debt financing is one of the most common ways to get funding. In simple terms, debt financing means an entrepreneur takes out a loan from a financial institution, which he or she promises to repay within a predetermined time period and subject to an agreed upon interest rate.

Debt funding can come from various types of funders, including banks, online and mobile lenders, peer-to-peer crowdfunding, impact investors, development finance institutions, microfinance institutions, and others.

As start-ups need to pay interest on their loans, typically in monthly installments, debt financing is best suited to more mature start-ups with stable cash flows. The amount of funding that an entrepreneur can expect to borrow depends on two factors.

  • Lender: On the organisation he or she is turning to – a bank or impact investor will be able to offer a larger loan than a microfinance organization or mobile lender platform.
  • Loan Size: The size of the loan will depend on how much debt the start-up will realistically be able to take on. Early stage start-ups with no product and no customers, for example, usually cannot (and should not) borrow much, while more established companies with proven cash flows will be able to tap into larger pools of credit.

In order to apply for a loan, start-ups will need to show a business plan and financial projections; these are meant to explain how the borrower plans to repay the debt.

When taking out a loan, borrowers typically focus on two key aspects of the financing structure: the interest rate and the tenor (the time until the entire loan must be repaid). The interest rates are seen to be correlated with the riskiness of the borrower – the less likely he or she is to pay back, the higher the interest rate a lender is going to charge, as a premium for taking on extra risk.

The rates are also determined by the central bank’s prevailing interest rates in the country. This is because government debt (bonds) are considered virtually risk-free, so the bank has no incentive to lend money to a riskier enterprise at a rate that is lower than what the government is willing to pay on its bonds.

In case of default, lenders get first claim on any assets the business has, meaning this is typically seen as a ‘safe’ financing structure from the lender’s side, when compared to equity investment.

Debt financing can come in two forms: secured and unsecured loans. Secured loans are a financing instrument in which the entrepreneur offers some asset as collateral, making the loan less risky for the lender. This could, for instance, be a car or debenture over assets that the lender will be entitled to if the borrower defaults on the loan, offsetting some of the risk for the lender and thereby reducing interest rates. Unsecured loans do not have such protections for the lender, and therefore have higher interest rates.

Advantage

  • no need to give up ownership in company

Disadvantage

  • often lenders will ask for collateral
  • interest payments can be difficult to make for cash-strapped start-ups

Equity Investments for Technology Entrepreneurs

Equity financing means an investor puts money into a start-up, in exchange for a portion of the company’s shares. This means the investor becomes a part owner of the business.

Equity investment varies in amount, depending on the entrepreneur’s needs. It includes everything from relatively small (less than KSh 5m or $50k) injections of capital from family members or angel investors, to large deals financed by private equity firms that run into millions of dollars.

Sign up now to get new funding opportunities emailed to you every week!

Prior to making an investment, equity investors go through a detailed screening process, commonly referred to as due diligence. At this stage, they look at the potential for a start-up to grow into a highly profitable business.

Most equity investors understand that the majority of start-ups fail; therefore, they look for growth potential rather than steady cash flows. Equity investors like to back tech start-ups because of their ability to scale with relatively low capital requirements compared to traditional brick and mortar businesses.

In order to receive equity investment, entrepreneurs will typically need to have an extensive business plan, with strong financial models showing growth projections, competitor analysis, proposed approach to marketing, and more. Equity is the riskiest type of financing for investors, as the funders stand to lose their entire investment should a company fail

Advantage

  • no interest payments to pay back
  • investors have incentive to be as helpful as possible: mentorship, advice, connections

Disadvantage

  • sometimes misaligned time horizons: start-ups building for the long term, while investors want to exit quickly
  • control mechanisms can mean entrepreneurs are less in charge of their business

Mezzanine Financing for Digital Development

Mezzanine is a hybrid instrument and refers to financing that sits between equity and debt (hence the name), and combines aspects of both types. It is popular with some investors because it shields investors from certain risk associated with pure equity investment, while still providing upside if a business becomes highly successful.

There are various types of mezzanine financing, including subordinated debt, convertible notes, and equity kickers. These are often combined into a single financing facility; the degree to which an investor is willing to be exposed to risk will dictate the amount of equity upside versus debt for which he or she will negotiate.

Convertible notes (also known as convertible debt) are quite popular in Kenya, especially for early-stage start-ups. There are several reasons why investors and entrepreneurs may want to issue convertible notes instead of debt or equity. For the investors, it provides a level of protection in case the money is used in a fraudulent way – they have the right to pursue the debt issued (typically this is at 0% rate, so they will attempt to recoup their investment).

For entrepreneurs, who expect their company’s equity to be worth more in the future, issuing a convertible note likely minimizes their share dilution. Both investors and entrepreneurs are also likely to benefit from kicking the can on valuation to a later point, when an institutional investor comes in.

