Africa’s technology sector is entering a new era, marked by a shift from rapid growth and enthusiastic investments to a more critical assessment of startup quality. As the initial wave of excitement fades, key players in the ecosystem are increasingly scrutinizing not only the startups being built but also the vision, experience, and capabilities of their founders.
This introspection raises several pressing questions: Are these ventures addressing genuine problems, or merely riding a trend? Do the founders possess the long-term perspective and operational acumen necessary for sustainable growth, or are they just riding a wave of chance and momentum?
Microtraction, a pioneering investment firm based in Lagos, is at the forefront of this critical discourse. Since its inception, Microtraction has championed numerous startups, including LemFi, Cowrywise, Honeycoin, and PaidHR, earning a reputation for spotting talent early and significantly influencing startup trajectories.
Inquiries into Founder Qualifications
For pre-seed investors like Microtraction, the quality of founders is paramount. In the absence of historical data to evaluate a startup’s potential, the founder’s reputation becomes the key metric. According to Ofion Isha, an investment analyst at Microtraction, the caliber of talent within the technology ecosystem, particularly in Nigeria, is diminishing, which directly undermines the quality of emerging founders and the businesses they establish.
Historically, early Nigerian software engineers aimed for excellence, organizing meetups and engaging with global experts to exchange ideas and best practices. However, as the landscape has evolved, such collaborative events have diminished. Concurrently, the economic downturn has compelled many promising Nigerian graduates to seek opportunities abroad, further shrinking the local talent pool that might eventually join burgeoning startups.
In response, Microtraction prioritizes identifying outstanding founders before they become apparent to the masses. A critical initiative towards this goal is the Microtraction Development Program, which aims to engage and develop potential entrepreneurs early in their journey. The firm claims to have refined its ability to identify ideal founders, considering qualities such as resourcefulness, intellectual curiosity, customer understanding, capital efficiency, and strong domain expertise or insight.
Focus on the Pre-Seed Stage
While many early-stage investors on the continent have begun to venture into later funding rounds, Microtraction remains committed to its pre-seed focus. “Our goal is to serve as the partner of choice for early-stage founders, ensuring they have a solid foundation in place before looking to scale,” explained Ato Benzi Enchir, Investment Principal and Head of SPV at Microtraction.
The firm’s current fund, valued at $10 million, issues investments ranging from $20,000 to $100,000, targeting companies with valuations between $1.4 million and $2 million. Isha acknowledges a significant funding gap in the pre-seed stage, noting that even those funds now leaning toward later rounds are starting to make smaller pre-seed investments. This shift, however, brings its own challenges.
Competing against larger funds, which often command higher valuations, places Microtraction at risk of losing lucrative deals. Nonetheless, this competitive pressure has compelled the firm to enhance its value proposition and remain relevant to founders. The firm’s strategy also reflects a diverse capital sourcing approach, as it has generally opted out of funding from development finance institutions, instead incorporating over 30 startup founders as limited partners in its second fund alongside general partners from prominent global VC firms.
Shifting Focus Beyond Fintech
Recent currency devaluations in several of Africa’s largest economies have prompted startups and investors to adapt, increasing the emphasis on building global businesses from their inception. This strategy is straightforward: securing a significant portion of revenue in dollars can safeguard a startup’s growth and mitigate the impact of domestic economic fluctuations. A global presence also enhances negotiating power in financing discussions and makes startups more attractive acquisition targets.
However, currency risk is only a fragment of the broader concern. Isha highlights that the current pool of founders is primarily centered around the fintech sector, which has attracted significant funding in recent years. While fintech undeniably offers lucrative opportunities and past exits, Isha warns against over-reliance on this highly regulated field. The intense focus on fintech may leave the ecosystem vulnerable to regulatory shifts, exemplified by Nigeria’s 2021 cryptocurrency ban, which forced many crypto ventures to navigate unfamiliar waters.
To mitigate such risks, Microtraction is actively seeking founders who operate in permissionless markets, thereby diversifying potential revenue streams. The firm has recalibrated its investment strategy to include sectors such as financial services, on-chain technology, the creator economy, and fragmented commerce. Microtraction aims to empower founders by broadening their focus, supported by strategic partnerships with influential players like NVIDIA, and initiatives like AI hackathons that foster globally relevant conversations.
Ultimately, the onus of this transformation lies with the founders and the talent they cultivate. This vigilance is why Microtraction is increasingly selective about the founders it supports, emphasizing long-term vision, deep market insights, and robust distribution capabilities. “We need founders who can answer the question, ‘Why is three years too late?'” Isha asserts, highlighting the urgent need for innovative leadership as the industry evolves.
