Series V

A short note on founder-friendliness.

We (VCs) often claim to be founder-friendly but what…does that mean?

The mechanics of the VC industry is such that multiple firms must compete for the best investment opportunities, and one of the ways to attract entrepreneurs with a choice is to brand yourself as “founder friendly”. Being founder-friendly is not the abdication of responsibility to deliver honest, critical, often difficult feedback to them. It is treating the founders as your customers and optimising for their success above your own. (Ironically, this helps guarantee your own.)

Founder-friendliness is not — should not be — a marketing term. It should come from the understanding that everything we do is in service of great entrepreneurs. Understanding that investors will not build the future, but exist to support those who will. Of course, this does not mean they should turn a blind eye to irresponsible behaviour.

And even more than the many things they can do, e.g., helping with organisational set-up, recruiting, corporate connections, etc., investors have an obligation to build a trust-based relationship with founders and to offer timely and valuable feedback when it is warranted.

Backing a super-smart, eager, hard-working team is not nearly enough: it’s doing the hard work of providing substantive feedback, but doing so with empathy. This gets to the essence of what being “founder friendly” should mean.

The objective is not [necessarily] to be a founder’s best friend but to be the partner that helps them be their best selves. And if this means having some hard conversations with bruised egos and hurt feelings in the short run, but with an eye towards longer-term payoffs, then it will be worth it.

Links from the Internets

  • Gradually, then suddenly. That is how disruption happens. [Link]
  • Mindshare before market share. [Link]
  • How to build products that scale in a country with no middle class. [Link]
  • Finance as a strategy. [Link]

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Series V

Customer discovery

We often see two competing mindsets while talking to entrepreneurs. On the one hand, you have those who idolize the visionary founder, who built the product, got to the market, and found that their intuitions were right. You might find them quoting Henry Ford as saying customers would have demanded a faster horse if he’d asked them. On the other hand, there are those who have outsourced their product roadmap to users.

In reality, both views are valid, and often at the same time. First, realize that most of us are neither Steve Jobs nor Henry Ford, yet we must build enduring companies. Next, even though the customer may not be able to articulate the solution, listening to them will tell you something about the nature of the problem. If Henry Ford had asked customers, they would never have asked for a car — but he would have learned they wanted to go faster. And the difference would have been his ability to sift through their feedback to guide product direction.

The process of navigating this maze is called Customer discovery. It is how you make sure the dogs will eat your dog food. It is how you check that you aren’t wasting resources on a product nobody wants.

Get out of the building

The first step is to get out of the building to test your understanding of the customers’ problem. Talking to customers is an obvious first step that gets ignored too often. At some point in the startup journey, founders may have sold themselves on their business concepts and created false confidence. Customer discovery is intended to expose the flaws in your logic, and that’s a difficult pill to swallow.

The art of questioning

If you ask customer X, “Would buy or use this product?”, Their answer would either be yes or no. But that doesn’t tell you much. We often hear things like “We spoke to x number of people, and 94% said they’d need our product”. Perfect right? But did those x number of people buy it?

It is tempting to ask leading questions that validate your preconceived notions without providing useful feedback. One day, though, we will all ‘realize’ that the emperor has no clothes.

In the same vein, you should employ both qualitative (discussions, interviews, etc.) and quantitative methods (surveys, questionnaires, etc.). You will find truth at the intersection between both of them. A deep understanding of your customer’s problems requires you to develop trust. Don’t force your proposed solution upon them. Let them lead the conversation, and you can learn what the real pain points are. Insights gained from discussions can be validated via surveys.

The result of customer discovery is that you’ll be receiving information to drive product and business model iteration. And so, it is crucial that founders, themselves, go out to talk to customers. This is a process that never ends. Great companies have developed a culture of new product innovation, and each time a new product enters development, you should dive back into learning, prototyping, and experimenting.

Links from the Internets

  • Lessons from Pillpack’s acquisition. [Link]
  • How design grows up. [Link]
  • This mathematical model could lead to a new approach to the study of what is possible, and how it follows from what already exists. [Link]
  • The Moat map and Network effects. [Link]

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Series V

In conversation with Dotun.

Today on Series V, we continue to discuss fundraising for startups in Africa. Catch up on the first and second parts here and here.

