# Equity in African VC is broken

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Well, that’s a dramatic title for an article. But, hear us out!

Africa is rising, we’re with you 💯. This article isn’t about that. This article is about what’s broken in our ecosystem and 3 ways we can [reset it](https://techcabal.com/2023/04/04/the-great-reset-in-african-vc-what-it-means-for-the-ecosystem/) together. Our shared goal is to build a stronger foundation for the next era of African tech.

These solutions are pretty big, and this is a call for members of the African tech community that share a commitment to building an ecosystem we are proud of. [**Join us by clicking here**](https://airtable.com/shrZbMSDhrFWn5C2g) if you want to be a part of this community effort!

# The soft life era of African VC 🎩

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So really, it’s a [mixed story](https://open.substack.com/pub/thebigdeal/p/q12023?utm_campaign=post&utm_medium=web).

Last month, the African tech ecosystem crossed the $20 billion dollar mark of cash invested into the African technology ecosystem between 2016 and March 2023.

, [Tage](https://twitter.com/ulonnaya), [Eunice](https://twitter.com/euniceajim), [Temi](https://twitter.com/TemiRansomeKuti), [Nichole](https://twitter.com/Nicho0le), [Maya](https://twitter.com/mayahorgan), [Rebecca](https://twitter.com/africatechie), [D. Barry](https://twitter.com/Daudex), [Benji](https://twitter.com/Benji_Fernandes), [Caleb](https://twitter.com/calebmaru), [Benjamin](https://twitter.com/DadaBen_), [Asemota](https://twitter.com/asemota?s=20), [Sultan](https://twitter.com/hackSultan?s=20) amongst others that ensure that we stay involved in the real things happening throughout the African startup ecosystem. ](Equity%20in%20African%20VC%20is%20broken%20cdac052e266647cb92d4110d60f24d24/Screen_Shot_2023-04-10_at_12.12.32.png)

Massive shout out to [Wiza](https://twitter.com/wizaj), [Tage](https://twitter.com/ulonnaya), [Eunice](https://twitter.com/euniceajim), [Temi](https://twitter.com/TemiRansomeKuti), [Nichole](https://twitter.com/Nicho0le), [Maya](https://twitter.com/mayahorgan), [Rebecca](https://twitter.com/africatechie), [D. Barry](https://twitter.com/Daudex), [Benji](https://twitter.com/Benji_Fernandes), [Caleb](https://twitter.com/calebmaru), [Benjamin](https://twitter.com/DadaBen_), [Asemota](https://twitter.com/asemota?s=20), [Sultan](https://twitter.com/hackSultan?s=20) amongst others that ensure that we stay involved in the real things happening throughout the African startup ecosystem.

The weirdest thing happened though. Even though we hit that milestone, March 2023 was the worst month in 2.5 years since a lot of global VC blew up around the world.

It’s a pretty important signal - as if we’re getting a sign to reflect on what we’ve built so far and what we can do better. Don’t get us wrong, we’re not saying that the soft life era wasn’t hard.

African startup teams, we are resilient. The last couple of years were difficult for every African startup team, but we thrived and collectively built scalable solutions to really hard problems for our people across the continent. Despite all odds, we keep doing the thing and scaled to the first $20 billion in dollars invested.

But let’s be real - it was also the soft life. Cash was cheap, fast and sweet. Investors spent 15 seconds on 2 slides on your Docsend, and signed SAFEs at a crazy dollar premium and sent the cash to your Mercury account by the next bank day.

Along the way, we celebrated ‘fundraising’, when really we were selling equity in Africa’s new economy and ran by serious corporate and criminal issues that popped up across our ecosystem thanks to the help of brave journalists.

Growth always comes at a cost and our foundation wasn’t strong enough. That’s why we’re saying that equity in African VC is broken. Then we’re making a public commitment to contributing to fixing it by building foundational solutions for the next $20 billion era of African VC.

