Checkpoint financing

It was bound to happen. Local VCs helped catalyse foreign investment into the space. Founders took advantage of the momentum to float their boats. And when venture capital, a tiny (relative to global PE holdings) but loud asset class combines with the obscure nature of private markets, you have a good recipe for entrepreneurial inebriation.

The bill of the thrill is expectedly high. Like the drunk Nairobi boda (motorcycle) driver who, with me riding pillion, sped recklessly for 15 minutes, collected 1000 Kenyan shillings, (instead of 200 Kes) and dropped me at the wrong address (my fault), when I first visited Nairobi.

But all of that is changing now. A rising tide lifts all boats, and when it ebbs, it leaves the naked swimmers without cover. Semil Shah, co-founder of Haystack, an early stage investing outfit writes, “For an early-stage founder, it can feel like the walls are closing in. And they are. In previous downturns, startups could still be acquired for modest or great sums; today, these types of transactions feel frozen, and larger-cap acquisitions face regulatory, shareholder, and balance sheet scrutiny.”

Checkpoint financing means founders and VC investors alike will need to prove to their investors that they can clear milestones over and over again. Even if it's just for show, no one wants to look like a softie, “...the larger the financing, the more checkpoints to clear,” notes Shah. Ask your friends who have raised or are trying to.

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“Many of these opportunities will be discovered through experimentation and exploited through stellar execution. In many cases, large, profitable opportunities in Africa are more likely to be created by deploying well-understood business models in poorly understood markets, rather than relying on frontier technology and innovation,” note the authors of Chasing Outliers: Why Context Matters for Early-Stage Investing in Africa. More than ever, investors and founders will need to immerse themselves in research and education. The payoff will be enormous for people who are patient enough. If this sounds like too much work for an investor or founder, maybe you should reevaluate your approach.

If anything, 2021 opened a door to unlock the entrepreneurial power in a digital Africa. It was never a call to celebrate Africa rising 2.0, but to understudy how a digital revolution in the demography and economies of Africa could create new opportunities. We would probably have been better off for it, if a piece of the capital inflow over the past three years had been devoted to researching and learning about markets over starting new companies with a hyper-growth-at-all-costs thinking.