"Africa risk"
I’ve heard from some founders fundraising in Africa that the one hurdle to get over with VCs is a general sentiment that “Africa is a risky place to invest”, that isn’t grounded in any actual fundamentals about the company or the market.
At first it might not seem rational for an investor to feel this way if it’s not based on company or market fundamentals. But general sentiment about a market can be self-fulfilling.
An early-stage investor in a company will only make money if the that company survives long enough to have a good exit. The company will only survive this long if other investors can be persuaded to invest at later rounds (1).
So an early-stage investor must believe that later-stage investors will believe invest in this company. If the early-stage investor knows that most investors won’t believe in the company because they are worried about “Africa risk”, then she won’t want to invest.
She has to behave as if she believes in “Africa risk” - even if she herself believes that there is no fundamental Africa risk (2).
The value of impact investors is to break this negative cycle. To put money into an ecosystem (be it a geographical ecosystem like African startups, or a cause-oriented ecosystem like climate-tech or immigration) until it becomes an attractive investment destination for purely profit-seeking investors.
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Or if the company can become profitable without having to raise another round of funding. A good option for many African startups
This is the same fundamental dynamic that leads to speculative bubbles