Image source: Techcabal
At one point or the other, every startup founder or CEO was a newbie in navigating the murky waters of institutional investment. They maybe even got burnt because they didn’t know the right questions to ask, or what to look out for.
So, we started the Ask an Investor series to help explain why and how investments in companies happen in Africa from the people who make them happen.
In the past year, I’ve interviewed over 20 investors who’ve shared their thoughts on what investors look out for in founders and startups before investing, the lessons learnt and mistakes made, key trends, and other relevant nuggets.
I’ll be highlighting a few insights from the published interviews here and think you should read the full version of the interviews.
If there’s one thing that I learnt early on from my conversations with different investors, it’s that all investors are not the same. Their approach to investing is often influenced by their background and experiences. While most people easily associate investors with just money, Founders Factory Africa (FFA) would rather have you think of more.
In a conversation with Sam Sturm, one of the founding partners of FFA, he explains why:
“We believe that capital isn’t the only way to support a business. You need it so that you can execute but at the end of the day, capital isn’t what solves problems. We believe that the challenges of product-market fit, customer acquisition, or retention are not the kind of challenges that capital alone can solve. Those are the challenges that you’re looking to entrepreneurs to solve, that you’re looking to the team to solve. If you can supplement them with experienced and talented people, you’d be successful.”
Alongside providing capital, FFA is a venture building studio, this means that a portfolio startup can expect to get support from private coaches, product managers, product designers, etc.
Five years ago, Yele Bademosi saw that it was difficult for people to raise funds if they didn’t have a wealthy relative or network, so he set out to make it easier for founders to raise money.
But first, the Microtraction team had to do away with the status quo. This meant no batches, no programmes, and no demo days. Microtraction invested on the go.
Another different thing about Microtraction’s approach is its bias for investing in startups with technical founders/co-founders. Why?
“If we give you money, and you’re using it to outsource development, you’ll probably get it wrong. The first version of your product is almost always wrong. So that’s what caused our bias for tech founders.” Bademosi explained. “We’re also biased towards having a co-founder because for the most part, we genuinely believe that it is incredibly difficult to start a company yourself. However, there’s always an exception to every rule.”
The original idea for Acumen was to bring the best of philanthropy to focus on solving problems for the poor. So Acumen goes a step further beyond providing donations and grants to startups. It’s a non-profit that uses donations received to invest in startups working on socially relevant issues.
Meghan Curran, West African Director of Acumen, explained this: “In our model, nothing goes back to the investors because the investors in the first place are donors. Instead that money comes back to Acumen, and we redeploy and reinvest it. We may use it to make follow-on investments in our existing portfolio, or we may use it to make new investments and to continue to grow our portfolio.”
Acumen is able to invest at an early stage and wait a little longer than other traditional venture capital firms because they don’t have to return the money back to donors.
2021 was an exciting year for North Africa as it garnered a lot of attention and funding. Before the boom, Sawari Ventures, which was founded over a decade ago, has been backing North African startups. The founders of Sawari Ventures also founded Flat6Labs—the MENA region’s largest accelerator.
In our conversation, Tamer Azer explained the difference between raising money as a VC fund and a startup.
“VC funds are different. They have a limited lifetime. They have a 10-year lifetime. You’ll spend the first third of your time investing, the second third growing, and the last third exiting your investments. You need to give the money back to your investors. It’s really the only way for many of us to actually make money off of this business. And it takes time.
“Just like startups, we go out into the market and raise money. Startups get the money a little bit at a time and have to prove themselves every 12 to 18 months.
“We have to raise all the money at once. So you come with a bit of a track record, and then you go out into the market and try to raise capital. It’s not like you’re raising a million or two million dollars in rounds. You’re raising 50 to 100 million dollars from a market and institutional investors that haven’t really gotten comfortable with the asset class yet. You’re reaching out to international investors, asking people in the United States and Europe to invest in Africa. It’s not just about writing cheques, we have to get the money to be able to write these cheques first. “
It’s a very different dynamic and we have to work really hard to be able to write these cheques. We work really hard to make the decisions on who we should give this money to.”
Within the first 10 minutes of my conversation with Franziska Reh, CEO of Unconventional Capital, I understood why the word “unconventional” was befitting.
Here’s how early-stage investment mostly happens: An investor and an ambitious entrepreneur get talking. After a few background checks and business plan conversations, the investor decides whether to invest. But not before checking their gut feeling. Along the way the investor is constantly asking, “Does this feel right?”
