In 2016, Paystack, a company backed by Stripe, secured a seed funding round of $1.3 million, representing a substantial investment for a Nigerian startup at that early phase. 

At that time, achieving seven-figure seed funding for African startups was uncommon. However, over subsequent years, these larger seed investments have become increasingly prevalent, with some startups now securing eight-figure amounts even at the earliest stages. Kuda, a Nigerian fintech company that received $10 million in funding last year, serves as a prime illustration.

Alongside the increase in seven and eight-figure seed investments across Africa, there has also been significant progress in pre-seed fundraising. Pre-seed rounds are generally sought when a startup is still developing its product, before generating revenue or establishing a clear market fit. These investments are typically provided by external sources, such as friends and family, and generally fall between $25,000 and $150,000.

However, the expectations regarding the amount of pre-seed funding available to African startups have shifted. 

During the previous year, venture capital firms that typically focus on seed and Series A funding began to participate in pre-seed rounds, and this trend continues. For instance, early in 2021, Cassbana, an Egyptian fintech startup, successfully raised a $1 million pre-seed investment, with Disruptech leading the funding round to support its growth within Egypt.

What is driving this evolving investor behavior?

Andreata Muforo, a partner at TLcom Capital, a pan-African venture capital firm specializing in early-stage investments, explained to TechCrunch that the surge of 23 pre-seed rounds last year – including 10 deals exceeding $150,000, according to data from Briter Bridges – stemmed from increased investor confidence in the market, particularly within the fintech sector.

Startups focused on financial technology foundations attracted investment

Although the majority of early-stage funding in Africa during 2020 was directed towards financial technology companies, there were notable exceptions. These included Zedny, an Egyptian educational technology startup, which secured $1.2 million in funding; Autochek Africa, a Nigerian automotive technology company, which raised $3.4 million; and TalentQL, a Nigerian talent sourcing startup, which obtained $300,000. 

Similar to how Paystack and Flutterwave developed payment solutions for numerous African businesses, these fintech companies are striving to establish themselves in key areas of lending and banking services. 

According to Muforo, “Financial technology is an attractive sector. However, last year’s early-stage investment validation primarily favored companies constructing the underlying infrastructure for this market, rather than those dealing with more conventional fintech products.” Her company, TLcom, spearheaded a $1 million pre-seed investment in Okra.

Okra is a fintech company specializing in APIs. Similarly, Mono, OnePipe and Pngme are also focused on API development. These companies are creating the API infrastructure necessary to connect bank accounts with financial institutions and other businesses for a variety of applications. Over the last year and a half, Mono and Pngme each secured $500,000 in funding, while OnePipe raised $950,000 during its pre-seed round.

It’s important to note that much of the activity surrounding these startups and their efforts to address Africa’s open API banking challenges occurred following Visa’s $5.3 billion acquisition of Plaid in January of last year.

Despite the eventual termination of the Visa-Plaid deal, the acquisition prompted a sense of urgency among some African investors, leading to significant funding for companies aiming to become “Africa’s Plaid.”

API-based fintech startups find digital lending companies among their most important clients. These lenders utilize the APIs to access customer financial data, enabling them to analyze spending habits and assess creditworthiness.

Shahry, based in Egypt, and Evolve Credit, operating in Nigeria, are fintech companies building credit infrastructure within their respective markets. Evolve Credit facilitates connections between digital lenders and individuals seeking loans in Nigeria through its online platform. Shahry, conversely, utilizes an AI-powered credit scoring system to allow users in Egypt to apply for credit. Both companies also successfully raised substantial pre-seed funding – Evolve Credit, $325,000, and Shahry, $650,000.

A recurring theme: Serial founders

Muforo observes that the quality of the founding teams, in addition to startups focused on building fintech infrastructure, was a key factor in the increase of pre-seed funding observed last year.

Adewale Yusuf, co-founder and Chief Executive Officer of TalentQL, a company specializing in the recruitment, management, and outsourcing of talent for both Nigerian and international businesses, expressed a similar viewpoint. He communicated to TechCrunch that the level of confidence between venture capitalists and founders was a significant element in many pre-seed funding rounds during the previous year. 

