Startups looking for funding tend to go for VC investment,  but there are plenty of alternative ways to get cash in the bank. From crowdfunding from your biggest supporters to finding the perfect grant, here are 10 types of startup funding African startups can leverage.

VC funding

VC funding is where a venture capital firm will hand over cash in return for equity. It is typically the most popular type of funding because the cheques tend to be larger than with other available options, which is particularly useful for startups looking to grow at rocket-ship speed.

Having the backing of a trusted firm can be a big reputation boost for early-stage startups, especially when competition for capital is fierce. There’s also nothing VCs hate more than FOMO: once one comes on board, the inquiries from others tend to follow. 

What VCs are looking for in your pitch deck will change depending on the stage of your startup: 

At Pre-seed:

• VCs will be looking for a startup’s vision rather than proof of revenue or product-market fit
• The people on the team are key: investors will judge the reputation and commitment of founders rather than poring over the early financial numbers 
• Investors will expect some proof of market validation for the product 

Seed Stage

• You need a detailed explanation of the problem and how your startup solves it
• Investors will look at the founder’s capabilities and ask why they’re the right person for the job
• You can impress VCs by displaying early traction or offering a product demo

In Series-A:

• At this stage, investors focus more on the numbers. Neeral Shah, founder of YardLink, shared that he and his team put a lot of detail into the metrics, the financial model, and the assumptions behind the metrics—much more than he had expected. I think that was the real eye-opener: it’s like a real business now, you really need to show the metrics and show that you have the numbers to back up the story.” 
• Ideally, you’ll have the business’s sales, income statement or profit-and-loss statement and cashflow forecast for at least three years 
• Investors will still show interest in the strengths, expertise, and experience of the founding team.
  

Accelerators

Accelerators choose a cohort of early-stage founders to take part in a development programme with mentorship, which is handy for first-time founders without existing connections. Participants can also get a cash injection when they ‘graduate’, but usually have to give up some equity; though that’s usually no more than 10%.  

But not all accelerators are equal: VCs consider only a couple of programs—namely Entrepreneur First and Y Combinator—worth founders’ time and an investor’s attention. Plus, while having a mentor is useful, it doesn’t always lead to a productive relationship: 71% of people who told Sifted their accelerator wasn’t useful said their mentors lacked the right experience to help them.

Angel investors

While some angels have had experience at VC firms, others pivot from being founders or operators themselves. They’ll invest in return for equity, and either put money in as individual investors or as part of a syndicate that has pooled together cash from several angels. They can also have specific subject expertise and will invest with that focus in mind — so, compared to more generalist VC firms, can potentially offer advice more specific to your sector. Founders now more commonly have multiple angels on their cap table.

Mathilda Bosch, an investor at Techstars London, says that while angels are typically 'passive investors,' founders can contact them for introductions and advice when needed, “can be a great segue to institutional investors, business development or talent acquisition.” 

There’s also potential for a more personal connection. Finnur Pind, founder of Treble, which builds audio for virtual worlds, says that his angel investors “are genuinely passionate about the technology and the positive impact [they] can bring.” 

That’s not to say that all angels are subject experts. Bosch notes that it’s important to vet investors just like any other form of financing, which is an extra task to consider: “Angels can vary in experience and organisation, and due diligence can sometimes be a frustrating process.”

Friends and family

Some startups, particularly in the earliest stages, will appeal to their nearest and dearest for financing before looking to outside sources. As you know the people you’re pitching to, one of the perks of this type of funding is that you don’t have to convince a jury of investors that you’re worth their time and money.

The Association of Chartered Certified Accountants has a handy guide on the pros and cons of this type of funding.

Being able to access funding from friends and family, however, is a privileged position to be in, as many founders don’t have the luxury of wealthy associates. That’s not great for the industry as a whole, as it makes it easier for people with existing connections to get a leg up and reinforces tech’s terrible diversity problem. 

Bootstrapping 

"Bootstrapping happens when the founding team funds a startup themselves and then uses revenue from the business, without external capital.

It can be the right fit for an early-stage startup, but founders should consider a few questions first."Companies in capital-intensive sectors, still working on product-market fit or in a “winner takes all” space might not benefit from bootstrapping, and find VC investment more appropriate.  

“Investors bring value and expertise to the business, not just money”

Bootstrapping the business means that founders retain control and can make every decision themselves. The flip side is that lacking expert insight from investors can be a difficult way to run a startup, so inexperienced founders might struggle. 

“[Our team] bootstrapped our company for as long as we could, because I felt that if we were giving up equity, we would be relinquishing control,” says Lucy Hall, cofounder and CEO at fashion rental platform LOANHOOD. In hindsight, though bootstrapping has its perks, she adds that “investors bring value and expertise to the business, not just money.”

