For most of 2022, founders globally have had one question: where are investors, and why aren’t they deploying funds into our brilliant startups? Some investors have blamed the funding winter on the economic recession, others have blamed excessive valuation of startups, and most have not quite blamed anything: they’re simply taking time to observe before they act. However, investment in Africa is boldly defying this trend. Among those currently betting on Africa is Microtraction, an early-stage African VC firm, which has just announced a $15 million first close of a community fund dubbed Microtraction Community Limited.
Microtraction was founded in 2017 by Yele Badamosi and Kwamena Afful. The duo identified a gap in the pre-seed funding stage of African startups and plugged right into it by building one of Africa’s most successful early-stage VC firms. In its 5 years of operation, Microtraction has invested 2 funds in 36 companies including Cowrywise, Helicarrier, Bitsika, 54gene, and Lemonade Finance, across Nigeria, Ghana, Kenya, and Rwanda. Its portfolio companies have raised over $100 million in follow-on funding and have a combined valuation of over $760 million.
Microtraction started with the goal to be “the most accessible and preferred source of pre-seed funding for African tech entrepreneurs.” To achieve this, they employed a three-fold strategy that will govern the rollout of their latest $15 million fund. The three parts of its strategy are an open-to-all application format, defined investment criteria and process, and a collaborative relationship that helps founders to grow.
The Open Application Format
Since Microtraction’s inception, they have kept applications open to all. Any startup founder in Africa can access a form on Microtraction’s website where they can submit a funding request. Microtraction notably invests in only a small fraction of its applicants. In its first year of operations, the VC firm invested in 8 startups out of a pool of 500 applications, striking a 1.6% acceptance rate, which mirrors YCobinator’s 1.5 – 2% and Techstars’ 1-2%. Microtraction is now in its fifth year, and more startups are sending applications, but there are also more funds to deploy, especially with the latest $15 million waiting to be disbursed. Experts have capped the chances of Microtraction’s yes to an application at 2%, especially as the VC is taking more steps to align with global best practices.
The defined investment criteria and process
When Microtraction launched, it didn’t specify the size of its fund, but its standard deals were clear to founders: 7.5% equity exchange for $15,000. Those were its days of small beginnings. As the market toughened and more firms ventured into pre-seed investments, Microtraction upped their deal to $25,000 for 7% equity in 2020. That remained until May 2022, when the VC firm stipulated $100,000 with 7% equity as the minimum amount to be invested in startups. This rate is similar to YC’s $150,000 for 7% stake, which now brings Microtraction to true competition status with YC, despite their many operational differences. Microtraction’s latest fund, Microtraction Community Limited, follows this $100,000 stipulation.
Portfolio startups can also receive a $350,000 ‘top-up’ fund, as long as Microtraction is not more than 25% of the startup’s next official fundraising round. What this means for startups is that Microtraction’s $350,000 is on the table for their next round if they can get other investors and aggregate the total raise to a $1.4 million minimum.
Microtraction hopes to make a minimum of 60 first check investments through its community fund, out of which 20 qualified startups will get the top-up fund. According to the company’s statement, the community fund has already invested in 20 startups.
Collaborative relationship with founders
With startup CEOs as Microtraction’s founding partners, it is no surprise that the VC is innovating its operations so it can double down on its relationship with founders. The pan-African VC firm is building a robust and rich community for its African founders to thrive, and they’re leveraging Web3 to drive this innovation. In a TechCrunch interview, the partners expressed that Microtraction has evolved from that VC firm that wrote first checks and provided access to first customers to one that provides an environment of champions for its founders, enabling them to scale to global levels.
The Web3 innovation will come in Microtraction’s development of a community vehicle, similar to a decentralised autonomous organisation (DAO), which the community fund will leverage to create an engaging experience for founders and partners in the community. Social tokens will be used to incentivise and gamify the experience of members who will enrich the community with value and support. At launch, the DAO will operate on an invite-only basis and come with exclusives like access to events, investment opportunities, and deep industry dives.
Rising from Microtraction’s track record, many African startups have praised the VC firm as a surefire way to make it to global accelerator programs. Over 73% of its portfolio companies from its first fund got into global accelerators like YCombinator and Google for Startups, with all but one receiving follow-on funding. 37% of these startups were also cofounded by women. This newly-announced community fund is designed to reflect this track record.