Blockchain Fundraising Can Benefit African Tech Startups

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Forbes | Oluwaseun Adeyanju | Feb 10, 2020

African startups - Blockchain Fundraising Can Benefit African Tech StartupsAfrican startups raised a record $1.34 billion in venture capital in 2019, up from just under $200 million in 2015, according to WeeTracker, a media firm focused on the African entrepreneurship space. That’s about a 46.3% increase on a compound annual growth rate (CAGR) basis. WeeTracker estimates show that the total African venture funding had reached $725.6 million in 2018.

Despite the impressive growth rate, there are still huge funding gaps that the continent needs to fill and here’s why.

The larger portion of funds being raised by African startups comes from venture capital firms outside the continent. Given how the technology ecosystem in Africa is still in its nascent stage, coupled with how venture capital funds are typically directed toward growth, many early-stage startups on the continent still struggle to raise early-stage funding. And that’s because there aren’t sufficient local angel investors to fill this gap.

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For instance, in Nigeria, only about $1.5 million of the $133.5 million that the country attracted in 2018 came from the Lagos Angel Network, Africa’s largest angel network, according to online business news publication Quartz. Nigeria attracts the majority of African venture capital — nearly 50% in 2019.

The consensus within the African angel investing community during the 2018 Africa Early Stage Investor Summit is that the lack of clear exit opportunities is a major contributory factor.

“It is easy to invest money in Africa right now, but it is hard to make money in investing here. The key is to be exit centric — we only invest in entrepreneurs who are focusing on building sustainable businesses that can exit,” Ben White, the CEO of Venture Capital for Africa (VC4A) said. “This conversation succinctly captures the challenges venture capital faces in Africa and why we need to keep working to strengthen and support the entire African venture ecosystem.”

How blockchain can solve the early-stage liquidity problem

Traditionally, investors in startups are able to exit and make money from their investments through three major avenues including IPOs, acquisitions and mergers. Each of these typically requires that a company achieves a reasonable level of growth. For a technology ecosystem that’s still at its nascent stage like Africa, reaching this level of growth can take a longer time frame than in matured markets.

The implication of the longer time frame here is that convincing investors and high net worth individuals (HNIs) to inject funds into the African startup landscape can be tough. They already have access to more stable investment opportunities elsewhere. For instance, the Central Bank of Nigeria’s Open Markets Operations Bills returns about 15% per annum.

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One of the ways to encourage investors to inject money into startups in the early stages is to develop a liquid market.

“One of my key thesis is that if we have more secondary markets in Africa and that allows early-stage investors to get some kind of liquidity, we will be able to recycle funds within the ecosystem,” said Yele Bademosi, a Binance Labs director and founder of Nigeria-based angel investment firm Microtraction.

“However, the current infrastructure for capital markets across Africa doesn’t necessarily support this.”

Here’s where blockchain comes into play.

The distributed and trustless technology has powered a new method of fundraising that can be borderless. This is evident in the initial coin offering boom and subsequently the emergence of the security token market.

While ICO fundraising, for the most part, has sought to circumvent regulatory spotlight, the development of security tokens has been about redesigning the regulated capital markets to increase access and remove the inefficiencies that presently exists.

In Africa, blockchain can help increase market access for early-stage companies for a start.

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“There is an opportunity to create our own funding infrastructure using blockchain to issue security tokens or hybrid tokens,” Bademosi added. “We will need to define our own guidelines and regulations around that, but what gets me excited about blockchain is that it can allow us to rethink capital formation and capital markets from the ground up in a way that could be trustless.”

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NCFA Jan 2018 resize - Blockchain Fundraising Can Benefit African Tech Startups The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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share save 171 16 - Blockchain Fundraising Can Benefit African Tech Startups