# Equity in African VC is broken 🛠

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And that’s okay. We’re all used to things that break. Things break at our startups all of the time. What’s more dangerous is when we pretend that something isn’t broken. Acceptance is the first step to build foundations to learn from our mistakes. If we don’t fix these, the cracks will get bigger and bigger over the coming years.

Here’s how African tech is broken:

### African VC is ***structurally* broken**

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Structural issues are the most dangerous, because they can last decades. They require fundamental changes to an underlying framework for the next $20b invested into African tech.

Structural issues are inherent to the design of a system, while systemic issues are caused by the way the system operates. In the case of the African tech ecosystem, the core structural issue was the wholesale adoption of a VC-style financing model from Silicon Valley that was not tailored to the unique challenges and market conditions of African countries. VC financing in Silicon Valley had decades to evolve in a well-built capital markets structure. VC financing in Africa sped up in less than half a decade, across very different markets.

This has widened the systemic issues such as centralized ownership **outside** of Africa, alarmingly low levels of financing for women-led and local-led startups. Let’s not forget all of the examples of poor corporate governance and lack of transparency that creeped its way into our ecosystem over the years.

As if this wasn’t bad enough, the macroeconomic and political environment across Africa is crumbling at an alarming rate, and will compound these structural issues.

We’re not done, let’s call it as it is without naming names. Easy money made it easy for bad actors to game the system. Sexual harassment, securities fraud, theft, poor treatment for employees all got reported, but forgotten just as quickly. Never forget. All of these structural issues are deeply ingrained and require fundamental changes to the design and operation of the African tech ecosystem to address them.

### African VC is ***financially* broken**

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Soft-life era SAFE valuation caps for African startups earning revenue in Naira, Shillings or Rand in a region with painfully low liquidity was never going to work mathematically. Valuations are all over the place, and the economies of the countries we operate in are declining (and growing) at an alarming rate.

Like, who crunched those numbers?


The face you make on that sweet exit, before realizing it was all just one bad circular reference.

Well, whoever crunched those numbers probably couldn’t have seen the huge public debt across Africa, de-dollarization and wild inflation all coming through at the same time. It’s genuinely a perfect storm. That storm is about to get worse when African countries need to restructure their debt obligations over the next 3 years.

The percentage of African startups that make it to priced rounds was about 8% in 2021. We don’t know yet what that number will be in 2023, but we’ll take the bet that it will be lower than 8%. That’s going to cause a huge ripple, not just for startups, but the effects of that ripple will move up the chain of entrepreneurship in Africa.

Even worse, is that our local venture funds are having a hard time. They got priced out of the last VC financing bubble (2020 to 2022), and now they’re stuck with mark-ups on their SAFEs that may or may not convert. A quick scan of the top local venture funds on Briter, and you’ll find that some of their portfolios have above 40% of their equity in SAFEs. That’s not a problem in a market with high exits, liquidity and percentage of companies converting to priced rounds.

It is a problem in our market, and is already making it much harder for those funds to raise their next funds. There’s tons of hope with new funds raised by Flat6Labs, Kepple, and others. But, the underlying financial issues are still there.

### African VC is ***legally* broken**

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Our legal systems were not ready for this growth.

Legal issues are like tech debt. We all know it’s there. But the revenue is too sweet, and we let the debt pile up until we lose money - then we get mad about it.


The sweet money came too fast in the soft-life era of African tech funding. We didn’t have the time to create standards for equity and corporate structures. We definitely didn’t have the time for regulations across Africa to catch up, so we all created entities across the world: Delaware, England, Dubai, Singapore - to be sure we closed the cash. We did what we needed to do, but there are serious consequences that have created legal debt across all of our cap tables.

Cap tables break all of the time, massive amounts of paper work make it harder to track true equity ownership in a company. This is especially true when our paper work is scattered across government registries, google drives, lawyer inboxes and platforms Raise, AngeLlist, Pulley, Clerky, Carta and others. This is made worse by the fact that the typical seed-stage startup in Africa has a relatively complex corporate structure. A Series A startup? A really complex corporate structure that is becoming more painful and expensive to manage with all of the new laws and regulations being passed for tech in multiple African countries.

