Financing Innovations – Cameroonian Startups and the Rise of Alternative Funding

By Dr. Adeline M. Nembot, Dr. Yollande Tankeu, and Larissa Ntoubia

---

1. Introduction

In Cameroon, startups have always relied on personal resources and bank financing despite their heavy investment requirements. Yet, rigorous collateral and high interest rate requirements limit access to bank loans. As a result in 2021, only 15% of Cameroonian startups had access to formal funding options, while the majority relied on personal savings or informal funding sources (1), such as Informal Saving Groups and Rotating Savings and Credit Associations (ROSCAs).

Moreover, according to the Central African Startup Finance Report 2022, funds raised in 2022 by startups in Cameroon remained stable year to year at 7.3 billion francs CFA ($12 million) (2). In 2023, the Africa platform’s report showing the breakdown by country of funds raised by young African startups revealed that Cameroon attracted fewer investors, raising just $4 million, far behind Côte d’Ivoire ($17 million), Senegal ($44 million), Benin ($71 million), Kenya ($88 million), South Africa ($410 million), and Egypt ($640 million) (3). This restricted access hinders startups’ potential to innovate, create jobs, and contribute to economic growth. In this context, there is a need for exploring alternative financing options, which demands a shift from traditional to emergent financing solutions.

From this perspective, the Denis and Lenora Foretia Foundation’s Nkafu Policy Institute, organized an Operational Working Group to examine how startups can leverage available opportunities to improve access to finance (4). Hence, this article examines Cameroon’s conventional financing environment for innovations/startups. That is, it points out its drawbacks and investigates the opportunities offered by emerging funding options. Hence, this article will be beneficial to startup owners, public authorities, financial sector operators, and capital providers to take advantage of the opportunities provided by innovative finance.

The rest of this article will present the limits of traditional financing in Section 2; raise the opportunities offered by emerging financing solutions in Section 3, give some policy options in Section 4, and lastly, a conclusion.

2. Limits of Traditional Financing for Startups

Startups face numerous limitations with traditional finance sources, which impede their ability to expand and survive (5). For instance, traditional finance for startups in Cameroon is frequently scarce, making it difficult for new companies to get the funding they need to expand. While traditional financing methods like angel investors and bank loans have played a role, their limitations are increasingly apparent in Cameroon, especially as startup financing is concerned. The reasons for this situation are as follows:

Firstly, banks in Cameroon require a proven track record of profitability and substantial collateral in the form of property and assets, which many startup founders do not have. This is due to the observation that the financial industry in Cameroon is mainly controlled by international banks, which have a negligible impact on the entrepreneurial system (6). Despite the excess liquidity recorded lately, access to financial intermediaries and services is still limited in Cameroon.

Secondly, the high interest rates that banks impose are a barrier to the Cameroonian entrepreneurial system. Compared to other countries like Sweden, Algeria, and Botswana, the country has one of the highest average loan rates in the world, 15.5%, according to the 2021 World Bank report (7). Consequently, it is difficult for startups to obtain funding at reasonable rates because they frequently find it difficult to create enough money to reimburse the high interest.

Finally, conventional financing investors usually look for a return on their investments in a predetermined amount of time. This can put pressure on new businesses to grow quickly and turn a profit, frequently at the price of innovation or sustainability in the long run. For startups, especially those in their early stages of development, this strain can be too much to bear. To overcome these obstacles, Cameroonian startups must be given access to inclusive and flexible financing options, which calls for creative approaches and policies.

3. Opportunities Offered by Emerging Financing Solutions to Startups

More and more financing sources than just bank loans, including venture capital (VC), seed accelerators, and alternative methods such as bootstrapping, are now available for startups (8). The startup financing landscape has changed in recent years, with new, innovative solutions offering alternative ways for startups to secure capital and achieve sustainable growth. Startups now have more freedom and control over their funding thanks to these new alternatives. The literature recognizes that startups funded by these emerging financing options tend to grow faster than those using traditional financing sources (9). The presence of angel investors in the Cameroon startup ecosystem is more noticeable in recent years (10). One example is the Cameroon Angel Investors Network (CAN) created in 2014, which is the first network of angel investors in Cameroon. CAN invests in all sectors and industries with a particular interest in technology (11). One of the most significant sectors is crowdfunding, which allows companies to raise funds by appealing to a large number of people who can each contribute a modest sum. By using crowdfunding, startups can reduce their reliance on traditional funding sources and gain important market validation from a diverse pool of investors (12).

Another financing option available to startups in Cameroon is revenue-based financing, which provides an alternative to traditional equity or debt financing. In this model, startups can obtain funds without reducing ownership, thereby enabling sustainable growth and flexibility in managing financial resources (13). Through revenue-based financing, startups can secure the necessary capital while retaining control over their equity, making it an attractive option for those looking to expand their business without compromising ownership.

Furthermore, an innovative approach is equity crowdfunding. This method allows startups to raise capital from a large pool of individual investors and provides equal access to funding while fostering a sense of community around the startups’ vision. Though the average amount raised through crowdfunding may be small compared to venture capital, it can be a valuable tool for early-stage validation and customer acquisition.

4. Suggested Policy Options

These suggested policy options were provided by stakeholders in the domain of startups during the first Operational Working Group of the Cameroon Startup Act Project, conducted by the Nkafu Policy Institute, a think tank at the Denis & Lenora Foretia Foundation. The following were suggested:

• Startup promoters should have a thorough financial education in order to properly estimate the financial value of the startup and assure backers of the existence of a market.
• Create a platform for startups to facilitate the sharing of experience and the flow of information.
• Facilitate the mobility and international visibility of Cameroonian startups.
• Startups need proven expertise in fundraising and negotiation techniques to facilitate their fundraising campaigns.
• Startups need to communicate more about their activities (e.g. digital, shows, fairs, etc.) and have a web page.
• The Cameroon government could regulate the activities of startups with a national law on startups.

5. Conclusion

This article seeks to explore alternative funding options for startups in Cameroon. The article also presents the limits of traditional financing for startups and the opportunities offered by emerging financing solutions to startups. The findings or conclusion suggest that for reasons like a proven track record of profitability, substantial collateral, and high interest rates, the conventional funding methods are keeping startups in Cameroon from succeeding. Hence, the emergence of alternative funding methods offers promising prospects for Cameroon’s growing startup ecosystem. This is because emergent financing raises capital from a large pool of individual investors while allowing owners to keep control of their businesses. By creating a supportive environment that embraces these new models, Cameroon can empower and strengthen its startups as a hub for innovation in Africa.