Our ecosystem needs to be bullish about investing in seed start-ups
One of the most prevalent problems in start-up ecosystems across developing markets is the seemingly shortage of investable start-ups between Seed and Venture Capital (VC), or series stage of funding.
This can mainly be attributed to a number of innovative ideas unable to progress beyond the ideation stage, due to a lack of adequate support structures dedicated to the validation and, ultimately, the commercialisation of the concepts or ideas. This naturally results in a limited pool of start-ups that are investor-ready.
The scarcity of investable deals, combined with the increase in VC allocation, has led to inflated valuations because there is too much capital chasing after too few deals. Inflated valuations typically lead to portfolio under-performance for investors, as the start-ups fail to live up to their inflated valuations. The result could be capital flight, as investors pull out or refuse to provide follow-on funding. This would then leave the start-ups stranded before they break-even, or become cash-positive.
With the global economic downturn, investment into VC deals has taken a sharp decline the world over, with emerging markets being the hardest hit. Africa, for example, experienced a record-breaking year in 2022 and gained significant VC funding momentum in the past five years, then its stock started looking grim this year, seeing half-year VC investments falling by 43% year-on-year, according to the African Private Capital Association’s half-year report.
South America has faced a much tougher year, with numbers from Crunchbase reporting that VC investments into South American start-ups fell by a worrying 83% from the previous year, while deal volume fell by 53%.
I read a piece written in 2011 by Paul Graham, the co-founder of Ycombinator, in which he aptly framed the role of start-up hubs. I won’t delve too much into the detail of his piece but basically, he kept wondering why start-ups in a particular town or area fail, while others succeed in another area. He concluded the thought saying that the problem was with the town, the area or the hub.
A couple of weeks later, he figured out that he framed the question incorrectly, saying: “The problem is not that most towns kill startups. It’s that death is the default for startups, and most towns don’t save them. Instead of thinking of most places as being sprayed by ‘startupicide’, it’s more accurate to think of startups as all being poisoned, and a few places being sprayed with the antidote.”
Start-ups do what they naturally do, which is to fail. What’s saving start-ups in other places/towns? It’s all about having the right support structure, mentality, being at a place where it’s okay to fail, where it’s okay to meet the coolest mentors, experienced CEOs, and guess what? even being in a place where it’s okay to bump into well-networked and experienced individuals who will give you the opportunity and chance you needed.
While investment into start-ups is considered a risky asset class, there should be a concerted effort by respective ecosystems to build an adequate pool of sustainable and investable start-ups at pre-seed and seed stage, to ensure a healthy deal flow across the various funding stages.
At 22 On Sloane, we aim to do just that and, at last week’s Global Entrepreneurship Congress in Melbourne, I was honoured to have shared the stage with key ecosystem builders that are bullish about supporting innovative, ingenious and resilient start-ups.
Let’s start taking the bull by the horns.
Kizito Okechukwu is the executive gead of 22 On Sloane, Africa’s largest start-up campus; and co-chair of the Global Entrepreneurship Network Africa.
BUSINESS REPORT