Invest in African Investors: A long-term solution to funding underrepresented local African founders

My name is Nwanacho Nwana and I am extremely passionate about Africa and African entrepreneurship. I was born in the United States to two Nigerian parents, and while I did not grow up in Nigeria, I have a deep love for my country and Africa as a whole.

I have always had a passion for starting and running organizations. At MIT, I served as 4-year class president and co-founded the Minority Business Association where I also served as president for a year. After graduating, I co-founded the Engineering Social Change initiative with MIT Sloan’s Office of Undergraduate Education that brought together MIT alums from intern to C-suite level to discuss social issues present in the workplace. Additionally, I started my own small public speaking company, and I have coached MIT professors on presentations given to Fortune 500 executives and a country government.

There is something special about having the confidence to pursue an idea, and having the community and resources around you to make it happen. I have been privileged to have both of these things so far in my life, and my biggest hope is that these same privileges can one day become a reality for the talented and brilliant individuals back home.

Africa Rising?

There has been a lot of buzz around the increasing capital flowing into companies focused on the African market. As of June, African startups had raised $1bn in 2021 which was 3 months faster than it took to reach that milestone in 2020, and 5 months faster than it took to reach that milestone in 2019.

Many of these ‘African’ startups receiving large checks, however, have one or more non-African founders, and those that are African often have done part or all of their schooling outside of Africa. Many of the ‘African’ startups raising significant money, like Opay and Kune, have non-African CEOs. Additionally, many of the CEOs and founders that are actually African have attended schools outside of Africa like Stanford, Harvard, and Oxford. I fall in this category of African, and while I am 100% Nigerian by blood, the majority of my privilege, experience, and exposure has been non-African.

When discussing issues of representation, it is extremely important to look at the actual data to not only make sure all conversation is rooted in the objective reality, but also to produce long-term solutions that are catered to the nuances of the issue at hand. I will first use data to attempt to answer questions surrounding the investment in local African founders. After that, I will show the investment activity data of VCs in Africa, North America and Europe to uncover the true root of the representation problem.

Investment in Local African Founders

Maxime Bayen, Senior Venture Builder at BFA Global and one of the most respected sources of information regarding venture capital and startup deals in Africa, released a dataset called the ‘2019–2021’ Africa Deals Database. The database includes 672 startups operating in Africa with at least one founder from Africa. Additionally, the database captures deals of $100K+ that took place in 2021, as well as deals of $500k+ that took place in 2020 and $1M+ deals for 2019.

I aimed to use this dataset to answer three crucial questions

  1. How many of these startups are fully founded by Africans?
  2. For startups that are fully African founded, are these founders educated in Africa or elsewhere?
  3. Are startups with a non-African CEO able to raise bigger rounds in general?

Due to the construction of the dataset, and for efficiency purposes, I will be focusing solely on the CEOs and not the full founding teams. The dataset included columns for the school of the CEO and the country of the school, which are both two very important variables for this discussion. Additionally, the CEO is traditionally the face of a startup and often makes some of the biggest early decisions of the venture, so the CEO is a decent founder to focus on to evaluate representation across the startups.

The first question is core to my claim, and unfortunately is not an easy one to answer. While the dataset had the names of the CEOs and founders, it was tough to determine each CEO’s country of origin with 100% certainty. Using imperfect methods, such as the name of the CEO and the location of the CEO’s earliest schooling, I evaluated a random sample of 30 startups in the dataset to estimate where the CEOs are from. I determined that nearly all of the CEOs that attended school in Africa were African, and about half of those that attended school outside of Africa were African.

The second question can be answered by the data. Of the 672 startups included, 369 of the CEOs attended university outside of Africa, 215 attended university in Africa, and this information was confidential for 88 of the CEOs. This confirms that the majority of the CEOs founding companies in African markets that have raised $100k+ are educated outside of Africa.

If we go with the 50% estimate for the percentage of CEOs that attended university outside of Africa that are actually not African at all, then for the non-confidential data points, about 31% of the CEOs are not African at all, about 31% of the CEOs are African but schooled outside of Africa, and then the remaining 37% of CEOs are Africans who also attended university in Africa.

The third question is a bit trickier to answer. The round sizes recorded fall in the following categories: $40M+, $10M-$40M, $5M-$10M, $2M-$5M, $1M-$2M, $500k-$1M, and $100K-$500K. In the below table, I have calculated both the percentage of companies with CEOs schooled in and outside of Africa. I did not include companies with information on CEOs labeled confidential.

Figure I. Local founder vs. External founder deal size distribution (567 total startups)

Starting in the lowest bracket ($100k-$500k), there is an almost even split between non-African and African CEOs. At the $500k-$1M level, the spread becomes a lot larger with 72% of the checks in this bracket going to CEOs who were not schooled in Africa. After the $1M-$2M bracket where the distribution becomes more even, the brackets from $2M to $40 million are heavily dominated by CEOs who went to school outside of Africa. About 75% of CEOs in that $2M-$40M bracket were schooled outside of Africa. Finally, in the highest bracket ( $40M+), the distribution is relatively even with 43% of the 14 companies in the bracket being founded by CEOs schooled in Africa.