At Uncap, the team decided to flip this approach upside down by relying on algorithms to make these decisions.
Reh explained, “At Uncap, in our investment process, no one in our team makes investment decisions. The selection process is based on an algorithm that focuses very much on the potential of the entrepreneur. It’s a model that measures entrepreneurial potential as a predictor of future success. Afterwards, we invest through a standardised model.”
This model allows Uncap to invest in thousands of entrepreneurs. Interestingly, Uncap exits the portfolio companies gradually over a period of time—an unconventional exit strategy.
“These companies we invest in buy back their equity through 5% of their quarterly revenues. They transfer 5% of their quarterly revenues to us. By this act, over time, they buy back the whole investment, plus the price that we’ve paid before. It’s a fixed multiple on the investment, it’s basically the same for everyone.”
The conversation with Tomi Davies, or TD as he’s fondly called, started off with him explaining how he was able to partner with some of the brightest minds on the continent to build the angel investment space in Africa. He was part of the team that started the Lagos Angel Network and the African Business Angel Network (ABAN).
While many know TD for his role in the African Angel community, but he’s more than that.
“I wear many hats: I’m chief investment officer at Greentech, President of ABAN, co-founder of Lagos Angel Network, and sit on the board of the Global Business Angel Network. I’m a founding member of the World Business Angel Forum,“ Davies said.
He also shared his proprietary framework for investing in startups.
“Over the past 10 years, I’ve interacted with entrepreneurs all over Africa and refined the POEM model. So it’s essentially vision, proposition, organisation, economics and milestones. If you take those, what you want to understand around the vision when you meet the founder is, ‘Is the founder capable? What drives them?’
“The second one is how significant the problem they’re tackling is. What’s the problem? How many people are bothered by this? Because you’re thinking about economic value.
“Finally, you ask: is the solution innovative? Is the offer compelling and unique? Also, is the business model sustainable? Those are things I look out for when I meet a founder.”
When I visited Ghana in July, Ato Bentsi-Enchill was one of the people I met. One thing that stood out to me was that he moved from a liberal arts background to business and investing in startups. How did he learn all these?
“In the early days, when people asked me to do valuation reports, I got initial guidance on YouTube, read as many books as I could on the topic and spoke to people in my network.” Bentsi-Enchill explained. “It’s been more of self-education, and I believe that works best for me, although an MBA will be necessary for the future.”
As a startup advisor, he helps African startups raise capital and protects them from difficult investors. In our conversation, he cites some instances where he’s helped.
“For example, investors often offer startups convertible debts—a loan that could be repaid or converted to equity at a later date. Now I’ve seen some term sheets where the investors ask that if the founder opts to pay back the investment, the investor gets some amount of free equity in the company. For quite a high-interest rate and no additional value, the investor wants more equity in the company? Make it make sense.”
Zimbabwe is known more for the Victoria Falls (the largest waterfall in the world) than its tech ecosystem, but still, Adam Molai is one of the few investors looking to change that.
In 2000, Molai started investing in other African companies through TRT Investments. Last year, he started the $2-million Jua Fund to provide African entrepreneurs with much-needed access to capital, mentoring, advice, and networks.
Over the past 20 years, he has been investing in African startups and, through the Jua Fund, has backed Kenya’s GrowAgric, Madagascar’s Jirogasy, Zimbabwe’s BRYT, Nigeria’s PowerStove, and many others.
In a conversation with TechCabal’s Managing Editor Koromone Koroye, he shared one of the best practices startups should adopt in getting funded.
“What I’ve seen is that there’s often a lack of belief that they’ll get the fund, so they go in, try to get the funds, then look for what’s required of them to comply. I think they should be looking at it in totality. Startups should think like this: I’m going to get the fund and because I’ll get the fund, this is what I must put in place to enable me get the fund. What happens when they don’t think like this is that for some it takes months before accessing the funds. They need the funds, the funds are there for them, but they can’t access the funds because they’ve not fulfilled the due diligence process.”
Since Benjamin Schmerler left the United States at the age of 18, he’s lived and worked in nearly every corner of the globe. Interestingly, he stumbled on the name for his firm—SUNU Capital— while in Senegal.
He heard the word sunu in a song, and when he found out that it meant “our”, it resonated with him. “I used it as the name of my firm because it’s a simple word and, more importantly, because I believe in collective effort; working together to build more wealth for everyone and leave this planet a better place for our children,” Schmerler said.