Last week, Kola Aina shared his thoughts on funding models. Today, Dotun addresses valuation and long-term thinking for African investors.

Dotun Olowoporoku

About Valuation

For startups with uncertain futures and no historical financials, the job of assigning a valuation is tricky. In these cases, startup valuation is more of an art than a science. There are many parameters to take into account like the market, the team, the product, and so on, but the most important of these is the market.

A lot of African founders compare their products with foreign counterparts, thinking they should raise at similar valuations, but forgetting that the market conditions are different. True, some products in Africa are unique to us, like USSD. But if your offering is Uber for x or e-commerce, and you are basing your valuation on comparables in other markets, you are going to get it wrong because the risk profile is vastly different.

How then deal should African founders approach valuation? In my opinion, by fixing the best price they can, but applying the necessary discounts to the numbers, they see on Techcrunch. Go for how much will help you get to the next milestone, and then determine how much of your company you want to give out for that amount of money. It is important to keep the next round in mind when pricing equity today. Rather than getting fixated on how much your company is worth, do a bottom-up analysis of how much your product roadmap requires, add an extra 20 %- 30% (because founders tend to underestimate how much they need), and give out a percentage you are comfortable with. Think “who is willing to give me $1.2million for X per cent of my company?”.

On long-term investors

African investors should not think of startups as a get rich quick scheme, but a commitment. Players in the African tech space should play chess and not checkers. They should be long-term in their thinking. It’s going to take time for the market to mature and they need to think beyond making money in 3 years. For instance, an investor in an African e-commerce startup should look far ahead into the future to a time where young consumers become the biggest spenders and the highest earners in the country. When that happens, most transactions will happen online. If you are betting on the technology companies that will deliver this future, you have to take a long view.

Plus, in cases where funds/investors do not have enough follow-on capital to deploy, they can provide portfolio support until the startups get to a stage where they are good enough for more money/foreign investors. They should also actively spend time building networks to secure follow-on capital for their investee companies.

Links from the Internets

  • CB Insights’ WeWork teardown. [Link]
  • Inside Uber’s rebrand [Link]
  • Lessons from Richard Zeckhauser [Link]

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Series V

In conversation with Kola Aina.

Last week, we started talking about fundraising, and we shared a few key points based on our investment conversations. Today, we will continue to explore this topic in depth.

This week, we have Kola Aina sharing his thoughts on funding models.

Kola Aina


First, it is essential to understand that not every company is venture-backable. There needs to be an implicit understanding that your investors expect some positive liquidity event within a time frame (usually 7–11 years). While startups are driven by their founder’s passion for creating something new, startup investors have a much different agenda — a return on their invested capital.

Founders need to understand the time horizon of their investors, the return profile they are looking for, and the incentive structure that guides their decisions. Depending on the discussion, different investors have different expectations and timeframes. For instance, if you’re raising impact investment, the return expectations might be lower, and there are other parameters your investors would use to measure success. It boils down to understanding your source of capital and the return expectations bundled with that capital.

Funding models that work best.

There are two ends of that stick. The first end is that capital is scarce and expensive here, and so there’s probably a higher expectation for profitability. Because of this fact, founders need to be able to stretch whatever capital they raise to stay alive for as long as possible. Some people argue that the expectation of being unicorns is not necessarily realistic in this market, so capital efficiency is critical. Several investors in this part of the world will be happy with a 10x return. That tells us something about whether to chase ‘growth’ or prioritise profitability. Becoming profitable stretches your runway to infinity, and understanding the balance is critical within the context of “Wakanda”.

On the investor side, I believe that a venture model that combines capital, mentorship, and proper governance is critical here. We don’t have a lot of repeat founders with experience, so investors must play the role of augmenting founders’ experience level and ensuring that the companies are properly governed without inhibiting them. There should be a lot more mentorship and support for the companies we invest in more so, because we do not have the depth of capital markets obtainable elsewhere. On both sides, startups and investors have to think much more in-depth and different than their counterparts in SV.

