Since the beginning of 2023, there has been a decline in global VC funding, which has significantly impacted the African tech ecosystem’s investment landscape.
With the looming global recession and challenging economic conditions, funders are becoming more cautious, requiring founders to navigate through significant challenges to secure venture funds.
In light of this funding uncertainty, what does the future hold for aspiring founders and early-stage startups seeking investment?
Shifting focus from funding woes, the latest trend in technology that promises solutions to numerous challenges is Artificial Intelligence (AI).
From generating text-based solutions to creating images, AI is revolutionizing the ever-evolving world of technology.
According to a report from Next Move Strategy Consulting, the AI market is poised for substantial growth over the next decade.
Its current value of nearly 100 billion U.S. dollars is projected to surge twentyfold by 2030, approaching nearly two trillion U.S. dollars.
With such potential on the horizon, now may be the opportune moment to embrace the power of AI within your field of endeavor.
To gain deeper insights into the current landscape of declining global VC investment and the burgeoning AI opportunity, I sat down with Ray Sharma, founder of Extreme Venture Partners, Canada’s foremost seed-stage venture fund.
Ray and his venture have not only funded but also discovered over 100 startups, some of which have achieved successful exits to industry giants such as Apple, Google, and Salesforce.
In addition to his role at Extreme Venture Partners, Ray has invested in local startups and is a Director and co-founder at Pacer Labs.
During our discussion, Ray shed light on the VC investment landscape and highlighted how AI is becoming the new frontier for technological development.
In the world of ventures, Ray emphasized that many professionals tend to overlook seed and pre-seed stages due to the relatively small deal sizes.
Venture capitalists often prefer larger deals, as they yield better economic returns for their partners. Recognizing this gap, Ray established Extreme Venture Partners in 2008 to address the lack of funding available for seed-stage companies, a need that persists to this day.
“Looking at it from an African perspective, we now see that there’s a similar gap in the market, where there’s a lack of professional funds that will support at the seed and pre-seed stage,” Ray remarked.
He went on to explain that late-stage companies find it easier to secure funding from larger investors, who are more inclined towards bigger deals due to economic considerations.
“It’s a similar situation over here. We perceive a funding gap or a gap in the market, and we want to try offering our service to the marketplace,” Ray added.
In his capacity as an angel investor, Ray emphasized that he sees himself not as the forefront leader of the Nigerian branch of the company, but rather views the Nigerian team as the true leaders and driving force of the partnership.
“My aim is, as much as possible, to be in the background, providing the best practices I’ve learned at Extreme Venture Partners and transferring that knowledge and information so that my partners here and the ecosystem can benefit.”
Regarding Pacer Labs, Ray explained that the concept of establishing a software development lab, coupled with a venture fund, mirrors the idea that led to the creation of Xtreme Labs (the software development arm of Extreme Venture Partners). This provides a due diligence lens for the evaluation of investment opportunity.
However, it has been tailored and customized for the Nigerian and African experience. Notably, the focus on the software development side is exclusively AI-based.
Xtreme Labs, as Ray pointed out, was initially concentrated on mobile application development. However, with technological advancements, the need to adapt to the current trend arose, prompting both the company and its Nigerian counterpart to embrace Artificial Intelligence.
“Now the playing field has been leveled once again, where we have a whole new methodology of development, a whole new set of toolsets, which again, will disrupt the entire development ecosystem.
This creates an opportunity where our team here in Lagos is on equal footing with any development team out there because it’s an entirely new methodology.”
Ray emphasized several converging trends that present a significant opportunity. He cited Nigeria’s youthful population as the first, likening it to how China’s population contributed to its technological ascendancy, and how India leveraged its vast population for prominence in the information technology sphere.
Expanding on this, Ray used Lagos as an example, highlighting the city’s population growth over the past two decades, signifying a shift towards the city’s core and leading to a surge in productivity.
“This is why you see this rise of Lagos, becoming the fourth-largest economy in Africa, which is remarkable. The second trend is this migration from rural areas to city cores, with individuals specializing in labor.”
Ray’s third noted trend was the impact of Covid-19, which prompted the emergence of numerous edtech companies as education moved to a digital format.
“And there’s no place in the world where I can see the benefits more from edtech than the African continent. Even if only two or three great edtech companies emerge worldwide, their most significant marketplace and opportunity, I believe, is the African continent. A good example is a company called RevisionDojo, offering 1:1 access to education, thru an AI tutor via WhatsApp or messaging.”
“So the combination of these three forces is what makes this opportunity compelling.”
Ray identified governance and scaling sales as the primary challenges faced by startups. He began with governance, explaining that many entrepreneurs are unaware of their obligations to their investors.
“This is not just a local challenge there is a lack of standards for things such as accounting or reporting they need to do and how to hold board meetings. The board meetings and governance you have as a two-person startup are very different from when you’re raising hundreds of millions of dollars in a Series A or Series B.”
Governance, Ray emphasized, is evolving and dynamic, meaning it will vary depending on the stage of the company. Small companies may only require bookkeepers for their accounting, while later-stage companies must have their financials audited by larger firms.
“We want to try and help provide some guidance as to what the appropriate governance is for different stages of the companies.”
Explaining the second challenge, which is scaling sales, Ray noted that one implication of the AI development phenomenon is that the cost of software development will drop dramatically, potentially by over 90% year over year.
To illustrate, Ray stated that a software platform that cost a million dollars to build last year could be built for less than $100,000 by the end of this year, marking an unprecedented 90% cost reduction.
According to Ray, this means that nearly any software project can be developed inexpensively and effectively. However, it also shifts the balance of power from software development to sales.
Now, sales development has become the key factor for success. Commodity software development may be affordable, but the challenge lies in selling it.
