The Blame Game: 5 reasons why early stage deals fall through in Africa – by Margaret Nakunza and Arielle Molino
If Africa was a person and I had to describe it in one word, that word would be innovative! For many
stakeholders, the conversation on Africa has shifted from problem-centered challenges to solution-
oriented opportunities, prospects, innovations that the continent can now boast about. This is evident
considering the number of investment funds that are streaming in to scout for companies across Africa.
However, there is a mismatch between who investors are looking for and what entrepreneurs are
According to research conducted during one of our Sankalp events, we found that 88% of
entrepreneurs are looking to raise capital which is not shocking, however, only 38% of the investors
offer ticket sizes below USD $1M, when 71% of the entrepreneurs are looking to raise less than $1M. It’s
clear that the majority of entrepreneurs in Africa are early stage entrepreneurs which often results to
many disappointments for entrepreneurs because early stage investing in Africa is characterized by
numerous challenges. Some are due to macroeconomic systemic factors that are beyond the control of
both the investor and the potential investee. However, there are some challenges that hinder the
conclusion of a transaction. It isn’t a blame game of just pointing fingers, as all stakeholders are key
contributors in the game of investments. Could there be a simple issue of misalignment of expectations
or are we looking at a more nuanced and hidden reason for deals falling through? Here are some
reasons why deals fall through in Africa:
1) Faking it, and not making it
Some of the early stage entrepreneurs are trying to turn themselves into social enterprises or
high-impact businesses even if it’s not core to their model. The depth of seriousness on their
impact is not really baked into the model of the organization. We notice the shift to impact
business when funds are on the table. However, when pitching to a group of investors, the
business plan is rejected because the idea of impact is not integral to the business making it
seem like an after-thought.
Recommendation for entrepreneurs: It is important for entrepreneurs to stay true to the nature
of their business model, don’t over exaggerate your impact play for the investor; they’ll see right
2) Misalignment of expectations
Investments are relationships that are built on trust. As such, managing expectations on both
sides is incredibly important. Entrepreneurs need to understand the due diligence process and
the expectations of the investor; on the other side of the table, investors need to be honest and
open about their processes. Even valuation is subject to due diligence, and investors may
discover that the market is not as big as they thought, or the picture that was painted is not
entirely accurate. Beyond valuation, investors will have critical governance expectations,
ensuring the right checks and balances for the company. While some entrepreneurs see this as
‘losing control,’ good governance will better position the company for additional capital raises
later on, and ultimately offer an exit for the investor.
Recommendations for both parties: Be honest and open with you understanding of the process
and expectations. Ask questions when you don’t understand. Focus on how to create value
together. If you see more value than money, then it’s a good partnership.
3) The fly-in, fly-out model misses important contextual nuances
80% of the funding that comes into Africa for young companies is foreign capital, and 42% of the
funding comes from just North America. Africa has 54 countries (or 56 depending on how you
count), which means an incredible diversity of resources, politics, and regulatory environments,
which cannot be homogenously generalized as “Africa.” Africa can be overwhelming for an
investor who doesn’t understand these unique dynamics, and generalized approaches may not
be effective. Investors who are not based in the region or country in which they’re investing in
can often struggle with “getting” the local context. Let’s face it, this is a reality for many global
investors, but when investors fly in and fly out, they may miss a lot of nuance that is in inherent
for the entrepreneur.
Recommendation for investors: Have a local base and not just a base where you employ expats.
Try your best to have local employees who are really able to understand the context in which
you’re investing, can ask the right questions, and understand the macro-level environment in
which entrepreneurs are working. If you don’t have the infrastructure to hire locally, then
collaborate with local partners or consultants who can offer a contextual perspective.
4) Lack of willingness to be flexible
We’ve all heard narratives around the need for more patient capital, but flexibility goes beyond
just exit timelines. Entrepreneurs need more than just money, and the best investors give
support, not just the cash. Trust is a very real currency in these transactions and investors may
need to go beyond the business – to understand what’s going on with the entrepreneur
mentally and emotionally. Running a start-up is hard work: ensuring they can pay salaries every
month, managing clients, delivering on goods and services, and fundraising all at the same time.
Investors who aim to understand the entrepreneur more deeply can also avoid “the beer head
effect” of investing into businesses that have all foam and no substance. First time
entrepreneurs aren’t bad entrepreneurs; they may just not be used to the language of investors.
Recommendation for investors: Don’t fall into the power play trap of who holds the purse strings.
Aim to build relationships with the entrepreneurs beyond just the business because the industry
expertise and advise you can offer as an investor may be just as valuable as the cash in your
fund. Remember it is a balancing act, and don’t get emotionally attached to a deal. You don’t
want to have a blind spot and be ‘so taken’ with an entrepreneur that you miss the bigger
5) Deal fatigue
If the deal is taking too long, it’s a lose-lose situation; the parties on both side of the table get
tired of the process. Time is a critical currency for entrepreneurs trying to fundraise, and they
hope for openness on how quickly investors will communicate interest or lack of interest.
Entrepreneurs may genuinely need time to get their documents in order. Investors could share
a clear list of what they’re looking for and let the entrepreneur come back at his/her own pace.
The ability to go away and come back after some time once the entrepreneur is ready, actually
helps build a healthy relationship.
Recommendations for both parties: Doing business in Africa is not for the faint of heart. If it’s a
‘no’ from investors, make it a quick ‘no,’ which is better for the entrepreneur than a prolonged
‘yes.’ Entrepreneurs, if you don’t feel comfortable with the investor, then pull the plug and move
on to identifying other investment opportunities.
It takes time to appreciate the continent and de-escalate the challenges that come with it. Africa is the
frontier and the future of investments – a rising continent ripe with opportunity. Entrepreneurs and
investors should both understand its challenges, embrace them, and grow businesses together for the
betterment of the region.