Alternative forms of capital returns

Our tendency to copy and paste what applies in Silicon Valley to Africa is wrong at the foundation. We must create models for Africa from first principles without reducing quality. I think that we should explore other ways to access liquidity for the right kinds of businesses, at the right level of maturity. Perhaps profit sharing or dividends is one option to explore. This may sound like a taboo in other markets, but in this part of the world where the investors that invest in a fund are not always as patient, there should be room for flexibility in the way deals are structured. As the ecosystem grows and as the patience of investors increases, we can focus more on increasing value and exiting in more traditional ways. But until we get there, actors in the space must begin to consider other paths to liquidity.

On the quality of our consumer market

There are several factors at play here. First of all, there is a high level of poverty. Until we fix that, we will continue to have consumers that have very little disposable income and have to direct most of it towards basic survival. Interestingly, I think that says something about the kinds of problems founders should build companies around. As opposed to building fancy, nice-to-have companies, it probably makes more sense to build painkillers — companies that address the key pain points of the majority of our consumers. I also think that the government and regulators have a role to play. For instance, in Nigeria, when you realize that 68 million adults are without bank accounts in a nation that is said to have 190 million people, you see that it is very difficult for the majority of the population to trade within the formal financial system, and so founders must be mindful of that even as the regulators and policymakers work to improve financial inclusion.

We certainly can’t absolve the government of their responsibility, but there’s work for every actor; founders, investors, and so on.

On fundraising

Fundraising is hard. You never want to be in a position where you need the money. You want to be in a place where raising is a strategic choice. As soon as you can, you want to be default alive as opposed to default dead. A good yardstick is to ask: If you keep growing at your current growth rate with your expenses remaining constant, will you reach breakeven before running out of cash?

Links from the Internets

  • Building in a small market: stories to tell. [Link]
  • Netflix has a site for their research. All of it. Bon appétit. [Link]
  • Uber’s bundles by Ben Thompson. [Link]
  • Disrupting addresses. [Link]

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Series V

Fundraising: Markets, Models, and more.

By NeONBRAND on Unsplash

We started Series V in March to talk about the things we care about that we think you should. The things we spend our days talking about and our nights thinking about. Some of it comes from our investment application pipeline, some of it, from the people we meet, and some of it, from the things we read and listen to. But if there is one topic that underpins all the work we do in the service of great founders, it is this: fundraising.

According to Partech Ventures’ Funding Report, African startups raised a total of $560 million in 2017. For context, that’s only a little more than Toyota pumped into Uber this week. This is an unfair comparison, of course. The market conditions are not analogous — apples to groundnuts — but that’s exactly the point! The fact that this market is an untamed beast: hard, inefficient, and illiquid, means that the founders (and the firms) that figure out how to make these stones bleed will do very well for themselves.

The high population that lines pitch decks comes with high poverty rates. The increasing mobile penetration is not turning as quickly into internet usage. Founders from these parts have to pay an ‘Africa tax’ when fundraising to grow their businesses. But these gaps, these challenges are all opportunities for the best of us.

In the coming weeks, we will explore this topic in depth. What funding models work best for our ecosystem? How to manage expectations during the fundraising process? How to do investor communication and relations? How to think about legal? How to think about valuations? And so on.

For now, here’s some low hanging fruit to get us started, based on our investment conversations:

  1. Start early. Always be raising: You shouldn’t wait until you need money to start raising. It is better to think about it as an ongoing process that yields results periodically.
  2. Think about liquidity: Your investors care a lot about this, and you should too. How does the equity stake you are selling to them turn into a healthy return for their own investors?
  3. Numeracy: Show that you have a firm grasp of the key metrics that drive your business. Learn to speak authoritatively about your numbers, now and in the future. Aside from memorizing them, you should also maintain a data room, where investors and investment analysts can access all the information they need to take a decision. (This should be obvious but is missing in too many cases.)
  4. Spatial awareness: Show that you don’t have your head in the sand. Beyond your immediate concerns, what does the broader business landscape look like today and how will it evolve in the future? What does that mean for your business?

Links from the Internets

  • The informal cooperative society for handcart pullers of East Africa. [Link]
  • Samir Kaji on the key components of an emerging VC. [Link]
  • “Sometimes you need to consider a cycle of change that fluctuates between doing things differently”. [Link]
  • Protecting against groupthink. [Link]

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