“The prevalence of investors contributing to pre-seed rounds wasn’t unexpected. This is largely due to the return of experienced founders and serial entrepreneurs to the market. I believe the established credibility of these founders was a primary driver behind the substantial size of those funding rounds,” he explained.

Yusuf, having previously founded a company himself, is also the co-founder of Techpoint Africa, a leading Nigerian technology media outlet. His colleague at TalentQL, Opeyemi Awoyemi, is likewise a seasoned entrepreneur, having co-established Jobberman, a highly popular recruitment platform in Africa, which is now owned by Ringier One Africa Media.

According to Adedayo Amzat, founder of Zedcrest Capital, a leading investor in TalentQL’s funding round, the founders’ prior experience was crucial in finalizing the investment. 

He stated that investors generally feel more secure investing in founders with a proven track record in pre-seed rounds, as they demonstrate a deeper comprehension of the challenges they are addressing. Consequently, these founders often secure larger amounts of funding.

“When considering pre-seed funding amounts, experienced founders are often able to negotiate a considerable advantage compared to first-time founders,” Amzat noted. “While pre-seed valuation caps for first-time founders typically range from $400,000 to $1 million, we frequently observe figures reaching up to $5 million for founders with prior experience.” 

This pattern was consistently observed throughout the past year. Yele Bademosi, who leads Microtraction, a West African early-stage venture capital firm, also serves as the CEO of Bundle Africa, a Nigerian-based cryptocurrency exchange that secured $450,000 in funding in April 2020. 

The co-founders of Shahry, Sherif ElRakabawy and Mohamed Ewis, also operate Yaoota, Egypt’s largest shopping search engine and price comparison platform.

Abdulhamid Hassan, co-founder and CEO of Mono, had previously co-founded Nigerian fintech startup OyaPay and data science company Voyance. Similarly, Etop Ikpe, co-founder and CEO of Autochek Africa, formerly held the position of CEO at DealDey and Cars45.

However, Fara Ashiru Jituboh of Okra, who had launched several ventures previously, and Akan Nelson of Evolve Credit, as a first-time founder, both received investments that many of their peers would greatly desire. In Jituboh’s case, her strong technical expertise was also a significant factor—she previously held a senior software engineering position at Pexels and worked as an engineering consultant at Canva before establishing Okra.

“We invested in Fara because she is a highly capable technical founder. Considering the technology-intensive nature of Okra’s operations, her expertise was essential to our decision,” Muforo explained regarding the investment in Okra’s CEO and CTO.

Nelson shared with TechCrunch that his background in finance played a role in Evolve Credit securing its six-figure investment. The team’s strong conviction in achieving product-market fit and the potential of the African loan marketplace were also sufficient to attract both domestic and international VCs, including Samurai Incubate, Future Africa, Ingressive Capital, and Microtraction.

Although early-stage investments in African startups have not yet reached their peak, the increase in the number of angel investors has reduced the obstacles to entry-level investing. 

Investors are now demonstrating a growing willingness to invest in African startups with promising potential, as they continue their search for the next Paystack. 

“A greater number of individuals are now prepared to accept risks in the market, particularly angel investors. They are more readily able to allocate $10,000-$50,000 due to success stories like Paystack,” Yusuf commented on the $200 million acquisition by U.S. payments company Stripe. 

Beyond its importance to the African technology landscape, the return on investment generated for early investors is a particularly noteworthy aspect of Paystack’s exit.

By the time of its exit in October 2020, some angel investors had achieved a return on investment exceeding 1,400%, as detailed in a blog post by Jason Njoku. Njoku, who participated in the funding round as an angel investor, is the CEO of IROKO, a Nigerian video-on-demand internet company.

For Muforo, the increase in early-stage investments is a significant development that the African tech ecosystem should appreciate, regardless of the specific round.

“Pre-seed or seed are simply labels used by investors and founders,” she stated. “What I believe is most important is the increasing flow of early-stage capital into Africa, and the growing attention that startups are receiving from investors, which is incredibly positive.”