In today’s entrepreneurial landscape, access to capital stands as a barrier for many start-ups, particularly in emerging markets.
Traditional financiers that are averse to risk and with stringent lending criteria, often overlook early-stage ventures that lack collateral or substantial revenue streams.
This is why venture capital has become increasingly attractive to the sector. Kenya attracted close to Ksh.140 billion in venture capital in 2023, surpassing other large economies like Egypt, Nigeria and South Africa as a recipient of this investment.
So just how does venture capital differ from traditional debt?
Bruce Nsereko, General Partner at Seedstars Africa Ventures, says: “Venture capital is effectively equity investments…when an investment is done, shareholding is effectively acquired from the investment. So one is buying a stake into the company, there’s no obligation for the company to pay that money back, really, it’s for that capital to be used to grow that company. Debt is effectively typically a loan, so provision of finance to be repaid, probably with interest.”
But while venture capital is very attractive, it can be extremely hard to come by. For Shamba Pride, a Kenyan start-up looking to ease the access of quality farm inputs for farmers, acquiring venture capital was like squeezing water from stone.
Shamba Pride Founder and CEO Samuel Munguti notes: “I shared over 120 pitch decks and less than 5% got feedback…the feedback is ‘I’ve received your deck and I’m looking at it.’ Less than 1% were successful. So you can imagine the magnitude of the challenge of raising capital for start-ups in the country.”
And even after Munguti got a positive response from Seedstars Africa Ventures, a venture capital fund, the money would still be largely out of reach, months later.
“For you to unlock this capital you also have to meet certain milestones, and for us the milestones were some bit of financial management, some bit of corporate governance in place, so basically we worked for about three months before the money started coming in,” adds Mr. Munguti.
This was in quarter three of 2021, and Munguti says the Ksh.120 million he received has changed the fortunes of at Shamba Pride in a way he could not have dreamt of.
“So we had 20 digi-shops by then and in 18 months we have grown the number of digi-shops to 220, that is 10x growth, and the number of agro-dealers we are servicing has grown to 2700 from 300 agro-dealers,” he stated.
So just who are venture capitalists and where do they get the money to invest in start-ups like Shamba Pride?
Take Seedstars Ventures Africa for instance. They are an early stage investor. Usually they will raise money from larger investors like the European Investment Bank. They then pool it and reinvest it in start-ups and SMEs. These start-ups have to meet certain requirements.
“We look for businesses that are serving valuable markets, so these are significant markets where a business can end up generating multi-million dollar revenues. And effectively we do that with businesses that seek to do that with a very efficient business model. So a business that is generating between 7,000 to 10,000 dollars a month, that is when it is interesting for an early stage investor,” Mr. Nsereko notes.
And it’s not all about the money, as he adds: ”Really we look to leverage our capabilities as a fund to help these companies grow and scale.”
So how can a start up seek out capital from a venture capital fund?
According to Mr. Nsereko; “It can be through direct communication from the companies themselves, so them applying on our websites or we have a portal where SMEs can apply for investment.”
It appears that venture capital funds are not short of money. The European Investment bank has pumped in huge amounts in the last year.
Edward Claessen, Regional Head of the European Investment Bank, says: “We’ve invested roughly 350 million Euros in fund that are active across Africa. Over the years we have invested close to 3 billion Euros into venture capital and private equity fund in Africa. They have invested that capital into circa 2000 SMEs in the continent.”
While securing venture capital funding may pose challenges, its transformative impact on start-ups like Shamba Pride underscores its pivotal role in fuelling growth and success in the entrepreneurial landscape.
