How To Drive Startup Investment Through Good Governance

Unlocking The Potential of African Tech Startups Through Accurate Financial Control, Compliance, and Reporting.

In the dynamic and fast-moving landscape of African tech startups, attracting investment is a critical milestone for startups looking for growth and sustainability, and knowing how to drive startup investment through good governance is key. As the Managing Director, UAE, DTOS Group, I am keenly aware of the challenges and opportunities that African tech entrepreneurs face. I recently visited GITEX Africa in Marrakech; the amount of talent, innovation, and drive I saw at the event was inspiring.

This was my first visit to GITEX AFRICA , and certainly not my last. The transformation of Africa over the last few decades has opened the doors for countries and individuals to leapfrog (global) legacy technologies and approaches, inventing sophisticated modern solutions to problems, that not only have the potential to transform the region, but also the world.

FinTech may first come to mind when we say “African tech startups’, however the metamorphosis doesn’t stop there – there are huge strides being made in CleanTech, AgriTech, HealthTech, gaming and ecommerce. For example, in 2023 Victory Farms received a $35 million investment to continue their mission to transform Africa’s food systems, ensuring food security and empowering rural communities. Earlier this year Husk Power closed $20 million in financing from the European Investment Bank in order to scale up in Nigeria.

At DTOS , we specialise in equipping tech startups with the necessary tools and frameworks to become investment-ready, ensuring they stand out in a competitive market. Good governance is critical to making or breaking a potential investment deal.

So, What Is Good Governance?

The Corporate Governance Institute defines “good corporate governance” as ‘the effective running an organisation. Strategically implemented policies and practices provide companies with a number of benefits that ultimately drive their profitability, reputation, and success’. Good governance can include a number of vital business practices and policies including, business strategy, accounting, financial controls, business transparency, managing funds and allocating capital, compliance, legal, diversity, risk management, stakeholder management, and other critical business controls.

However, Before We Delve into Good Governance, We Must First Ask Ourselves “Why Is This Important to Investors?”

Investors, particularly Development Finance Institutions (DFIs), seek ventures that align with Environmental, Social, and Governance (ESG) targets. African tech startups must, therefore, present themselves not only as innovative but also as responsible and sustainable investments. DFIs are mandated to invest in ventures that promote economic development and social progress, making governance a key factor in their decision-making process.

How Can Startups Drive Investment Through Good Governance?

In my opinion there are four critical “musts” for any startup who is… starting up. Or, for more established startups, consider this a gentle reminder.

1.??? Financial Control and Reporting Structure

A robust financial control system and transparent financial reporting are fundamental to good governance. Startups must demonstrate accurate bookkeeping, regular financial audits, and clear financial projections. This not only builds investor confidence in the startup's financial health and accountability, but also helps the startup manage their funds and become more accountable.?

Without Financial Control and Reporting Structure?

No doubt the answer to this is obvious - poor financial control can lead to mismanagement of funds, inaccurate financial statements, and potential financial losses. Investors may view this as a red flag, indicating a lack of reliability and transparency, thus deterring potential investment.

2.??? Good Governance Framework

Establishing a well-structured board of directors and promoting collective decision-making processes are essential to startup governance. A diverse and experienced board can provide strategic direction and oversight, mitigating risks and fostering growth. Good governance practices ensure that decisions are made transparently and ethically, enhancing investor trust.

Without a Good Governance Framework?

Lack of a solid governance framework can result in poor decision-making, lack of accountability, and potential conflicts of interest. This can create an unstable environment, making investors wary of committing their resources.

3.??? Strategy Formulation and Planning?

Strategic planning involves setting long-term goals and defining the roadmap to achieve them. Startups should regularly review and update their strategies to adapt to market changes and investor expectations. A clear, well-communicated strategy demonstrates foresight and preparedness, qualities highly valued by investors. This will show that you are thinking big picture, aware of the landscape around you, and able to be agile to the market.

Without Strategy Formulation and Planning?

We are all familiar with the age old saying, if you ‘fail to prepare you prepare to fail’, and it never rings truer than in the world of startups. Absence of a coherent strategy can lead to misaligned objectives, missed opportunities, and an inability to pivot in response to market dynamics. Investors may also see this as a lack of direction and vision, reducing their confidence in your startup's potential for success.