There’s a distinction between acquiring sales and the more significant challenge of scaling sales. The issue for startups globally is how to scale sales efficiently.
How do you transition from having the entrepreneur drive sales to having an organized sales force with defined quotas?
In considering potential early-stage startups for investment, Ray outlined two critical factors. The first is the entrepreneurs themselves.
“You need an entrepreneur who possesses the right ego, someone who can navigate situations when circumstances change. You need to be adaptable enough to shift the strategy towards where the opportunity lies.
This adaptability is commonly referred to as the pivot or finding product-market fit. Essentially, it boils down to having the right entrepreneur with the right intelligence and mindset to adapt based on market dynamics rather than adhering rigidly to preconceived notions.”
The second factor Ray emphasized is the addressable market opportunity. This encompasses both the total addressable market and the serviceable addressable market.
“We prefer to see an entrepreneur who comprehends their market opportunity. They should be able to analyze it from various angles, whether geographically or demographically.”
“When an entrepreneur demonstrates a thorough understanding of their market, it instils greater confidence in the investment opportunity.”
Ray sees enormous potential for Nigeria and Africa to lead the AI development evolution, much like India did in the previous generation of development. India is now home to numerous IT services companies.
“In AI-based development, you’re not writing the code; you’re instructing the AI on how to write the code. This means you’re less of a doer and more of an editor. Therefore, there’s no reason we can’t lead this entire evolution and development right out of Lagos, Nigeria.”
Rather than competing directly with Silicon Valley, which already dominates the traditional software development sphere, Ray envisions an opportunity for Africa to leapfrog from software development to the new era of AI-based development.
Ray points out that Lagos, with its abundant academic talent and favorable cost structure, is ideally positioned to become a global leader in AI-based development.
For aspiring entrepreneurs, Ray advises focusing on sustainability and viability.
“One notable change in 2023 is the shift in investor focus from the unit economics of entrepreneurs to a ‘Path to Profitability.'”
In the United States, there was a shift from focusing on KPI optimization and management to unit economics for entrepreneurs. However, with a six-quarter hiatus, IPOs, and a significant decline in private funding, investors are now placing greater emphasis on the path to profitability.
“It’s crucial that entrepreneurs in the local ecosystem have a clear understanding of when and how they will become profitable and possess a credible strategy. Gone are the days when investors would pour money into anything solely based on sales growth. Now, profitability has become increasingly important.”
Regarding the decline in VC funding, Ray explains that there was a six-quarter ‘hangover’ following years of robust funding. When interest rates started rising in 2022, it brought about a series of implications.
Ray illustrated that the once thriving IPO market had to shut down, resulting in not a single tech IPO for over a year in Canada between 2022 and 2023.
“We went from a record number of IPOs to none. Then, during that six-quarter period, where interest rates were rising and IPOs weren’t happening, private companies and financing started changing too. They became more stringent with their terms and conditions, leading to lower valuations.”
Ray noted that these terms were heavily skewed in favor of investors and often unfair to entrepreneurs.
This is why the path to profitability is crucial. Once a company reaches the point of cash flow breakeven, it’s no longer dependent on external sources to fund its operating losses, allowing it to avoid accepting unfavorable terms.
For Ray, prioritizing profitability over rapid sales growth in 2023 and beyond is the wiser approach.
Ray expressed great enthusiasm for the progress of Pacer Labs in Nigeria. He revealed that while the initial stages of the Lab were planned with three phases of progress in mind, their engagement in software development has expanded beyond local startups and enterprises. Companies from North America are now reaching out to Pacer Labs in Nigeria for software development.
“That, in my view, represents a major turning point. When we were devising our plan for the lab, we envisioned three phases, not even considering that we would soon be involved in development outside of Nigeria.
However, it seems that this has happened much sooner than anticipated. The aspirations for Pacer Labs have become quite significant. We aim to become the leading independent AI software development entity on the continent.”
Ray further emphasized that software development will be democratized with AI, with users taking on a more collaborative role, instructing the AI on what to do.
Expanding on the potential of AI, Ray highlighted the technology as the next frontier for software development.
He pointed out that Nvidia, in the last quarter of 2023, generated $6.5 billion in revenue and posted an additional $6.2 billion in after-tax profit in the subsequent quarter, making it the latest company to join the trillion-dollar valuation club. According to Ray, these financial figures represent unprecedented milestones in Wall Street history.
“We’ve never witnessed financial performance on this scale. It’s unprecedented and it underscores the incredible surge and business opportunity for leaders in AI.
With this, you recognize a clear trend emanating from North America and the level of investment in AI. What this means for the average individual and every user is an entirely new way to interact with the Internet.”
“Imagine an AI cloud established on the Internet. Instead of conducting a text-based query on a search engine, searching for information that’s just one click away from actual knowledge, now AI takes you straight to the knowledge.
And importantly, it allows us to talk to computers in a normal conversational human way. It solves one of the biggest problems in the human-computer interface, the issue of, how do we converse with a computer. Now we can talk to them using regular English language and that’s a game changer.”
Finally!
Rays’s foremost job is working in mergers and acquisitions, especially for Extreme Venture Partner’s existing portfolio. He spends most of his time dealing with investment bankers and focusing on ways to exit investments.
In Lagos, Nigeria, Ray is playing nothing more than a supportive role for Pacer Labs, helping the team, in terms of whether it be customers and getting their products, venture fund and getting the right pieces of the puzzle together.
“The reality is that Pacer Labs is an effort led by Nigerians, for Nigerians, and focusing on Nigerian companies. I just want to get my experience and my knowledge from abroad and see if we can bring it over here, adopt it, and then optimize it for the local culture.”, Ray concluded
Don’t miss important articles during the week. Subscribe to techbuild.africa weekly digest for updates.
