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Consider this before investing in a start-up

January 28, 2014 • East Africa, Lists, Southern Africa, West Africa

 

What is top of mind for potential investors in technology companies across Africa. (Image source: docstockmedia/ Shutterstock.com)

What is top of mind for potential investors in technology companies across Africa. (Image source: docstockmedia/ Shutterstock.com)

Much has been written about the growth of Africa’s technology-focused startup business ecosystem. In strong emerging markets like Kenya, stakeholders – including venture capitalists, angel investors and multinationals, are continuing with efforts to further entrench the country’s ‘Silicon Savannah’.

In October 2013, at Intel Capital’s annual CEO Summit, discussion over establishing a startup venture and exposure to capital resulted in the point being made that companies that disrupt something in the market or create something truly unique appeal to potential investors.

ITNewsAfrica has previously published a list of the top reasons why African tech startups struggle, which covered details of the realities facing these startup ventures. We also published a list focused on setting up a viable venture in the first place and what may be perceived as being a non-entity before it has actually begun to operate.

Now we move the focus away from the startup venture itself and look closer at what potential investors should bear in mind before they seriously consider investing.

It is particularly relevant, given that, according to Smallstarter.com, research confirms that only one in ten startups will still be in business five years after inception.

Louise Robinson, sales director at CG Consulting, a consulting company specialising in lead generation and databases across Africa, offers insight into what investors would generally look out for in a startup. Credible information and reliable partners, it would seem, are sought-after when engaging this market.

“As one of the few remaining untapped markets in the world, Africa has come on to the radar of many companies looking for additional revenues and a competitive advantage. However, the process of doing business in Africa is different to anywhere else in the world, and can prove difficult for the uninitiated. Understandably, organisations are turning to large repositories of data to uncover trends, statistics, and other actionable information to help decide on their next move, and are finding that the data available about African companies is usually patchy, at best,” says Robinson.

The following are said to be amongst the top considerations for those looking to invest in tech startups in Africa.

1. Time, energy and resources to invest

Does your business have the available resources and time to proactively manage an investment of this nature? Without the appropriate level of input of energy and resources, no investment can result in success and pay dividends. The first consideration for decision makers is whether or not they are in the position to invest in the first place.

2. Validated customers

One of the primary factors to consider before committing interest in a venture is whether or not the startup company has validated customers. Is there evidence of a customer network or a track record of service delivery? African businesses often have little in the way of traditional communications, so a customer reference is simply that – a customer reference.

3. Online presence

A lack of a web presence does not necessarily indicate a fly-by-night.. Africa is social networking focused, and mobile connectivity is far more prevalent than traditional fixed line. Investors should check out the social media and mobisites of the companies they are interested in.

4. The line between local business customs and solid business practices

An investor must have a good enough understanding of where the two meet in order to evaluate the potential success of any African business. Having a local advisory or consulting firm on board can make or break any deal, and can mean the difference between investing in the next Mark Zuckerberg or in a 419 scam.

5. High growth potential in strong emerging markets

According to smallstarter.com, one of the main benefits to investing in a startup business is the potential for large returns. Investors will consider what markets the business is looking to penetrate and what the growth potential is like in these segments. This will have a direct influence on whether or not to invest – and how much.

6. A concrete business plan

It is critical that a technology startup company has a solid business plan and strategy in terms of how they want to engage the market, their value proposition and how they plan on making money. Without this basic plan, a venture cannot get off the ground.

If you have any other tips for tech investors, please leave a comment.

* Image via Shutterstock

Chris Tredger – Online Editor

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