Increasingly banks and other traditional financial institutions are no longer the most ideal sources of capital for start-ups and first growing firms owing to their lending models and approach which many argue are no longer as relevant.

Start-ups and fast-growing firms across the world are turning to venture capital and angel investment as a source of their capital. Last year alone, according to the latest Africa Investment Report by Briter Bridges, 500 African startups raised a combined $5 billion.

A majority of this firms would probably not have qualified for lending from traditional banks as they would have had challenges meeting requirements such as collateral, proven business model among other criteria.

Zipline raised $250 million for operation expansion, making the firm one of the few companies to cross the $100 million investment mark. All photos: Courtesy.

Rwandan based firms also featured among the top recipients of investments, underlining the country’s goals to increase the ability of local firms, especially startups to mobilise capital.

Rwandan based firms that hauled in more capital include Ampersand, which is involved in electric motorcycles, and Zipline –which is involved in delivery of medical supplies using drones.

Other firms which have presence in Rwanda and received top funding include Zola Electric which is involved in renewable energy, Chipper Cash which is debuting the fintech sector, Andela among others.

Zipline raised $250 million for operation expansion, making the firm one of the few companies to cross the $100 million investment mark.

Ampersand mobilised about $13 million from two rounds of investment to facilitate its expansion beyond Rwanda.

How do firms go about this?

Michael Shema, The Managing Director of Gahigiro Capital Ltd, a Rwanda based corporate finance advisory firm which was recently involved in raising about $5m for Gozem (a Togo based firms) in its seed and series A rounds said that Rwandan firms have a multitude of avenues through which they can raise capital. Gahigiro Capital also supported Lipa Later, a regional consumer financing platform to secure a US$ 10 million debt.

 "Today Rwandan firms have a multitude of avenues through which they can raise capital with the first difference coming from whether this capital will be coming from an institutional or angel, High Net worth investors. This multitude of opportunities is mainly due to the policies of the Government of Rwanda to create a business-friendly environment for entrepreneurs and investors both local and foreign,” he said.

TMembers of SusTech 4 Africa, one of local Start-Ups that is based in Kigali. 

He said that the type of investors that a Rwandan firm could raise capital from differs in terms of their mandates, sectors of interest, and stages/ticket sizes that these investors focus on.

"Today some of the investors we see most active in Rwanda are; social impact investors, venture capitalist, and strategic investors. All these investors have different process they follow before making an investment and different objectives and risk parameters when considering potential investments,” he said.

He summarized the process of raising capital locally as one involving initial meetings with potential investor and introduction of company where one presents the project and opportunities therein which opens up for signing of a non-disclosure agreement between company and potential funders. This allows for exchange of more detailed documentation on the opportunity before the submission of Expression of Interest and Non-Binding Offer from investor.

Investors go on to conduct due diligence reviews and submit binding offers which if acceptable lead to legal agreement drafting and signing paving way for the transaction.

Josh Whale, the Founder and Chief Executive of Ampersand explained that a fundraising process depends a lot on the type of product and business with some such as software more straightforward.

He however noted that for complex hardware or products that require a lot of Research and Development or capital investment before reaching market it’s not as simple.

"We spent a lot of time trying to fundraise our Series A ($4m) from African VCs. These purported to be technology investors but actually look at the investment more like a bank manager - focusing way too much on monthly revenues rather than the technology itself, capability of the tech team, market size, unit economics, margins, customer traction and so on,” he said in an interview with The New Times.

The typical funding cycle in East Africa is also much slower than in serious tech investing, he said, adding that the shortest time one would raise funds is 6 months compared to 6 weeks in the Silicon Valley.

"Grant funding for startups is even slower: and 18 months is not unusual. That’s tough for an entrepreneur,” he said.

Regarding the typical funding cycle for social enterprises (startups aiming at a profit as well as a social and or environmental outcome), he noted that the usual pattern is that a startup raises some initial angel funding, or a small grant estimated at between $10,000-$100,000.

The start-up then raises a ‘seed round’ which tends to be between $250,000-$700,000 which is often at the stage where the company has a strong prototype and business plan, the basic economics look good, and a good team, but few or no sales.

The problem is then that for the next stage, the typical VCs that fund startups in East Africa will expect the startup that has used that previous seed funding to have

He cited that often, the challenge comes in in the next stage whereby the venture capitalists in the region expect the start- up has used that previous seed funding to have monthly revenue of as much as $100,000.

"That’s possible for an app or a ride hailing business where most of that revenue is just pass-through costs. But to develop something as complex as an electric vehicle battery, it’s just not realistic. Companies developing electric cars must spend hundreds of millions or even billions on research and development before making their first sales,” he noted.

Locally, individuals and corporations with disposable income have been challenged to consider debuting as investors or venture capitalists as it has proven to be viable, with returns as well as with multiple impact in an economy.