Founders Factory Africa to deploy $114M using learnings from past programs

This week, South African early-stage accelerator and investor Founders Factory Africa (FFA) raised $114 million. The firm plans to use the impact capital from Mastercard Foundation and Johnson & Johnson Impact Ventures “to scale its model to better serve founders across the African tech ecosystem.”

FFA combines venture studio and VC models, providing investment and hands-on support for early-stage founders building local solutions to local challenges. Founded in 2018 by Roo Rogers and Alina Truhina, the firm runs its model via programs in partnership with corporates and impact investors.

In 2019, FFA partnered with South African healthcare company Netcare to select 35 African health-tech startups for an acceleration and incubation program. The following year, the firm inked a deal with Standard Bank, accepting five startups across fintech and healthtech sectors into its venture program. And in 2021, FFA announced a partnership with Small Foundation, selecting 18 agritech startups for an acceleration and incubation program.

The selected startups across the three programs received between $40,000 and $250,000 in cash in exchange for varying equity stakes. In addition to capital, FFA provided these startups with technical and operational expertise, including tailored support services across product development, UX/UI, data science, engineering, business development and growth marketing. Through the partnerships, the startups also had access to distribution channels, customer acquisition, pilots, data, IP and expertise provided by the corporate investors.

Since its inception in 2018, FFA has backed and helped scale 55 startups across 11 African countries. It provides up to $250,000 equity capital to startups at the idea, pre-seed and seed stages, and $150,000 catalytic capital in non-dilutive funds into portfolio companies.

Still, FFA’s newly announced mammoth raise isn’t solely for investing equity and catalytic in new and existing startups. “The allocation details are still being structured and finalized with various investors on how that would play out. We are very clear on the fact that our model from day one has been quite operationally heavy to unlock support growth for our startups,” CEO Bongani Sithole told TechCrunch in an interview. “So that means hiring great talent to unlock that growth, bolstering our support structure and building out IP to help our founders scale their businesses.”

TechCrunch caught up with Sithole and co-founder Truhina to discuss Founders Factory Africa’s strategy, its dynamics with various LPs and how the firm intends to deploy its new capital.

TechCrunch: Will the strategy FFA, built in partnership with Standard Bank, Small Foundation and Netcare, change in light of this new investment?

Sithole: The structure we have built over the last four and a half years covers three sectors: healthtech with Small Foundation, fintech with Standard Bank and agritech with Small Foundation. These were the three main drivers in the African context to have an entry point and drive our initial vision that we’ve started with. With a recent capital, we’ve seen many more sectors beginning to emerge in the African continent, so we’ve decided to be more agnostic. 

The idea is not to change the strategy; it’s to take opportunities in these new emerging sectors. This expansion for us is to make sure that we cover the bases of what is essential in the African continent to build further faster and, hence, that is, in a way, new partnerships to unlock growth for us. So that, for me, is not a change in strategy. It’s an evolution of our model.

How have you approached these diverse partners to be agnostic and double down on what we have achieved? 

Truhina: When we started in 2018, Standard Bank Group was our first anchor. We played a huge role in aligning the startup needs with the ability to de-risk and support them operationally with technical expertise. The team behind FFA also leveraged Standard Bank and Netcare Group’s expertise and accessibility to partnerships and distribution channels.

Our role will be very iterative as we evolve and continue to listen to the entrepreneurs in light of a changing continent and market dynamics. From an LP or investor perspective, that means taking in what we started with that was corporate-based and then bringing a family office and a foundation that can also deliver value to our portfolio; then, our most recent partners in MasterCard and Johnson and Johnson Foundation. 

So, this is a testament to the fact that we continuously need to think about the diverse LPs, investors and funders to deliver diverse and dynamic types of capital to our entrepreneurs and the ecosystem. And at the same time, be very in tune with where the LPs and investors are going.

How do you manage the dynamics with various LPs from different programs as an accelerator, venture studio and investor?

Sithole: Typical fund structures mean that when investors raise a fund, they’ll have to deliver on it, close it, and start a new one. How we’ve structured FFA and our partnerships with our LPs is one of a continuous relationship. And the reason for that is twofold. The integration of corporates and startups is very critical to the African continent. So, from that perspective, that gives us two things. One is access to capital to further our mission, and second, our startups can continue to integrate and leverage the assets held by corporates in the African continent. 