Crowdfunding

Crowdfunding is a type of funding where a large group of people invest individual amounts through a platform. 

Types of crowdfunding include:

• Equity crowdfunding: Supporters become co-owners of the company. Companies can’t typically rely totally on this form of financing and will often raise most of the funding they need from a lead investor first, before going to the public. 
• Rewards-based crowdfunding: Supporters are offered non-financial exclusive perks, like access to the product before launch (handy for getting feedback on the product in its early days) or merch. 
• Crowdlending: Startups can access peer-to-peer lending platforms where they apply for interest-added loans. This cash has to be paid back by a certain deadline and can be tied up with assets, so is a risk for startups that aren’t certain about their ability to repay on time. 

Mark Vincen, chief financial officer at electric bike developer Cowboy, highlights that crowdfunding teams “will be communicating with a very wide range of investors with very different backgrounds, interests and levels of sophistication when it comes to investment, so it’s important that companies are extremely thoughtful about how they position themselves and the investment opportunity as a whole.” 

Having launched a fresh crowdfunding round in March this year, after one in March 2022 that raised €2.7m, Vincen also notes the need for “high-quality content that goes through a tough due diligence process” to convince the crowd to invest; the Cowboy team put together a video campaign. Once founders raise the money, crowdfunding donors want to be kept up to date, so maintaining communication on the latest developments is key to retaining support.

Grants

Some organisations offer grants, a form of non-dilutive funding where the money doesn’t require you to give up equity. This is a common option for techbio, healthtech and other science-based startups, but can also stretch to others with an impact mission. These sectors are good fits for grant funding as they can be an “extremely valuable way to accelerate key R&D activity,” says Scott White, CEO at UK semiconductor startup Pragmatic, which has received both European Innovation Council and UK Research and Innovation grants. 

There are perks to grants besides the money: “They aren’t just non-dilutive funds, they lead to partnerships that will help us make bold scientific and technological discoveries,” says Ian Wharton, cofounder and CEO of digital health app Aide Health, which is in the process of receiving a grant after last raising a pre-seed round in November 2022.

“Care must be taken to only focus on grant-funded projects that create true strategic value for the business”

But founders should choose which grants they apply to carefully: “Care must be taken to only focus on grant-funded projects that create true strategic value for the business,” White tells Sifted — especially given how competitive they can be. 

Grants applications also have “a significant time requirement”, adds Wharton. He suggests that founders thinking about applying for a grant “should consider working with a grant writer with a proven track record to navigate the application process”.

Bank loans

Most major banks offer business loans to entrepreneurs, but very early-stage startups often struggle to secure this type of funding because they can’t always prove a reliable business model and banks consider them higher risk. Silicon Valley Bank, for example, was a popular choice for startups before it collapsed, as it had lower barriers to entry for its loans than many legacy banks.

In the UK, founders can also apply for a government-backed Start Up Loan, which can provide up to £25k and offers 12 months of free mentoring, plus support with writing a business plan.

Venture debt

Venture debt is a type of funding that startups must pay back, rather than exchange for equity. White, who raised venture debt in previous roles before joining Pragmatic, says this type of funding can be helpful to “supplement funding in between equity rounds”. 

“In practice the usable proceeds typically translate to just a few months of additional cash runway”

Debt is usually more accessible to later-stage startups that have already raised money from VCs or institutional investors. It also favors startups focused on profitability rather than growth-at-all-costs, as this improves their chances of repaying the cash more quickly.

Even for startups that fit the bill, venture debt can be an expensive option, as interest rates tend to be higher than traditional bank loans. Plus, White notes, “in practice the usable proceeds typically translate to just a few months of additional cash runway”. Founders can also find it confusing to work out the terms of the deal, as they must agree on the interest rate, transaction fee, drawdown period—the period in which the company can borrow money up to the predefined limit—and other details.

Convertible loans

Convertible loan notes is a type of funding that sits between borrowing and equity. A startup borrows money, and if it doesn’t repay the loan by a set maturity date, the loan converts into equity. This option works well for African founders who need cash in the short term but don’t want to give up more equity, as long as they believe their startup will soon generate revenue. There’s no equity sacrifice if they repay the money on time.

Revenue-based financing

Revenue-based financing is technically a loan, which is repaid by promising the lender a percentage of the company’s future gross revenue over a set amount of time. Applicants won’t have to put up any assets as collateral, unlike a bank loan. Plus, when it comes to the level of involvement, revenue-based financiers are often seen as a middle ground between detached bank lenders and hyper-involved private investors. 

The nature of this type of funding does mean that it’s only a viable option for startups with regular revenue coming in, and as the monthly payments are a set percentage, businesses that are short on cash or need all the money they generate may not be able to spare the repayments.