While convertible notes can be difficult to understand, the key thing to keep in mind is that the amount an investor puts in as debt will be converted to equity at a later point, to be defined in the contract. The share price will determine how many shares that funding injection will be converted to.

To give a very brief example: a founder and an investor agree to a $50k convertible debt, at a discount of 20%. This means that when the company raises money in the next round, the early investor is able to purchase shares at 80% of what they are worth.

If, for instance, the shares are priced at $1 each in the next round, the investor will be able to purchase them for $0.80. That means instead of buying 50,000 at $1 each for the $50k lent in the convertible note, the early investor will actually be able to purchase 62,500 shares ($50k/$0.80).

There are other considerations and clauses that can be agreed upon, including a valuation cap. An in-depth overview of convertible notes is outside the scope of this guide, but there are plenty of online resources, books, and individuals who will be able to walk entrepreneurs through the complexities.

Advantage

  • mitigates risk for investors, meaning better funding terms than straight equity
  • can delay valuation of start-up which is imprecise in early stage companies

Disadvantage

  • entrepreneurs may need to make regular payments to funders → can be overly complex and expensive to arrange

Learn More About African Entrepreneurship

In cooperation with various financing partners Make-IT published this African Entrepreneur’s Investment Guide as a comprehensive, accessible, and informative tool that can be useful to entrepreneurs in all stages of their business. Its aim is to help Africa’s rising entrepreneurs to navigate the nebulous and sub-optimal financing landscape.

This guide aims at helping start-ups understand and navigate the variety of financing options. These include diverse mechanisms such as grants, seed funds, angel investment, impact oriented venture capital, debt, etc.

Furthermore, the guide outlines requirements, investor expectations as well as investor types in an easily accessible way, and offers practical support to entrepreneurs in asking the right questions when approaching an investor.

More Funding Opportunities

Do you want to get advice on how to apply for USAID grants or get startup investments for technology entrepreneurs?

Then please sign up now to get our email updates. We are constantly publishing new funding opportunities like these:

Filed Under: Funding
More About: , , , , , , ,

Written by
Wayan Vota co-founded ICTworks and is the Digital Health Director at IntraHealth International. He also co-founded Technology Salon, MERL Tech, ICTforAg, ICT4Djobs, ICT4Drinks, JadedAid, Kurante, OLPC News and a few other things. Opinions expressed here are his own and do not reflect the position of IntraHealth International or other ICTWorks sponsors.
Stay Current with ICTworksGet Regular Updates via Email

17 Comments to “4 Technology Startup Funding Sources for African Entrepreneurs”

  1. Word life global ministries says:

    We are an organization looking for funding for startup investment/technology entrepreneur in our community in Zambia.
    Our ministry is called Word life global ministries.
    Vision: to silence ignorance and deception

    • Wayan Vota says:

      Thank you for investing in Zambia. An inclusive digital economy is key to building a safer more prosperous future for the citizens of Zambia. Yet many people remain unconnected to the internet because they cannot afford to access and use mobile services. Only 40% of Zambians have access to 3G connectivity and only 32% use mobile internet – about the same that have a TV or electricity.

      • Chibuike says:

        i have an ICT company in my country Nigeria, The firm is basically an ICT technical base, we deal in all kind of technological innovation, repairs and training. over the years, the company has trained over an hundred persons among whom today about 40% of that population are gainfully self employed, in 2013, the company suffered huge lost from five times consecutive arm rubbery and bugling of our office and since then the company finds it difficult to do much in training the youth from the million of unemployed Nigerians. we have police extract on the robberies cases and the company is registered with the Cooperate Affairs Commission CAC. Please sir, we need a funding body to come to our rescue. Thank you for your help and time.
        Company name: Chitarget Computers
        Registration No: PL17605
        Contact No: +2348030900076, +2348150748275
        Geopolitical zone: North Central, Nigeria.
        Registered office: No 1 Foot hill kufang, Miango road jos
        Present Address. No: 40 Angwan Abuja Riverside Tudun wada Jos( My resident)
        State of Operation: Plateau State
        Email address: chitargetcomputers@gmail.com

  2. Nawa Lindunda says:

    How can I qualify for these funds n what is the requirement for one to attain them

    • Wayan Vota says:

      Generally, the project must contribute to the specific objective of the Call for Proposals. It must also specifically show in detail that it is aligned with the guiding principles of the investor. Projects consisting exclusively or primarily of sponsoring the participation of individuals in workshops, seminars, conferences and conventions usually do not get funded.

  3. I am a professional Dstv installer and also. A professional sign writer Who is seriously need a Startup grand in technology entrepreneur In life So that I can start up a company This. Is for the glory of the lord . Plz Help. Me in any way . I will really appreciate you if my request will be considered with you favourable office.

