When it comes to tech entrepreneurship in Africa, securing funding is both an art and a science. As founders strive to transform their innovative ideas into thriving businesses, they often find themselves navigating a complex terrain of investor expectations, market uncertainties, and economic fluctuations. The need for guidance and insights on securing investment has never been more critical.
Funding to the continent began to dry up by Q3 of 2022, with startups raising 58% less than the previous quarter. Deals dropped from 74 in Q1 2022 to 61 in Q2 and then Q3 saw 43 deals, ushering the continent into what is popularly referred to as the great market reset or funding winter.
To support African founders as they strive to navigate the funding market after a reset as this, we launched The Investor Clinic and the September edition brought together three seasoned investors, each with a distinct perspective on Africa’s startup ecosystem.
With a shared goal of fostering entrepreneurship and innovation across the continent, these investors offered their invaluable insights and candid advice to founders who joined the event.
In this article, we delve deep into “The Investor Clinic” conversation to unravel the wealth of knowledge and wisdom shared by these investment experts. We explore investment philosophies and the key takeaways they offered to the eager audience of founders, innovators, and aspiring entrepreneurs.
Current market realities and how to navigate it
Olivia Gao
“From our point of view, I think this year has been interesting because last year we actually did a lot,” She said.
According to Olivia, the environment is slowing down and the bar for getting Series A funding from their assessments is getting higher with more scrutiny on the fundamentals.
Many seed-stage companies that raised seed rounds before are raising seed extensions which means that they probably had challenges hitting their targets and they expected to raise a Series A at this point, but they couldn’t, so they have to resort to doing a bridge or extension,
“But it also speaks to, the fundraising strategy if you are already post-seed or if you are raising your seed – which is to raise as much as you can because the likelihood of the markets turning warm again is very unlikely until at least till H1 2024,” Olivia said.
Olivia advised that conserving your cash as much as you can is the best strategy and is what Verod-Kepple portfolio companies are doing. “One of the cases is where one of the companies we invested in Egypt, was on a very high growth trajectory, but because of the lack of venture debt in local currency, they switched the mode to be aiming at breakeven, by the end of this year.”
“That move definitely slowed down the growth, but we think that’s the right thing to do, in a very uncertain market situation.” She concluded.
Kristin Wilson
“I am a fan of solid unit economics, and this is important because venture in a place like Africa’s emerging market context and the lack of resources, I don’t think that the spray and pray approach both to investing as well as to building is really strategic,” Kristin said.
The first thing is having a product and building a company that’s solving problems because that allows you to be resilient having revenue as your north star, and pursue profitability intentionally.
“Because the truth of the matter is that survival is a key metric, in seasons like this in the winter, right? And this is, this is the law of the land. This is the law of the jungle, right?” Kristin said laughing.
Kristin added that time is a precious resource. “People have a habit of wasting people’s time. And that’s true for investors, it’s true for founders, it’s true for players in the ecosystem. And so you have to actually become a fierce, protector of your time and do your research.”
“I think the earlier you start to have a data-driven approach to fundraising, the earlier you start to have an approach where you talk to investors because you understand their thesis of the fund or as an angel or whoever, and you are able to present a clear thesis around why you are also fit, why you are also aligned” Kristin advised.
“I think that shortens the time to decision making. And it also allows you to make sure that you are, you are actually using, a really critical resource, which is your time.”
Joseph Benson
“It’s basically if you are post-seed stage or you’re like seed stage, you have to conserve cash, try to be very smart about your decisions in terms of expanding hiring and things like that,” Joseph said.
“If you are, you know if you are like pre-seed or much earlier, try to find other ways to raise money that isn’t like venture capital and make sure you have an actual business.”
The free inflow of capital from 2020 was just the fact that people were just building companies for the sake of building companies. The tides have changed and people are now asking what’s the business here? And then it’s difficult to raise any further money. You have to ask yourself, am I really building a business here?
Related Article: The Dark Side of Venture Capital
Mistakes founders make in the fundraising process
Olivia Gao
“Inability to communicate the problem statement part clearly in a pitch deck is one,” Olivia said.
“For example, I come across a deck that says we want to solve for lack of financial inclusion but lack of financial inclusion is a status quo and is the result of a problem,” said Olivia “So if you are unable to articulate your problem well, it means that your solution isn’t effective.”
“Great founder or great product to be, have been overlooked just because of this mistake and this happens a lot of times at the pre-seed or very early stage, period.” She added.
Olivia also added founders tend to overemphasize their advisors, the very high profile advisors, looking very shiny, but do not mention the team at all or really just, don’t say much about the team.
That’s almost like a red flag when you don’t even want to spend too much time or emphasize your own team, but trying to use or leverage external value to prove the value, of your company.
Joseph Benson
“One of the biggest ones I’ve seen is just not really doing your research into the investor you’re reaching out to,” Joseph said. “Founders don’t take their time to come up with a strategy for fundraising and these are the people that a fit for what I’m building.”
It’s important to have a solid strategy around your fundraising even when you’re speaking with Angels. What angels you should reach out to and if they’ve invested in this space before?
Key metrics pre-seed startups should pay attention to
Kristin Wilson
“Unit economics is a major for us. At Oui Capital when we are looking at a business and we are evaluating it, we’re not just thinking about whether this is a great idea or a great story.” Kristin said
“We’re also asking does this make sense? Like do the margins make sense? Will they ever be profitable even if we gave them a billion dollars” Kristin added “Because those things matter and so we try to think about those things. We try to do very intensive modeling out of the business, under different scenarios.”
What do investors look out for when they receive a deck
Joseph Benson
“For us at DFS labs, the first thing we check is does this thesis fit our model?” Benson said, “How do we see them either making money in the future if they’re not making money now?”
Benson also shared that they further go on to look at the team and its composition. “Because we’ve seen many scenarios where the wrong team has the right model and nothing comes out of it or you just have like one co-founder that you can already see based on precedent, this person is going to be a problem.” He added.
Kristin Wilson
“I definitely go to the team slide first actually before I read anything else, because I just wanna understand who’s behind this thing because I think that building a business is about executing, it’s not necessarily about having users idea or something. So I do look at the team slide first.” Kristin said
“Then I also go to understand the problem that they’re trying to solve and see if there’s a problem-solution fit.” She added.
Olivia Gao
“I look out for founder-problem fits and we even look for investor-founder fits,” Olivia said.
“As a Series level fund, we are looking for highly scalable businesses. If we invest in a company at a 20 million valuation in order to deliver the return for our LPs, we really need at a minimum to see how this company can grow into a $200 million company” She added.
“As a larger-sized fund, we are very selective and the bar is very high when it comes to measuring scalability,” Olivia said.
Concluding the event, we featured a pitch session where Bobala Ojolaami, co-founder and CEO of Recital Finance, an infrastructure company specializing in financial and payment operations pitched his startup. After his pitch, Joseph Benson shared some feedback, emphasizing the significance of honing their SaaS business model, particularly during these early days.
Funding has become a blend of strategy and precision, and the recent market reset has heightened the need for strategic guidance. As startups continue to grapple with the shifting sands of investor expectations and economic fluctuations, the insights shared at “The Investor Clinic” are invaluable.
Olivia Gao’s advice on cash conservation, Kristin Wilson’s emphasis on solid unit economics, and Joseph Benson’s call for smart decisions resonate as survival strategies, especially for a time like this.
Additionally, Olivia and Joseph’s warnings about common fundraising mistakes and the meticulous scrutiny investors employ further show that navigating this funding winter requires diligence, resilience, and adaptability.