One thing he’s been thinking about recently is how to aggregate African markets.
“What I’m really interested in is how to break the borders between countries so we can get a larger aggregated market that can be efficiently served. I believe if we can do this, we would see exits on a scale beyond anything we have seen to date.
“I talk to entrepreneurs all the time and they show me the total addressable market (TAM) of Africa, a map of 54 countries. They hint at the possibility of expansion, and I’m thinking, how do we unlock Gabon? What does it take to be a part of Cameroon as well? There is so much untapped potential all over the continent that I am absolutely excited by infrastructure that turns the 4 or 5 markets where all the activity is happening into 10, 20, 30 countries over the next handful of years.”
A few minutes into our conversation, Satoshi Shinada reminded me that I need to visit more African countries. At the age of 18, he left Japan to visit 40 African countries in the space of almost two years.
For Kepple Africa Ventures, the big vision is to create clusters of businesses that become new industries in Africa.
In our conversation, Shinada shared some mistakes he’s made.
“I’ve made a number of mistakes. One that stands out is investing in some startups that are trying to solve too many problems at the same time. It looks beautiful because the startup is solving everything, and it involves different stakeholders in that sector. But a downside to this is that the startup struggles with monetisation for lack of understanding about their customer’s biggest pain point.
“Another mistake that I made is caring too much about how we can connect startups with Japanese companies. A while back, some of the startups we brought to Japan got lots of attention from Japanese companies, but because the startups are at an early stage, the Japanese companies couldn’t invest. So we decided to be the first investor with these startups. But, as you know, when your investment decision is driven by excitement and not purely commercial criteria, it distorts healthy decision-making.”
In 2012, Idris Bello and his partners, then in their early 30s, left their lucrative jobs and raided their savings to create the LoftyInc Afropreneurs Fund. Over the years, through trials and errors, they’ve seen some level of success. Today, LoftyInc operates three funds that have deployed over $12 million into over 75 African startups like Flutterwave, Andela and Trella.
Bello, who believes in sharing a full picture of his investor journey, shared some notable deals missed or mistakes made along the way.
“Those are the aspects of investing that people don’t say much about. I remember when we wanted to start our Fund 2, we decided to register in Mauritius because we were told it was better. It turned out to be a bad decision because of the tedious registration and documentation process there. The KYC (identity verification) was unnecessarily complicated as they wanted to know ‘everything’ about everyone who was investing, and it got expensive and complicated very fast. In hindsight, it was a bad decision. We ended up cutting our losses and registering in Delaware, US.
“Most of the mistakes we made were as a result of wrong judgment calls. Here’s another that probably cost me a few million. In 2013, I remember committing to invest $20,000 in Fora, which later became Andela. Unfortunately, on that same day, someone else came to me with another idea. So I told Iyin to bring back the $20,000 cheque. I split it into two and gave both start-ups $10,000 each. Today it is clear I shouldn’t have gone back on my initial investment.”
Five years ago, Jack Knellinger, Dave Richards and Will Poole formed Capria ventures, an investment firm that started out investing in local funds (VC firms) across the global south—Africa, Latin America, and South Asia. Recently, Capria Ventures has begun investing directly in startups, providing the much needed growth stage capital for them.
Today, Capria Ventures has investment activity in about 50 countries with $650 million worth of current assets under management.
In my conversation with Jack Knellinger, he enlightened me on how they support VC firms—a subject rarely spoken about.
“Obviously, the main thing top of mind is fundraising—helping them close their fundraising. Here, it involves everything from introductions to reviewing pitch materials. We look at how the funds are being positioned as well as the terms and negotiations with limited partners to ensure there’s alignment between the fund managers, general partners, and limited partners.
“As soon as the fundraising is done, we move to portfolio management. How are they putting in place the right systems and processes to grow, scale, and institutionalise the firm? Here, there’s a wide range of things to be done in that regard, from team development to appropriately conducting due diligence before investing. When the fund managers have built up their portfolio of companies, we move to how they think about exits. What’s the right time to exit? Do they want to look at partial exits?
When a firm has mastered these aspects and gone on to raise multiple funds. We look at how they’re telling the story of the firm and the funds you’ve managed.”
And that’s all for this year! Thank you to all the investors who took their time to talk to me and help others learn more about investing in startups.
Which investors/firms will you like me to talk to in 2022?
Image source: Techcabal