According to WeeTracker media firm, African startups raised about $1.3 billion from venture capital funding in 2019, which is an improvement from the past years. Nevertheless, startups in Africa still face enormous challenges when it comes to funding projects due to a lack of liquidity.
Blockchain technology could step into the gap and help startups especially in the emerging tech hubs like Kenya, Nigeria, and South Africa to raise funds for their projects through blockchain-powered equity crowdfunding. Equity crowdfunding has helped revolutionize the way businesses raise funds from investors.
By adopting blockchain technology, startups do not have to go through the tedious process of getting their companies listed on the stock markets to sell their shares.
Why investors hesitate
In Africa, the ecosystem for doing business is still not that favourable for startups to achieve reasonable growth in a short time span. Most startups struggle to make ends meet due to factors like high taxes, which are common in many African countries. In some worst-case scenarios, some startups end up closing shops. This makes investors shy off from investing since they are not sure if they will live to get the returns.
Also, in Africa, secondary markets are scarce resulting in low market liquidity for investors to exit from investments. Venture capitals, for example, look for entrepreneurs that build sustainable businesses with promising exit opportunities. For a startup to win a venture capital investment, it has to have at least an IPO, merger, or some acquisitions, which are only possible if a startup achieves a certain level of growth.
To create the necessary liquidity, startups in Africa could adopt blockchain technology to enable them to tokenize their assets.
How token-based financing increases market liquidity
By using blockchain, startups can create tokens (either utility or security tokens). They can then go ahead and sell the tokens through Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), or Security Token Offering (STOs) for the case of security tokens.
Investors will find it safer to invest in startups by buying tokens since the tokens are easily traded in exchanges where the liquidity is high. If an investor purchases some tokens from a startup, and the startup succeeds to get the tokens listed on a cryptocurrency exchange, then the investor can trade the tokens and make some profits. In most cases, the price at which the tokens are listed on the crypto exchanges is usually higher than the price of the tokens during the initial offerings.
Therefore, an investor could decide to exit the market immediately the tokens of the startup get listed on an exchange.
Besides, since a good amount of investment in Africa comes from outside Africa, token financing offers the best opportunity to tap into the external sources. Blockchains are usually decentralized and they allow cheap and fast cross broader transfer of funds. Therefore, investors from any corner of the world can easily purchase the tokens of a startup in Africa without necessarily having to travel to a specific country or sign huge volumes of paper agreements.
Examples of African startups that have reaped big from token financing
Below are some startups that have raised funds through token financing by conducting ICOs, IEOs, and STOs.
Golix, a Zimbabwean crypto exchange that was started in 2014. In 2018 Golix conducted an ICO that raised $23 million by offering their GLX token.
The UK’s BlockBank that acquired some stake in Kenyan Spire Bank. BlockBank was able to raise about 12.8 million in its pre-ICO conducted in 2018.
Wala, the “zero-fee money app” South African startup that was able to raise $1.2 million through an ICO conducted in 2019.
Mazzuma, a Ghanaian startup that was raised over $45,000 in its third token sale phase after successfully conducting a pre-phase, first phase, and a second phase.