According to Paul Graham, a startup is defined as a company that is "designed to grow fast." This emphasis on growth and the ability to scale fast is what sets startups apart from more established companies and small businesses.
One of the key reasons why startups raise funding is to support this rapid growth. Startups often have ambitious goals and need significant resources in order to achieve them. Funding allows startups to invest in research and development, hire staff, and expand their operations and into new markets, all of which are necessary for growth. This is why it is common for anyone that follows the startup ecosystem to read about various startups raising funding from investors.
Venture capital (VC) firms are one of the most common sources of funding for startups. VC firms provide financial backing to startups in exchange for an ownership stake in the company. VC firms typically focus on investing in growth-stage companies that have the potential for high growth for example, they will invest in a startup that has 5,000 users and $5m a year in revenue at a $50m post-money valuation (the value of the startup after investment) in the hope that the funding will push to 10,000 users and $15m in revenue hence a bigger valuation. Startups, however, are risky investments and VCs are looking for companies that can offer a high return on their investment.
According to data from CB Insights, global startup funding reached $415.1 billion in 2022, a drop of 35% year-over-year. US-based startups raised 48% of this funding despite US funding dropping by 37% from 2021. African startups raised only 1.2% of all global funding, amounting to around $5 billion despite being the only region to record positive growth (+5%) in funding in 2022. In comparison, Africa's share of the global GDP stands at 2.5%-3% while its share of the global population stands at around 17%. This disparity in funding is due to a number of factors.
One major factor is a lack of access to funding sources. Many African startups do not have the same level of connections or networks as startups in more developed regions, which can make it more difficult for them to secure funding from VC firms and angel investors. Additionally, many African startups may not have the same level of experience or resources as startups in more developed regions, which can make it more difficult for them to attract funding.
Another factor is the perceived risk of investing in Africa. Africa is a more risky place to invest due to factors such as political instability, lack of infrastructure, and lack of legal protections. These factors can make investors more hesitant to invest in African startups.
Finally, the lack of a strong startup ecosystem in many African countries can also play a role. Many African countries lack the supportive infrastructure and resources that are necessary for startups to thrive. This includes things like incubators and accelerators, which provide startups with the resources and support they need to grow.
In conclusion, the low percentage of global funding that African startups raise is due to a combination of factors, including lack of access to funding sources, perceived risk, and lack of a strong startup ecosystem. However, with an increasing number of initiatives and organizations focusing on supporting African startups, it is likely that this situation will change in the coming years.