ATBN in collaboration with AfriconEU hosted a webinar titled “Alternative Funding Sources for Digital Innovation”. The main speaker, Angie Madara, is the Founding GP at Athena Fund. Angie is an entrepreneur turned investor who previously founded award-winning EdTech company Growd Global.
The webinar introduced participants to available alternative funding sources such as crowdfunding, microcredit, loans and grants for digital innovation and discussed their pros and cons.
Below are the investment channels that were highlighted and the key takeaways from the discussion.
Grants
Grants are an amazing source of investment for founders because they are not required to pay back the funds. There are a growing number of grants available in Africa that target specific sectors and entrepreneur segments particularly agriculture, health, women, technology and finance.. Some funders to consider include UNCDF, African Development Fund (AfDB), African Enterprise Challenge Fund (AECF), African Women Development Fund (AWDF), ELMA Group of Foundations for Nigerian Startups, TY Danjuma Foundation also for Nigerian Startups. Resources such as Funds for NGOs which aggregate and share grant funding opportunities are a good place to start.
On the flip side, applying for grants is very competitive and takes a long time to prepare. Furthermore, grant money is often not very flexible. Grant funders may require recipients to commit to pre-defined outputs and therefore grants cannot usually be used to explore new, untested products and services. Entrepreneurs looking to develop and test new offerings may want to seek other sources of funding.
Incubators and Accelerators
Incubators and accelerators have proliferated and become increasingly specialized. There are programmes catering to different groups of entrepreneurs and startups. Typically incubators and accelerators offer capacity building to entrepreneurs and link them to investors or business support services. Some programmes may also offer a cash prize or some funding alongside this support. Even with no funding offered, participating in these types of programmes can help to increase the visibility of a startup and increase their chances of being funded especially if they have been part of a well known accelerator such as Techstars, Google for Startups, Antler, YCombinator and 500 Startups.
The large number of incubators and accelerators that are available however means that not all of them are very helpful. Entrepreneurs should be wary of programmes that do not clearly distinguish the startup stages that they support or do not have strong links with investors. Entrepreneurs may end up wasting valuable time in such programmes.Therefore before you sign-up for programmes, do your research and validate their credibility.
Challenges and Competitions
Innovation focused challenges have picked up hugely. There are a growing number of competitions related to Green innovation, financial inclusion, agriculture, health and education. Some competitions include, X Prize, Lego Foundation, SDGs Global Startup Competition, Startup Africa GSMA – Global Mobile Awards and Jumpstarter, Africa Business Heroes among others. These competitions often give founders free money for their startups without having to pay it back. They can change the ball game for startups by offering them credibility when approaching funders, giving them exposure and platforms for networking.
However, these programmes are highly competitive and can have lengthy application processes which can become a distraction for founders. They may also cause entrepreneurs to focus on the wants of the investors funding the competition rather than those of the customers that the business is serving.
Crowdfunding
Crowdfunding has grown in popularity in recent years and is lauded for democratising access to funding.There are various models of crowdfunding including donation-based, which involves asking for donations and reward based in which donors receive rewards in the form of products or services offered by the fundraiser, based on the amount of money they donate.
Other popular forms of crowdfunding include equity-based (the crowd receives shares in the business) or debt/crowdlending (the crowd lends money in return for interest on the loan). Some of the benefits of crowdfunding include the fact that they can offer low interest rates in the case of crowdlending. They also provide free marketing and visibility and can be an effective way to validate an idea or product.
Some of the disadvantages include giving up equity in the case of equity-based crowdfunding as well as the costs charged by the crowdfunding platforms. In addition, successful crowdfunds often require entrepreneurs to already have the majority ( up to 70%) of the funds they need already secured or pledged. Lastly, for startups in Africa, the crowdfunding space while picking up, is still in infancy so there may not be many options. Thundafund and Uprise.Africa are some of the crowdfunding platforms that have come up in the region.
Revenue-based funding
This option is increasingly being offered by banks which often focus on specific goals such as lending with gender-lens or on certain sectors, for example green lending. Commercial Banks, Mastercard (0% interest), European Investment Banks and AfDB are some examples of funders offering this model.
The pros include retaining equity and no interference from the lender. However, it is usually difficult to qualify for this funding as it requires high turnover or cash flow and could come with high interest rates.
Conclusion
To determine which of these funding options is good for your business, you must know what you are willing to invest or lose in order to attain funding. You must also know your business’ financial goals and clearly understand what milestones investors will require of you. Angie from her experience advised founders to delay seeking funds and bootstrap as long as possible in order to retain a bigger portion of their business.
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