Examining the Afreximbank US$25 mil startup fund: Not nearly enough a share of US$650 mil available

Afreximbank has reiterated its US$25 million startup fund at the Second SME Summit in Addis Ababa, Ethiopia. Now, before we get carried away this is a drop in the ocean in comparison to the flows of startup funding across the continent of Africa. The existence of the fund, which was termed “The Fund for Export…

Afreximbank startup fund

Afreximbank has reiterated its US$25 million startup fund at the Second SME Summit in Addis Ababa, Ethiopia. Now, before we get carried away this is a drop in the ocean in comparison to the flows of startup funding across the continent of Africa. The existence of the fund, which was termed “The Fund for Export Development in Africa (FEDA)” was made public in September 2022 when it announced a US$670 million fund that will be funnelled across four fund strategies:

  • US$270 Million will be earmarked for FEDA Direct Equity Fund I, which will provide equity and quasi-equity financing to businesses aligned with FEDA’s mandate.
  • US$250 million is allocated to the Strategic Initiatives Fund, a proprietary fund established by Afreximbank to implement landmark and high-impact greenfield investments in sectors critical to the growth of intra-African trade and value-added export development across the African Continent.
  • US$125 million involves the implementation of a private credit fund, Africa Credit Opportunities Fund, L.P. (ACOF) jointly sponsored by FEDA and Gateway Partners Group
  • US$25 million Venture Fund to provide equity, quasi-equity and venture debt financing to high-impact early-stage ventures across Africa.

Afreximbank’s plan to deliver the fund

The “Instruments of Intervention” as the Africa Export and Import Bank calls it are going to be structured by way of the 4 “I”s:

  • Investment:
    • Soft Loans enable export-ready beneficiaries to fulfil orders from international buyers.
    • Convertible Grants that target digital startups with the propensity for scaling across borders
    • Venture Fund as a patient equity-linked capital to enable youth enterprises to scale.
  • Innovation
    • Incubation and Acceleration activities for youth enterprises in target sectors
    • Periodic Innovation challenges organized by developmental partners e.g. UNECA, AUC, IFC etc
  • Integration
    • Integrating youth engagement components into the design of Bank projects and into the Bank’s digital ecosystem.
    • Support the emergence of digital trade enabling infrastructures e.g. internet connectivity
  • Inclusion

The problem with the Afreximbank FEDA startup fund

Figures from 2022 showed that startups on the continent raised US$3 billion which is a fraction of what Afreximbank has on offer for the moment. Of the 633 startups funded in 2022, they employed 34,201 individuals, with an average of about 54 people per startup according to a report by Disrupt Africa. This means, at least to me, if there is more money that is coming in from the continent to help startups scale it would help the reported 9.53% unemployment rate across the continent.

It should be mentioned that the number quoted above is something of generalisation and might not have factored in some key metrics happening in each of the individual countries recorded. However, it is what we have at the moment and it gives a general picture of the state of affairs in Africa.

Furthermore, the figures are for only funded startups and not for the thousands maybe hundreds of thousands of bootstrapped ventures that are charting their courses across various industries. But those employment numbers could be greater if viable startups had more money to dedicate to Research and development, as well as scaling operations.

I say this because there are a number of startups in Africa that are in this pre-seed to seed stage limbo where it’s essentially subsistence instead of expansion. They have, unfortunately, come to the end of whatever patient capital was on the offer and in an effort to raise funds were rebuffed by the VC class for a myriad of reasons (probably because they aren’t in fintech or that their territory of operations is problematic).

If we look at the US$25 million startup fund under FEDA that Afreximbank has on the table then it would be safe to assume that the ticket size will be US$100k to maybe about US$500K (at the most) which to be honest for seasoned startups that have been operating for some time is not really money because they may make a more compelling case that a startup that’s in the idea phase.

What this might lead those funds to be used for is more in keeping the venture alive than scaling operations to compete or establish an industry that is not yet properly explored.

Which markets are those funds going to be deployed

Above the need to support seasoned startups who have been in the pressed stage for years, the greater concern is where Afreximbank will deploy the money. More often than not, accelerators and incubators lean more toward the big four (South Africa, Kenya, Nigeria, and Egypt) where 75% of VC funding traditionally goes.

If the Afreximbank was looking for a playbook of putting money into startups then those countries present an easy playbook. They are well-explored and very well-supported and the success and tracking of startups in those markets will be easier. However, if (and I am speculating here) Afreximbank chooses this route, which is low-hanging fruit if we are being honest, they will be marginalizing startups in areas that typically don’t get any investment but have viable business models and products.

Terms of the Afreximbank startup VC fund

The terms follow the investment vehicle stated above which includes:

  • Soft Loans – typically one to a developing country, made on terms very favourable to the borrower.
  • Convertible Grants – financial donations that are refunded if recipients manage to generate sufficient income after the start-up period.
  • Venture Fund – patient equity-linked capital to enable an enterprise to scale.

These are right around what most founders would expect went they get a term sheet. However, there is no granular explanation of how those terms will be assessed because banks are typically in the business of lending money to make a profit for itself, investors and other stakeholders. Much like any business they have to upkeep their operations across various territories and regions.

What will be the difference is what those terms actually look like and how market-specific they are to be considered “favourable” to the ventures the bank is looking to help scale across the continent.

Not completely look a gift horse in the mouth

The Afreximbank is in the business of African Imports and Exports so for them to stray from their course offering any startup some money is something to be celebrated. However, the value of the fund is significantly low for the goals that Afrieximbank wants to achieve along with the initiatives of the Africa Continental Free Trade Area.

I sincerely hope the fund is in a stepped approach to help the Bank find a baseline because it would be a preferable option to have African ventures being funded by African instruments. Moreover, African Financial Instruments identifying capable startups that may have, for one reason or another, stalled in their funding efforts but have sound business models and products that might just need that boost to really kick off…

Whether this ends up being the case is something we will have to wait and see…