When a cap table is broken, that means there are expensive pieces of legal debt that could break the startup at any time. Most times, the people that lose out are the founders, shareholders and employees, because no-one can genuinely track their latest percentage ownership in the company without spending hundreds of thousands of dollars at Series A to fix it.

# 3 solutions for the next era of African VC 🙏🏾

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Things break, especially when you grow as fast as our ecosystem did. More than ever, we need African solutions to this big problem. We’re all building the foundations of Africa’s new economy. This isn’t about just building stuff, this is about building the economic and cultural foundations for the next generation of people that will call us their ancestors.

If we get this wrong, we’ll do real damage. If we get it right, we really could raise Africa. Consider this a public commitment to being sure that the following three solutions happen in real life.

These are **big** solutions, and they will take many years to make very real. We know that. There are a few steps we’ve taken to get the ball rolling, and will be releasing them over the coming months.

Here are three solutions we think could build a stronger foundation for the next era of African tech:

### A Pan-African VC Standard

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The greatest tech ecosystems around the world will typically publish and follow a set of guidelines or standards. For example, the American National Venture Capital Association sets out a set of standards and model templates that all lawyers and financial analysts can use to issue, buy and sell equity in American startups. Those standards are plugged into local capital markets and securities law, and give a rubric by which the ecosystem runs. Same thing for the Canadian Venture Capital Association standard, which members of our team were involved in drafting back in the day.

We’re suggesting a Pan-African tech standard, a set of suggested rules that are built to relieve the structural, financial and legal issues we’re facing by designing a comprehensive guideline for how we should buy, sell, value and govern equity across key African markets. The idea is for this to be plug and play, so that countries across Africa can adapt it and plug it into their own laws and rules.

### A Pan-African Equity Stack

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A stack is a model that companies, funds and lawyers can adopt for creating corporate structures based on the industry and markets that we operate in. This is especially important in our ecosystem where there are is no single set of laws that govern a particular industry or country for a tech company. Think of this as creating our own Delaware free zone.

Our suggestion here is to release set of equity and corporate stacks - models from successful startups that can be used by founders and teams.

For example, we’ve been incubating a Web3 corporate stack for African companies. It is a corporate model that is modularly built for companies to hold their holding company in the GCC or Delaware, subsidiaries in Nigeria, Kenya and prescribes a set of licenses, pay-out partners, and valuation metrics to enable a company to operate legally, and grow in line with market trends.

Our goal is to incubate and release similar stacks over the coming months with partners.

### **A Pan-African Startup Act**

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We’ve all heard about the mythical startup acts popping up across Africa. The good news is, they are genuinely awesome attempts to bring clarity to our ecosystem. The bad news is, they suffer from the same mistake of Africa as a whole - none of those Startup Acts are integrated for them to work together.

Our suggestion here is to integrate Africa’s startup acts into one Pan-African Startup Act, and then lobby for it to be plugged into the African Continental Free Trade Area Agreement. This will help align Startup Acts, bring clarity to startups and investors operating in multiple jurisdictions, and bring the trade benefits of the AfCFTA to our entire ecosystem.

# **Next steps**

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So, we hope that something in here made sense. Consider this a public commitment to see these solutions through. [Our only goal is to raise Africa](Introducing%20raise%20africa%20%F0%9F%92%AB%20b5b7f69572c94b4d80728256cb3be08f.md), and we believe startups are the next generation of Africa’s economy.

If you’re down to join us on the journey to see these solutions through (and you’re genuinely serious), join our community [here](https://airtable.com/shrZbMSDhrFWn5C2g). If you want to follow what’s going on in general, find us at [raise.africa](http://raise.africa).

Let’s build an ecosystem that we are proud of.


Until next time!