    • Wayan Vota says:

      Have you looked into freely available, high-quality Open Educational Resources (OER) that could be adapted for use by your company? Training institutions, nongovernmental organizations, and others invest in OER training resources to improve entrepreneurship opportunities for African startup companies.

  4. Tshepiso Marumo says:

    I need funding and training opportunities for my technology startup

  5. Daniel Ngeno says:

    Please give me a clear direction on how to apply for funding to sponsor technology companies.

  6. Forda Becky says:

    If you have a low credit score and you are finding it hard to obtain a loan from local banks/other financial institutions for your technology startup, you can look at alternative funding options that use cars, trucks, tractors, boats, and other personal assets as collateral. I have a loan and got my company funded even though I don’t fit into the conventional lending system.

  7. Macmillan Mafuta says:

    Boyous Community Foundation is a growing institution based in the heart of Zambia who is promoting development through ICTs. We seek to partner with technology companies that can improve our country. Your response will be highly appreciated

  8. Terence says:

    I am a Ugandan by nationality and coming from the least developed part of the country called Karamoja. Kindly inform me on what process I should undertake in order to apply for a grant that can make me obtain support for my small technology company.

  9. Joseph Mwenda says:

    I just checked this website I realized the funding is mainly for IT related projects. Kindly advise if at all you know any organisation that would be interested to fund projects that look into the plight of the vulnerable and less privileged in our society within my community right here in Zambia.

    In our communities we have challenges such as high number of children dropping out of school due to lack of funds and high unemployment levels leading to alarming poverty levels.

    The mission will be to ensure the plight of these people is improved, more number of children are going back to school, and provide startup financing for those who are not employed.

  10. Kibatto Joseph says:

    I am writing here seeking for funding opportunity in my company services among which we have several Medical centers. One is located in Nsangi Buwaali registered as Gods Mercy Clinic. Another located in Katereke-Masaka road. Our Motto is Stand for Better Life.

    My medical services provide the following services
    – HIV testing and Counseling
    – Admission and out patients
    – Immunization
    – Family planning
    – Safe Male circumcision
    – Dental Services
    – Laboratory Services
    – Maternity ward
    – Antenatal treatment
    – Routine Medical Screening

    On the above services we are looking forward to helping young, new born children born with HIV/AIDS by proving them with Education in our startup school in Nsangi. We look at retaining such children without care in our rehabilitation home which we are opening up soon after enough support is attained for our services.

    Kindly we seek for your financial support to enable us sustain the Medical Team which is serving a good work to the people of Uganda with computers, servers, routers, and other information technology systems for health facilities.

  11. Saleuft says:

    I have two technology ideas that need startup funding. if your company wants to use these two ideas i am ready to sell it by 2 or 3 million dollar. A large portion of this seed money will be used for academic sector software developer training. Many poor children who are deprived of education due to lack of money are going to be helped by your investment.

    1. Mobile Device Sleep Aid
    You know that a large part of the population of the world suffers from insomnia. One of the most important reasons of insomnia is the blue light coming from smart phones, laptops and televisions. These technologies affect our normal life. Because of insomnia we are not only losing our ability to work properly in our daily life but also we are facing many physical and mental problems To get rid of this situation we must try to make these technologies the way they are more tolerable to us. In this situation the sleeping mode option of smart phones, laptops and televisions can help us. The users can turn the option on before they go to sleep. It is found in a research that red light helps to sleep by increasing the emission of melatonin hormone. Sleeping mode works just about this matter. When the user turns the sleeping mode option on the device will use all types of data using red light. For instance if any one turns the option on while watching the movie, the device will show the movie using more red light. Similarly if anyone reads books on laptop or smartphone he or she can use the option. Then the text will appear using red light. Same goes for using the social media on smartphones or laptops

    2. Smartphone Use Timer
    The number of people who are addicted to videos, video games and social media is increasing day by day. A big threat in society is for teenage children to become addicted As a result of video game social media addiction, not only children, young people are losing their normal work performance. If someone is addicted to the above mentioned details, but can not come out despite the desire to go outside. On the other hand, parents are afraid to give their children a smartphone. In this situation, a new option named Timer can be added to smartphone, laptops, and televisions. The timer option will mainly control the time of smartphone, laptop and television users. On the other hand, if the parent wants to stop watching videos for all time on his child’s phone. Again, if you want any person through the timer option, you can set the time used for smartphone, laptops, televisions. That means if someone wants to use televisions, smartphone, laptops for two hours a day, then add it to the timer option .In that case, his phone, laptop and television can not use more than two hours on that day. The timer option for smartphone will work with the person’s fingerprint