So, that means that we continue to maintain relationships and leverage the partnership we’ve built. It’s a structure built in such a way that is continuous but equally serving the needs of the African founders — both to provide equity returns to investors and for us to make a significant impact in the continent. 

In what other ways will this capital be deployed?

Truhina: It’s still important to recognize that what we do is not “conventional VC.” I say that because some of the capital from the $114 million will bolster our operational capacity to deliver technical expertise because we know that money is a blunt instrument. We know that if you’re writing checks to early-stage entrepreneurs, that is not a catalyst for their success. And we have proven that and learned a lot about what methodology, IP, types of activities, and interventions we need to deliver for the portfolio companies to scale and not fail. 

Sithole: When we started, the market kept telling us we should provide follow-on startup investments. We have been thinking about making follow-on investments from day one, but the initial capital was not structured in such a way that could enable us to do that. At some point, we thought about having a sidecar fund to unlock opportunities to provide follow-on capital, even debt financing. 

So, it’s good that this new capital we have raised is structured so that FFA can carry out follow-on funding into existing startups. In addition, part of the capital is helping us to drive what we call a traction framework where we show how to build scalable businesses that focus on fundamentals. That is the most critical thing if you were to differentiate us. We have a process, a structure, an IP, and all that. That’s where some of the operational capital will be going into to double down on that.

That’s not the only thing FFA is doubling down on, it seems. The press statement also highlighted that the firm wants to address gender imbalances with this capital. Do you want to touch on that?  

Sithole: We are a very well-balanced team and that was very intentional. At different levels, we’ve got a fair representation of women across Africa, and that is our culture and something that we will continue to fight for as a company. 

Globally, in the VC market, you can see that women founders are hardly supported. It’s still less than 2% in the global space. At FFA, we intentionally consider our balance as a company and how we influence the investments in the market to ensure that we support many more VC-bankable women founders on the continent. If you look at our current portfolio, compared to the global statistics, of the 55 businesses we have built currently, over 20% are women-founded and women-led. That was very organic and intentional from day one. So, essentially, we want to double down on that endeavor. 

What is the idea behind the catalytic funding being provided and how is it non-dilutive for founders?

Sithole: Non-dilutive capital touches on my point earlier where we’ve seen businesses taking equity capital over the last four and a half years when they didn’t need to, in search for a business model. We see a portion being set aside for startups building in specific sectors or types of business models, which founders can use as they search for a business model without necessarily giving up equity. This is a need in the market and we are very intentional to figure out how as we grow and scale our model, even beyond the $114 million.  

Once they hit certain milestones and figure out business and operational modes, they can raise equity capital, which we can also fund. So, the reality of the current capital in a non-dilutive nature means some of this capital will be used to support those initiatives without taking equity.

Truhina: As we figure out how to deploy this capital, catalytic in this context also means you can invest $1 and the startup can deliver $2 worth of value. That’s what we’re looking to do, seeking ways to help these founders access different types of capital to provide double, triple and quadruple that value.

How many startups does FFA plan to back and though sector agnostic, what industries is the firm taking a close at?

Sithole: The way we are tackling the deployment of capital at the moment with our partners is not genuinely focused on a particular number of businesses per se. It’s more focused on sectors that we want to invest in and looking for strategic businesses that we can invest in. That can be from 50 to 100 businesses or whatever the case might be. 

The three original sectors: fintech, agritech and health, remain critical. However, we are also seeing growth in logistics tech, e-commerce and other subsidiary sectors emerging on the continent, such as clean tech, enterprise tech, and HR recruitment. 

Does raising this capital prove that the venture studio model works in Africa? 

Sithole: For us, we are not in the business of proving if a venture studio model works or not, to be honest. Businesses in Africa and the nascency of the market suggest that African founders, with where we are today, still need a lot of hands-on support. 

There’s still a lack of talent, funding, access to the market, and trust plaguing the tech industry. This means there’s a need for founders to have partners to build or to co-build in the early stages. Whether that is an answer that the venture studio model works in Africa or not I’m not sure. But what I know is that for businesses that are building, these needs continue to rise and we will continue to do this because the market is demanding us to do that. 

Truhina: When we first started, we were described in different ways. But we like to think of ourselves as thought leaders as we push the needle as to what it means to invest in the continent. Fundraises like ours are helpful to signal to the market that there’s more money. But even though we are obviously investors at a base level, we don’t want to be boxed into an accelerator, incubator, venture studio, or VC because what we do isn’t comparable to our colleagues and peers.