COVID-19 Has African VCs Ditching Old Habits While Flirting With Investing Remotely
African Startup Funding In COVID-19 Times
Compared to the first quarter previous year, venture capital (VC) activity has actually been quite robust so far this year. However, there’s some evidence that things may be starting to slow down, especially as the global pandemic continues to trigger a wide-spread economic downturn.
For context, the first two months of 2020 seemed pretty decent with respect to announced African startup funding deals. February 2020, in particular, offered much with USD 136.58 Mn raised in total up until the coronavirus struck.
And then, March 2020 witnessed a spectacular decline with only USD 16.03 Mn raised throughout that month. For perspective, the month of March accounted for just 7 percent of the USD 245.13 Mn raised by African startups in the entirety of Q1 2020.
But do things really have to slow down? Is there really no way around the issues that saw African startup funding begin to plunge downhill right about when COVID-19 forced restrictive measures in various African countries? And why is this even happening?
Well, to answer the last question, a combination of economic, financial, and logistic constraints have shrunk startup investments. Even for cases where there’s plenty of cash to go around, investors’ due diligence is hampered by restrictions on movement and travel.
Simply put, there’s a lot more to venture capital than just handing out money. And that “a lot more” part is being hindered by certain necessary restrictive measures put in place since COVID-19 happened.
But life must go on, right? “Crisis” can also be “opportunity,” and investors know this. So, how can venture capitalists keep things moving and continue deploying capital in these times?
Investing remotely has to be the answer. Only one problem, though, VCs are hardly fans of the idea. Scratch that; VCs have never been big fans of the idea. For investors, the way to go when plotting investments has always been to meet founders and their teams in person, and even visit the sites.
“Honestly speaking, it is very important to meet in-person before making a decision to invest,” Rena Yoneyama, Managing Partner at Samurai Incubate Africa, told WeeTracker. “Online meeting works, of course, but there is a lot of information that we receive by offline communication as well.”
She added: “It (investing remotely) is difficult, especially if you’re a fund type of investor. We have our investors for the fund (Limited Partners) and owe a responsibility to utilize the fund money properly. I think it isn’t acceptable for many LPs if we explain to them that we invest in African startups remotely without actually meeting with the founder(s)/teams nor visiting the sites.”
How VCs feel about in-person meetings & investing remotely
In an earlier story, it was revealed that WeeTracker Research found the total disclosed African startup funding amounts to be USD 245.13 Mn in Q1 2020.
While that figure actually represents a 57 percent quarter-on-quarter decline (compared to Q4 2019 when African startups raised USD 576.98 Mn), it still reflects yearly growth in first-quarter funding.
And that’s because, in Q1 2018, African startups only raised 124.15 Mn in total. In Q1 2019, that figure grew 33 percent to USD 186.09 Mn. But it’s still significantly less than this year’s first-quarter numbers.
However, a COVID-19-influenced funding slowdown seems imminent in Q2 2020 and it is already manifesting, even as a fair amount of announced funding deals still hit newsreels from time to time.
One of the most recent, notable fundraise announcements came early this week when Okra, a Nigerian fintech API platform that only launched in January 2020, raised USD 1 Mn in a pre-seed round led by TLcom Capital.
As Andreata Muforo, Partner at TLcom Capital, later revealed to WeeTracker, discussions with Okra actually began in the second half of last year. Although the deal was not entirely done remotely, Muforo did say that negotiation of terms and documentation were all done remotely.
She, however, maintained that the TLcom team had “several opportunities to interact with the team in-person and to undertake business due diligence.”
Muforo also stressed the importance of in-person meetings. As she put it, “In-person meetings with founders are critical to accelerating the investment process.”
“When investors undertake due diligence, they are looking to get a deep understanding of the market and company by speaking to the team, clients, existing investors, etc. Larger investments do require a face-to-face meeting with the founders,” she emphasized.
For Keet Van Zyl, co-founder and partner at SA-based VC firm, Knife Capital, the process can evolve and the evolution has already begun. But he maintains that in-person meetings are vital and indispensable in many cases.
“With everything that is happening in the world at the moment, venture capitalists are also looking at how to re-imagine their own business models in the post-COVID world,” he said.
“There are already many startup funding models that eliminate or minimise in-person meetings like AngelList, equity crowdfunding, co-investment instruments, etc. A lot of the due diligence and post-investment management efforts can be digitised.”
Van Zyl added: “However, venture capital is a relationship game more than a pure funding game, so in-person meetings remain invaluable in many cases. “
So, is investing remotely a no-no?
Every year since 2015 (albeit with the exception of 2016 when a recession hit), funding for African startups has grown at an impressive pace.
In 2015, African tech startups raised a total of USD 185.7 Mn in funding. Startup investments generally plummeted in 2016, though only in terms of value as the number of deals recorded actually rose to 146, suggesting that more African startups were funded in 2016 than in 2015. During that recession-hit year, the total amount raised by startups on the continent fell by 30.5 percent to USD 129 Mn.
In 2017, African startup funding recovered, hitting USD 201 Mn. In WeeTracker’s African Venture Capital Report for 2018, USD 725.6 Mn was invested across 458 deals — a gigantic 300 percent leap in the total funding amount and over 127 percent increase in the number of deals compared to 2017. This past year (2019), the figure touched the billion-dollar mark for the first time, reaching USD 1.340 Bn.