4.??? Compliance with Relevant Laws

Adhering to legal requirements and industry regulations is non-negotiable when it comes to good governance. Compliance reduces the risk of legal issues and penalties, creating a stable environment for business operations. Startups should stay updated on regulatory changes and ensure continuous compliance. It’s better to get your affairs in order at the beginning than risk legal issues risk your months and years of hard work when it finally matters most.?

Without Compliance with Relevant Laws?

Non-compliance with laws and regulations can result in legal penalties, reputational damage, and operational disruptions. This can severely impact investor trust and the startup’s ability to attract and retain investment.

While I would argue that these are the four essential areas to focus on first to drive investment potential, there are other areas of good governance you should be putting into practice and building into the DNA of your business to drive future investment.

Risk Management

Implementing a comprehensive risk management framework helps identify, assess, and mitigate potential risks. This proactive approach can prevent disruptions and protect the startup’s reputation.

Failure to manage risks effectively can lead to unforeseen challenges, financial losses, and reputational damage. This can deter investors who seek stable and resilient investment opportunities.

Data Protection and Cybersecurity

Never more important in the world of tech, safeguarding customer data, propriety information, and ensuring cybersecurity are paramount. Investors are particularly concerned about data breaches and cyber threats, making robust data protection measures a key selling point.

Inadequate data protection can lead to data breaches, legal issues, and loss of customer trust. This can significantly harm the startup’s reputation and attractiveness to investors.

?Sustainability and ESG Compliance

Startups should integrate ESG criteria into their operations. This not only aligns with investor values but also enhances the startup's marketability. Sustainable practices can lead to cost savings, improved brand image, and greater customer loyalty. They are considered one of the major factors that effect B2B decision making.

Ignoring ESG criteria can result in missed opportunities for investment from DFIs and other socially conscious investors. It can also lead to negative environmental and social impacts, which can harm the startup’s long-term viability.

How Can Good Governance Help Startups Overcome Investment Challenges?

One significant challenge for investors in African tech startups is the lack of exits. This makes the market less attractive to global investors, particularly those from the US, who seek clear exit strategies.

Good governance can address investment challenges like this by:?

1. Improving Operational Efficiency: well-governed startups are more likely to scale efficiently and achieve profitability, making them attractive acquisition targets. Inefficiencies and poor management can hinder growth and scalability, reducing the likelihood of successful exits and deterring investors.?
2. Enhancing Reputation: good governance practices that emphasise transparency, accountability, and ethical conduct can enhance a startup's reputation, making it more appealing to investors. A tarnished reputation due to governance failures can significantly reduce investor confidence and interest.
3. Facilitating Mergers and Acquisitions: startups with strong governance frameworks are better positioned for mergers and acquisitions, providing investors with viable exit options. Whereas a lack of good governance can complicate M&A processes, making it difficult to secure favourable deals and, again, limiting exit opportunities for investors.

In Summary...

For a tech startup, implementing good governance policies and procedures can feel a little like the boring school assignment. You know you need to do it, but it’s not why you set up the business or even likely to be your area of strength. This is why companies like DTOS exist with chartered accountants and seasoned business advisors who love nothing more than getting into the legal and financial detail, and seeing their clients thrive.

Good governance is not just a regulatory requirement; it is a strategic advantage that can unlock investment opportunities for African tech startups. By implementing robust financial controls, establishing effective governance structures, and adhering to legal and ethical standards, startups can become more attractive to investors. This, in turn, fosters growth, innovation, and long-term success.

At DTOS Group, we are committed to supporting African tech startups in their journey towards becoming investment ready. We have offices in Rwanda, Uganda, Kenya, Mauritius, and the UAE, and we have helped startups grow sustainably by focusing on good governance. We work in partnership with even our smallest startups to build a strong foundation that appeals to investors, drives sustainable growth, and ultimately contributes to the economic development of the region.

Supporting the growth of startups in Africa is a topic that has become my raison d'être, as we say in French. I’m always open for a brief call to hear more about your startup and see how we at DTOS can help elevate you on your journey.