It is tough to come to a definitive conclusion from these data points alone, but there are a few things that stand out to me. 45% of the 155 total startups that raised $100K-$500k have CEOs who attended university in Africa which was the best representation of any category. In the lowest bracket, African educated CEOs achieve their highest representation in the dataset. In the next bracket ($500K-$1M), there is an immediate decrease to 28% representation of Africa educated founders and then, in the $2M-$40M bracket, only 25% of the startups have African CEOs. This implies that while Africa educated CEOs are able to raise their earliest rounds, they struggle comparatively to raise bigger rounds from bigger investors.

Figure II. Increase from lowest deal size bracket leads to significant decrease in local founder representation

It is worth noting that there is not a clear incentive for these foreign investors to put in the additional time and resources towards sourcing these African startups founded by local African founders. Some of the brightest Africans are attending schools outside of Africa and they are much more accessible to the average investor in North America and Europe. Additionally, these are some of the top schools in the world, and consequently, these founders will be disproportionately endowed with the networks and resources that may not be available for many local African founders.

Activity from African Investors

Iyinoluwa Aboyeji, founder and general partner of Future Africa and another one of the most respected voices in African venture capital and entrepreneurship, recently posted that a lot of the conversations around funding going to white founders is dominated by performative wokeness, and the focus should really be on the funding of local African VCs. While I do not think that all conversations around the global biases and perceptions of African competence in entrepreneurship are performative or not real, I do think the core point here has a lot of validity. Like I mentioned before, external VCs really do not have much of an incentive to put in the extra effort to source these local African startups when they can much more easily find, relate to and understand the non-African ventures and founders that are solving higher-level problems in the African markets.

Additionally, we should not expect these non-African investors to be particularly competent in investing in African founders solving local African problems! They can never understand the nuances of local customer behavior and cultural considerations that will affect the viability of a venture. Competent African VCs run by Africans, like Iyinoluwa Aboyeji, are going to be 100 times better at investing in these markets and will have the ability to generate attractive enough returns to continue to invest in these local founders.

Using the same ‘2019–2021’ Africa Deals Database, I looked at all the investors in the Africa, North America and Europe regions to see their activity, in terms of number of deals. I not only looked at the number of total deals, but I also looked at how the volume of deals is distributed over different deal sizes to understand how check sizes differed between investors from the three regions. The dataset included total number of deals from 2019–2021, number of deals $1M or more in 2019, number of deals $500k or more in 2020, and the number of deals $100k or more in 2021.

Figure III. Number of deals done by African, North American, and European investors with Africa-focused startups at different deal sizes

There are two data points that stand out from this table that are core to the discussion of local African founder representation. The first is that when it comes to investing in startups focused on African markets, African VC firms have been more active than North American and European VC firms in terms of number of deals. This data point alone should not be surprising, but when you couple this with the fact that this activity gap is mostly driven by African investors’ activity in the lowest bracket of funding ($100k+), the finding becomes less encouraging.

In the $100k+ bracket for 2021, African investors did 138 more deals than North American investors and 78 more deals than European investors. This gap gets smaller and smaller as deal size increases. The second data point that stands out is that at the $1M+ bracket in 2019, European investors conducted the most deals with startups focused on the African markets and North American investors were slightly behind African investors.

This data shows that the African investors that are disproportionately investing in local African founders are as active as investors from the other main regions when it comes to Africa focused startups. This data also suggests that on average, these African investors may not have the type of capital necessary to continue to invest in these local founders after the earliest stages of funding. While these African investors focused on Africa are able to write relatively more checks in the $100k+ bracket, capital constraints likely make bigger checks more difficult. More capital-endowed investors in North America and Europe are better equipped to take bigger bets on higher-level problems facing Africa that are likely being solved by founders that are either not African, or founders that have been schooled outside of Africa. This is what likely explains not only the decreasing activity gap between Africa and other regions as the deal size goes up, but also the findings in Figures I and II from the founder side.

In summary, a large part of the problem of underrepresentation is a problem of capital distribution. African investors in Africa that understand the local context are actively investing in local founders, but likely do not have the type of capital that European and North American investors have. The solution to this problem is two-fold. Just like any other problem of representation, the pressure and call for accountability needs to be directed at the correct source. Under the assumption that local African VCs will deploy capital most frequently, and likely most productively, to local African founders, then it is most appropriate to pressure those that are in the business of providing capital to VCs. Pressuring North American and European investors to invest in local African founders will not work for the reasons I have previously stated, and these foreign investors should also not be the ones investing in local African founders. The necessary redistribution of capital needs to be demanded from the original source of capital itself and this can only happen if limited partners are held accountable for representation both internally and in their investment strategy.

The second side of this problem is making sure our assumption about ‘African’ investors is actually the reality. When I say African investors, I envision investors that are willing to put in the effort to understand local contexts, source local African startups, and be value-add investors in them. I do not mean investors that are disconnected from what is actually happening on the continent and are just throwing money at things that sound interesting. If we are holding LPs accountable for distributing capital to African VCs, we also have to make sure that these African VCs are actually doing the work that will truly empower the local African founder.

While this article was mostly data-driven, I believe there is a lot of power in hearing the stories of local founders regarding fundraising, and building a community around shared experiences and learnings. Additionally, I believe these stories will expose more nuanced issues in the funding pipeline that will need attention if we truly want to lift up the local founder. If you are an African founder that was born in Africa and fully schooled in Africa, I would love to talk to you and hear your story. My email is nwanachonwana@gmail.com, so feel free to reach out :)

Let’s keep pushing Africa forward!

Posting about emerging trends in Africa's startup ecosystem and promoting the funding of local African founders