Venture capital is a long-term play. This framework is the cornerstone of well-established ecosystems of the world. The likes of Silicon Valley have grown accustomed to and embraced the long-term play in funding and scaling a startup. The business sense in most people finds it unfathomable to throw tens (and sometimes hundreds) of millions of dollars into a startup that doesn’t turn a profit for years. Yet, this is the exact approach that has enabled the tech giants of our time to exist and come to define the globalised world we live in. As a nascent industry in Africa, venture capital is slowly, but surely, building its wings to soar.
Tech startups are forever in a race against time to raise funding. AfricArena’s research among its network finds that the most successful startups in capital raising are those with the most experienced founders (see report). Further digging reveals that this is owing to the arduous process of due diligence in the African VC space. The truth is, venture raising is tougher in Africa compared to developed markets where more capital is available. Investors in Africa conduct deeper due diligence than their European or American counterparts and Term Sheet conditions tend to be tougher, which makes the investment process longer. Furthermore, many investors in Africa claim that early-stage founders are less prepared to meet the demands of due diligence and Term Sheets; while at the same time, startups claim that investors in Africa are not doing enough to make themselves visible and accessible.
In November 2019, 50 of the most active investors (mainly VCs) investing on the continent came together for a weekend VC Unconference in Cape Town, South Africa to connect and discuss how to foster co-investment and deal syndication. It became apparent that investors across the continent have expectations and processes that largely vary. This creates friction, extends the average fundraising time, deprives entrepreneurs of precious time out of their business, and can prevent investors from doing deal syndication.
Enter the Digital Collective Africa.
What came out of the VC Unconference was the formation of the Digital Collective Africa initiative. This Collective is a pro bono and Pan African initiative driven by Africa’s top VCs, incubators and accelerators, industry bodies, public institutions and entrepreneurs, with the purpose of creating resources to facilitate venture capital investment in early-stage African tech startups and standardizing the investment process. The Collective has garnered the support of the major investment networks, including: ABAN, EAVCA and SAVCA; as well as many VC firms, startup founders and entrepreneurial networks.
The key working streams of deliverables include the following:
Standardised and common standard reference Term Sheet.
Standardised and interoperable Due Diligence methodology and checklists for Seed & Series A investments.
An initiative to lobby for adoption of Startup Acts in Africa. After Tunisia and Senegal, the current focus is on South Africa — a community-building effort is currently underway to prepare a campaign.
Evaluation of the impact of incubators and accelerators on Startups
A set of open source resources contained in a pan African community-managed platform: http://www.digitalcollective.africa/ where all of the above will be available, plus much more resources (reports, content, list of investors, incubators, events, and more)
A starting point: A Term Sheet guideline
As a founding member of this Collective, AfricArena is proud to welcome the first deliverables of this initiative: a website for consolidating resources and tools, and a Term Sheet template drafted by Endeavor South Africa.
These deliverables were officially launched in a virtual event that served as the Collective’s first step in making a dent in the African tech ecosystem. The main topic of the launch event was the public release of the Term Sheet template, drafted by Endeavor South Africa, with the consultation of multiple VCs and entrepreneurs, which aims to support founders in their Seed and Series A equity financing rounds.
A Term Sheet is a monumental document in the deal process — a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. Why is there a need to revisit and revise the way Term Sheets are structured, particularly in the context of Africa? For one, early-stage founders lack experience in capital raising make unintended errors that are costly, in the form of premature dilution and voting rights, among others. From an investor perspective, complex protections and unreasonable terms in previous deals can deter investors in later rounds. A move in the right direction in reducing friction in capital raising for startups is bringing balance between founder interests and investor protections through standardized term sheet guidance.
The Term Sheet template, and its accompanying Guidance Note, features most common terms applied in South Africa and global Term Sheets and provides a commentary on term ranges. A special component of the Term Sheet template is a glossary of key terms — definitions of most common terms used, including convertible instruments and SAFEs. A key feature of the Guidance Note are the “Founder-Friendly Tips” that point out common pitfalls and what terms should be looked out for, nuanced for different geographies. It must be noted that this template is most applicable to South Africa, but work is underway by Endeavor offices in Kenya and Nigeria to add sections that specifically relate to raising capital in other countries.
Veteran entrepreneur and current CEO of RecoMed, Sheraan Amod, who has extensive experience in raising venture capital over multiple rounds, comments on the Term Sheet as “extremely reasonable”. He explains, “the benefit [of a standardised term sheet] is one of demystifying what often is seen to be a complex and bespoke process, and entrepreneurs without diverse experience get confused by this and that’s not good.” Furthermore, Amod urges entrepreneurs to educate themselves on the clauses and tools inherent in Term Sheets.
Julia Price, of Endeavor SA, notes that the Term Sheet is not designed to solve all the challenges that founders may face when raising capital. Rather, it is designed to create awareness of the complexity of Term Sheets and the inherent structures.
“Founders can be so focused on getting money in the bank for their current round, but often don’t think through the implications and unintended consequences of what it might mean later on.” — Julia Price, Global Capital & Partnerships, Endeavor South Africa.
The newly drafted Term Sheet template hopes to help founders avoid costly errors that will haunt them in later fundraising rounds.
The intention is that this will remain a working document and is updated on a regular basis. Africa’s robust tech entrepreneurial ecosystem will take time to reach the level of developed markets, and perhaps emulating what has already been done may produce varying results; nevertheless, the Term Sheet template is a progressive step.
{Southern Africa Term Sheet Guidance Note: view and download here.}