There was plenty of optimism after last year’s funding exploits but the ongoing pandemic has put a damper on things. One report already estimates that VC investments in African tech firms could fall by as much as 40 percent in 2020.
While it is unlikely that the concept of investing remotely can, by itself, save the ecosystem from suffering a funding slump of that magnitude, there are indications from even the VCs themselves that it can be a solution of sorts. But not without certain factors like funding size, investment stage, investor history, and some other variables at play.
As Yoneyama explained, “We haven’t invested in a company without meeting with the founders in-person by anyone in our team yet. But from now on, it would be necessary to keep investing just by meeting online.”
“As an international investor, I strongly start recognizing the importance of a network of trusted people and having local partners in countries we invest in to ask them to meet with the founders in person, conduct due diligence, and get a reference.”
She added, “It (investing remotely) should be effective in terms of cost and time for sure because we don’t need to fly from one country to another and from one place to another in a city with a huge traffic jam like Lagos. However, nobody knows and it’s too early to tell if remote investing is practical and effective in terms of fund management and performance.“
What VCs say about the ‘when’ and ‘how’ of investing remotely
- Damilola R. Thompson, Associate General Counsel & co-Director, Corporate Development, EchoVC Partners
“Investors generally have different criteria attached to the way they deploy capital. Typically, this will differ based on investment size, investment stage, primary market of the potential investee company, experience of founders, etc.
As a result of this, the way a startup rate along these lines determines how much importance is attached to in-person meetings. So while the ideal scenario will be to schedule an in-person meeting with a founder, we also know that many investments have been completed virtually.
We believe that as a firm we need to be nimble enough to adjust to market and global realities, this is the expectation of our LPs who have given us capital to deploy, and doing otherwise will be in breach of our obligations.
Notwithstanding, we are taking extra precautions as we deploy capital now, and adding more thoroughness and depth to our already extensive diligence process on a case-by-case basis.
We are actually in the process of evaluating some deals for potential investment. For us, the most important goal is that these startups check all the boxes in our diligence checklist, irrespective of the virtual process involved in our evaluation process.
We are not compromising on the quality and extent of our diligence and when we feel that something is missing, we request more video calls and for more documentation. Simultaneously, we are corroborating all the information we receive with customers, potential customers, employees, and investors of the startup.
Our virtual diligence process has been structured in a way that we get sufficient comfort about an investment before we decide to deploy but at the same time, we are also careful not to antagonize the founders with our process. That way, the process balances itself out.”
- Keet Van Zyl, co-Founder & Partner, Knife Capital
“Knife Capital’s model of investing is rooted in the philosophy of investing time and money in entrepreneurs. While we do invest remotely – and have a few investments in countries outside of South Africa – we would be loath to invest where we’ve never actually been in contact with the startup founder.
There has to be a connection that goes deeper than just the need for funding. We are active investors that partner with entrepreneurs for mutual upside benefit, and you just don’t partner that well with people that you’ve never met. We are happy for other funders and funding models to plug that gap.
We’ve had positive experiences with remote investing but generally, those have a local co-investor involved in the cap table who can be closer to the entrepreneur in times of crisis or opportunity.
Entrepreneurs need to be well organised to raise funding remotely with clear pitch decks, well-populated data room information, and quick response turnarounds.
Post-investment timely and transparent reporting is required, and at the very least, a monthly video conference meeting with the founders and management team.
Online collaboration tools and reporting software packages have facilitated this in recent times. But nothing beats a physical get together at least once a year to strategise.
There is no one-size-fits-all solution here. The closer the relationship between Startup founders and their early investors, the better in my opinion. But it depends what kind of investor you are or want: An enabler, accelerator, handbrake, or pure reporting line.”
- Andreata Muforo, Partner, TLcom Capital
“We have seen investors investing (pre-COVID-19) without having met the founders – this typically happens when companies have strong existing investors or a strong local investor leading a round and the incoming investor is investing a smaller amount (around USD 250 K or less).
Larger investments will be difficult to make without ever seeing the founders in person. The hope I see is that countries are starting to cautiously open up their economies, so for locally-based investors, there will be opportunities to meet founders in person (likely while wearing masks).
TLcom has its partners in Nairobi and Lagos. I see foreign-based investors being challenged given the current perceived risk associated with global travel.
The most important piece of the investment cycle that needs to be solved at this trying time is how investors can meet founders face to face.
The other pieces of the due diligence process (speaking to clients, existing investors, negotiating terms, and completing documentation) can be undertaken remotely via calls.
Here, I see locally-based investors being able to solve for this faster (as economies open up) and they can serve as the bridge for foreign-based investors.
Pure remote investing may work for smaller angel investments, with strongly networked founders in early-stage companies with fewer business aspects to diligence.
For larger investments, remote investing will be difficult as a face-to-face with the founders is required including a visit to the company operations.
Companies that have interacted with investors in the past are at an advantage, as well as companies with credible existing investors as that increases the confidence of incoming investors.
In addition to the investment decision, post-investment management is a major source of value generation, and remote interactions between investors and founders can be suboptimal.”
