With African start-ups expected to attract up to $2.8 billion in financing 2021 according to projections by various indexes, what lessons can Rwanda pick from previous years of venture capital? A recent report by AfricArena, which is involved in fostering the availability of capital to A frican tech founders, revealed unique characteristics of markets that propel venture capital. Demographic advantage Various aggregators and indexes show that markets that have been able to attract the highest number of venture capitalists and funds have demographic advantage as it is indicative of the market potential of the start-ups scale and growth. For instance, Nigerian start-ups received investment of $307M in 71 deals in 2020, an average of $4.3M per deal and $747M in 2019. The report’s authors say that while the West African nation does not fair as well in most indicators such as ease of doing business, the estimated population of about 200M is a big incentive for venture capital. “Foreign investors are likely attracted to the Nigerian market due to the perceived favourable demographics which would result in increased demand for investment. Private equity and venture capital investors seem to be attracted by the size of these economies and the opportunities that have emerged in these countries,” the report read in part. With the East African region perceived as highly integrated, Rwandan Start-ups stand a better chance to attract more venture capital by targeting the region with their products and solutions. The East African region has a population of about 175M and over 250M including DR Congo. “It therefore appears that the East African market is highly valued. This is as a result of a more mature ecosystem that was initially supported by impact investors,” the report read in part. Legislation The report also observed that countries that ease processes required for foreign investors to set up offices and settle in the country have ability to attract more capital as it is the more prudent way that Seed stage investments are made. “It is very difficult to invest remotely into seed stage startups, so it is best for VCs to have a base where they are investing in order to understand the market better and deploy capital quicker. There is therefore an increasing need for countries to enact legislation to make it easier for businesses to incorporate locally, making it easier to start a business as an entrepreneur, but also to start a local investment fund and invest in seed stage businesses from the country,” the report noted. Rwanda was listed among countries that have eased the process for investors to set up operating bases in the country. Marketing and promoting the aspect could see Rwanda positioned to attract more capital. “Developments associated with the efforts of national governments within Africa to implement supportive public policy to streamline business regulation for small businesses may attract more and more interest from investors and more VC investment in these countries. Implementation of the Start-up act With Rwanda set to soon have a startup act aimed at supporting the entrepreneurship and business ecosystem in the country, experts say that it makes it easier for all parties to raise capital, set up companies and deploy capital. Experts say that with the start-up act rolling out strategic incentives and interventions will accelerate the formation and sustained scale of innovative and high-growth firms and consequently capital investment. “A good example is Rwanda, who has positioned itself as the hub for East Africa. So you find that many businesses go there to try and validate their business model, because it has an environment that is very conducive for foreigners to get in, to test their business models to find proper product market fit, and position themselves to scale into the larger East Africa. So I think there’s a realization as well, among governments in East Africa, particularly to provide an environment that can attract investments,” report noted. Provisions for due diligence Increased funding by venture capitalists is often preceded by due diligence as the investors seek to understand the firms and ecosystem. The need for due diligence is much more necessary in early stage and seed investments. “It’s very difficult to invest remotely into seed stage startups. If it is a later stage, you can find which startups are doing great, because we have the revenue, and market share, and we can see the track record, but for seed, we cannot see anything,” investors quoted in the report said. With that, Rwanda requires provisions for investors to conduct due diligence as well as have necessary supporting data for investor insight into the market. The report noted that provisions by firms seeking capital to accommodate portfolio assistance by the investors in roles such as advice and strategic support could improve the chances of securing capital. This is because the presence of some investors in a firm in the various portfolio assistance will increase the chances of other investors following suit. “The validation that you bring [as an investor], the faith that you’re going to continue to support the business in terms of funding. The fact that people can trust that the business will be institutionalized. All of those things are valuable. And at the next round - investors also follow investors who are successful,” investors said. Other aspects that could improve chances to attract Venture capital include quality of incubation, diversification of operations as well as cooperation with corporations to raise the profile of solutions.
