*James, a first-time fund manager raising a $50 million fund, shares insights on finding the right investors and how to convince them to sign those cheques.
Raising money is no easy feat—just ask any startup founder who has closed a funding round. These conversations can stretch on for months, sometimes years, and finding the right investors often feels like searching for a needle in a haystack.
These same challenges also extend to venture capital firms when they are raising capital. While there is no shortage of stories about the difficulties of raising funds as an African startup founder, little has been said about the unique problems of African investors raising their first funds.
In this two-part series, an African entrepreneur and consultant who has partnered with an accelerator manager and an experienced tech operator to launch his first fund shares his experience. While he has clear goals—developing a model that will change how African VCs return capital to their investors and investing in “overlooked” early-stage startups that have not raised growth-stage capital—the journey to achieving them has been difficult.
(This interview has been edited for clarity)
TC: What is the size of the fund you’re targeting?
*James: We want to lead and co-invest in deals. We’re targeting a fund size of $50 to $70 million and plan to write checks ranging from $2 million to $5 million on average. This means that even for Series B rounds, we’ll be co-investing alongside other investors.
TC: How did you reach that amount?
James: We started by considering the number of companies we wanted to support and worked backwards. We assessed our capabilities, network, and overall resources, as well as the type of transformational support we aim to provide. We intend to have a very intentional platform strategy for our fund, offering meaningful assistance rather than spreading ourselves too thin with an overly large portfolio. By estimating the ballpark number of companies we plan to support, we conducted financial modelling and arrived at that fund size.
Additionally, we’re leveraging our backgrounds, resources, and sectors of expertise based on our previous experiences. This includes the networks we can provide to the companies we invest in and the direct support we can offer. All these factors informed our ultimate choice of fund size.
TC: How much of your own money did you have to put up for your fund?
James: 1%-3% of the fund.
TC: What made you think of starting a fund?
James: I have a background in entrepreneurship and strategy consulting. Although I wasn’t an entrepreneur for a long time, my experiences and some challenges with the African VC industry led me to start a VC fund.
First, the VC ecosystem on this continent is quite young—venture capital as an asset class here is probably around ten years old, so it’s still in its infancy. When I looked at the number of VC firms and their focus, I noticed that many are investing in early-stage companies. However, there’s a significant dearth of growth-stage VC investing.
It’s always great to hear about companies raising pre-seed and seed rounds, and we celebrate those achievements. But then we don’t hear anything about them for the next four years; they don’t seem to reach Series B funding. This could be because the companies weren’t great or because scaling ownership is hard and things happen. But it can also be due to the lack of growth-stage investors.
In talking with friends who work at DFIs (Development Finance Institutions) that are LPs (Limited Partners) in many VCs on this continent, I found that when they looked at the potential returns, many funds weren’t on track to deliver the expected returns to their LPs by the end of their fund cycles, which often conclude around 2024 or 2025. This suggests that the model might be broken.
There are a few things that need to change—not only in portfolio construction but also in the level of support provided to companies. That’s why we’re working on a model that we believe is different in how we approach investments.
TC: How did you develop your thesis?
James: We found alignment not necessarily on specific verticals or sectors, but on overarching themes that transcend individual industries. We focused on the types of companies we wanted to invest in and the attributes or “X-factors” we sought in those companies.
One key theme was investing in digital infrastructure—the infrastructure for the new economy. Another was the concept of network effects across sectors, sub-sectors, or verticals. These were crucial overarching themes that could be applied to many areas. We reached this alignment by bouncing ideas off each other based on our experiences, the gaps we observed in funding certain types of companies and the kinds of businesses we wanted to support.
From there, we adopted a sector approach, starting by identifying the sectors or sub-sectors we wouldn’t invest in, as well as the specific pockets within sectors we wanted to avoid. To inform these decisions, we drew upon our collective experiences—our “secret sauce.”
In terms of sectors, we’re interested in HealthTech, ClimateTech, and certain areas of FinTech—especially companies building infrastructure for the new economy and enabling verticals within FinTech. Sustainable mobility is also a key area of interest for us.
Initially, we focused on the growth stage, but we ultimately broadened our scope to include earlier stages—from Series D down to seed and Series A. We believe there’s a “missing middle” between seed and Series A, a gap that’s often overlooked. We find this space particularly interesting and see the potential in enabling companies within it. So, while we began by considering growth-stage investments, we expanded our focus to include early-stage companies.
TC: What challenges do first-time funds face when talking to LPs?
James: One of the first challenges as an emerging manager is the lack of a track record. If you don’t have a history of investing, potential LPs may ask, “Why you?” It’s crucial to clearly explain to LPs why you are the right person if they deploy funding into your fund.
The second challenge depends on the type of LP you’re approaching. Institutional LPs, like DFIs and impact investors, have specific mandates. A significant challenge is finding the right LPs whose mandates align with the type of companies you’re trying to invest in, which is a massive consideration.
For high-net-worth individuals, challenges vary based on their geography and knowledge of the continent. If they are not familiar with the African business context, there’s a lot of education involved—many calls, travels, and efforts to bring them along on the journey. Even for those who know the continent—accomplished business people or wealthy individuals—you still need to educate them about venture capital and help them understand the potential returns. They might understand business but may not be familiar with venture investing, so you have to create spaces for that dialogue.
TC: What type of returns are you anticipating and sharing with your investors?
James: The typical lifecycle is 10 years and in terms of return, between 2x and 3x, which is the average.
TC: How are you approaching potential Limited Partners (LPs), and what types of LPs are you targeting?
James: First, there’s the scientific and data-driven approach, where companies provide databases of LPs (Limited Partners) based on geographical dispersion, and you pay for access to that information. These databases include contact details—that’s one method.
The second approach is leveraging your network. Informally, you know people and can get warm introductions to LPs.
The third approach, related to the data-driven method, involves doing your research. As a consultant, I enjoy research, so you can identify different institutional LPs active in your sectors of interest by exploring their websites and seeing the initiatives they’re funding. This method is somewhat coupled with the first one I mentioned.
Once you’ve sourced LPs through your network or data-driven methods using third-party information, it’s about prioritisation. You need to understand their mandates—especially for institutional ones like DFIs (Development Finance Institutions) and foundations. It’s relatively easy to find out what their mandates are.
For family offices and high-net-worth individuals, identifying their sweet spots and interests is trickier. It takes more time to discuss with them. Knowing their past investments can give you an idea, but not always, as their focus may have changed. This part is more difficult because you need to meet them, understand their views on the business environment and specific sectors, and then determine whether you can move the conversation forward. With them, it’s more art than science.
*Name changed on request of fund manager.
