Is venture capital overrated?

TechCrunch reported that the latest Crunchbase data shows that Black startup founders in the United States raised around $264 million out of the total $33.6 billion in global venture capital allocated in the last quarter of 2022.

That’s an uptick from the $178 million or 0.43 percent the group raised in the third quarter of 2022.

In total, U.S. Black founders raised an estimated $2.254 billion out of the $215.9 billion in U.S. venture capital allocated last year. That’s about 1%, a slight drop from the 1.3 percent raised in 2021. Let’s break this down.

The situation is not any different in Africa and closer home in Kenya, where young innovative creators are struggling to raise capital to run their budding businesses.

Sankalp Africa which is an impact investing, social entrepreneurship, and non-profit sector in Africa, India, and the United States seeks to have a paradigm shift toward venture capital investment toward startups.

Arielle Molino who is of American origin with a decade of experience in the social enterprise space in Kenya working with Sankalp told NTV that it is time to innovate around financing models for emerging markets regardless of where the money in venture capital is coming from.

“The US has 20 unicorns, while Africa has just 7 of these. While about 40% of the global venture capital goes to American startups and companies at various funding stages, it is clear there is a big mismatch in the financing gap in these continents in question and this is something we need to address,” Molino who is married to a Kenyan told NTV.

Molino says all it takes is founders and innovators disrupting the existing model of venture capital investment with financing models and options like mutual funds, and insurance companies, as it happened in the US in the early 60s.

“The first venture capital was founded in 1961 and not much has changed since then. To me, it’s a lack of innovation, and venture capital let’s be honest leaves out a lot of people,” she opined.

To illustrate the magnitude of her statement, she says women-owned, founded, and run startups raised just 3% of global venture capital last year. Also, potential investors tend to overestimate the growth curves of various startups making it hard to empirically judge the break-even points and return on investments of some of these young companies.

The other issue of concern is the distribution of the equity venture capital funds per country, where she observed that the majority of the VC funds went to Nigeria, Kenya, South Africa and Egypt startups, leaving behind a huge market that needs the finances set up shop.

“I don’t think, it is a black financing problem. It is just in the paradigm of financing for startups. See we live in a diverse world and businesses are diverse, why do we only over-emphasize venture capital as the only solution to financing startups?” She inquired.

Some of the startup financing options that Sankalp Africa seeks to champion are as follows;

Venture Debt

Venture debt is a type of loan offered by banks and nonbank lenders that is designed specifically for early-stage, high-growth companies with venture capital backing. The vast majority of venture-backed companies raise venture debt at some point in their lives from specialized banks

Venture debt is often used by companies who do not qualify or do not want bank debt due to their riskier nature. For example, a software company may not qualify for bank debt because they have a lower amount of hard assets (e.g. no equipment, no buildings, etc.) – so the bank has limited assets to secure their loan.

Revenue-Based Financing Model

Revenue-based financing (RBF) is a type of debt financing that is typically used by startups. In this arrangement, the lender provides the startup with capital, and in return, the startup agrees to pay back the loan with a percentage of its future revenue. It is also known as royalty-based financing.

Startup Grants

Grants for early-stage startups are a new funding option that provides financial support to companies that have emerged from the early stages of their development. Investors vet a startup’s ability to generate revenue, its potential to impact the community, and how likely it is that the startup will actually achieve its goals before it can finally invest.

Grants are normally non-refundable upon profitability, however, startups must really prove themselves for consideration for startup grants.

Startups are equally advised to align with the Sustainable Development Goals (SDG’S) and Environmental Social and Governance structures to align with the demand for climate-sensitive investments and fundraising.

As a no-brainer, Fintechs have long been the most attractive startup ventures attracting the most venture capital. Investors are equally being asked to look to broader avenues and more startups to invest in.

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