2018 in Review: The Craziness & The Fails
When I sat down to write this blog, I did some free word association with our portfolio company names and the events of the year. Because I’m more a math person than a words person, I used a couple of the same words over and over — mostly “craziness” (good crazy) and “fail” (bad crazy, oversimplified). Some companies got both, depending on the time of year. All our thoughts from the end of 2017 still hold. This is still hard. I’m still learning and we are still working on investing in and hiring more locals and women. There are a few things we’ve done to turn those thoughts into actions:
Radical Honesty: Not the same as the radical candor circulating of late, but we do that too. When I’m struggling with a specific deal or term, I tell my IC. I talk to trusted co-investors. I tell my friends and my parents know more about the state of the pay-as-you-go solar industry in Africa than they ever anticipated. I and the team have surrounded ourselves with people who care and whose opinions we value. We added new members to our venture investment committee including Chad Larson and have invited in power house IC members from the broader family office, Mike Barry and Paul Tregidgo as well as our COO, Kelly Escobedo. Without their questions, their prodding and on good days, their affirmations, I’m not sure where we would be. Thank you to all of them.
Getting Outside of Our Comfort Zones: We continue to struggle to find local and female entrepreneurs running companies at the stage, traction and valuation we target. I take perverse comfort in the fact that we did not make a new investment in 2018 (more on that below), but 2018 was at least a year of action. We now organize quarterly “Ladies Drinks” in Nairobi. With 120 women fund managers and entrepreneurs on the list serve, each event has about 50 attendees. I’ve met at least a dozen promising early stage founders through the network and have spent more time mentoring female founders that are too early or outside our target industries. We’re also thinking about how we can better support emerging managers that will have different networks than us in markets we care about. Joining new accelerators and co-working spaces that seem to be more heavily trafficked by the local community, we’re prioritizing events and going through deal databases often. Our entrepreneurs still remain our greatest source of referrals and we have shared that we are actively looking to increase the diversity of our teams. All told, we’ve increased sources of our deal flow dramatically.
Knowing that these thoughts don’t die with the publishing of this blog, onto 2018. What. A. Year. Our first real seed investment closed its Series A, far surpassing our best case expectations. A couple companies ricocheted from huge rounds, lauding success, to careening off a cliff that ended in severe austerity, before bouncing right back all in under a year. We learned the difference between accounting revenue and cash the hard way. And we made the difficult decision to start winding down one of our earliest investments. Oh also, we didn’t make a single new investment. But I still felt crazy busy (good and bad crazy). Here are some of the things we learned.
How to Sit on Our Hands: We saw nearly 200 companies in 2018, mostly in our target industries at the nexus of cleantech, fintech and logistics…tech. New funders including American, Chinese, Japanese and Middle Eastern VCs and strategic investors, as well Africa focused fund managers closing new money, flooded the East African market. Venture arms at DFIs also found their internal footing, deploying cash faster than their reputation, at earlier stages, across the continent. This is mostly a good thing. Companies at the stage we usually focus (Series A-ish) had a lot of options. We started asking for valuation expectations closer to the beginning of a diligence process (sometimes even during the first call). That saved us a lot of work — teams were commanding numbers at which we didn’t feel comfortable. Valuation metrics used were often not sustainable and the lack of focus on or sight line to profitability scared us (see below). Here’s where I admit we are very fortunate to be an evergreen fund with one backer that is deeply involved and is in no hurry to do deals for the sake of the press release. With eight portfolio companies across the continent, we’ve learned that backing a new team is akin to marriage. Foregoing discipline or values to make something work is not a good idea.
Managing the Highs and the Very Lows. Retreading 2018, thinking about the “craziness” and the “fails”, my mind went immediately to the founders and CEOs that experienced these events in a far more personal way. We experience the ups and downs of the startup lifecycle most often at board meetings, via tense emails or real time 4AM WhatsApp conversations, but in most cases I get the real stories over a beer with the members of our management teams. After pouring nearly all of one’s personal capital (cash, relationships, sanity, or all of the above) into a startup, entrepreneurs can mix company success with their own personal self-worth or reputation. In some ways, investors almost demand that senior managers experience this transmorphism, but I’ve also found my job is sometimes reminding a CEO that they are more than a fundraise or quarterly numbers. On balance, most entrepreneurs don’t suffer from lack of self-esteem, but when one gets sunk so deep into the day to day chaos, it’s hard to sort between life and work and find the dividing line between the two. The energy to build a coherent business model, hire well, and maintain a motivational culture is bottomless. Sometimes, I’m good at sorting out strategies to ease the mental and emotional burden and sometimes I’m just really not. We’ll continue to both remind entrepreneurs that they’re more than their companies as well as offer resources — extra hands, a shoulder to lean on, time off, or [insert other self-healing activity that doesn’t involve alcohol here] to ease the burden. Watching the peaks and mostly the valleys of the entrepreneurial journey is the hardest part of my job.
Why are We Building this Thing Again? Growth vs. Profitability. It’s a false choice between growth at all costs and profitability. Unless the capital markets in Sub Saharan Africa experience a fundamental shift, money to fund loss-making businesses runs out. A realistic road map to breakeven is critical to long term longevity for all but the most hype-iest of situations (yes, I made that word up). Business plans are built on fairy dust and a dash of experience. They change, but the universe of follow on funders and potential acquirers might not. Seed investors that can convince A and B round VCs to do secondary buyouts when a company is still in the j-curve can get away with it, but since we intend to follow on over time, we have to focus on how and for what type of acquirer our companies are built. Large rounds for the not-yet profitable (call it $10 million and above) are mostly the domain of DFIs and foreign investors with global portfolios. These investors can be fickle (more organizational bureaucracy than individual failing) and often don’t have the stomach for bumps in the African road. Even on paved roads, cash flow focused private equity investors are often the only available money when checks get big. Consistent EBITDA is the price of entry. When ongoing funding is less a worry, how is all that money coming back? Do acquirers care about geographic footprint? Strong customer relationships? Repeat business or the purchase of multiple products? Insight into local supply chains and regulatory expertise? Today’s strategy shouldn’t be completely divorced from these questions and investors should be honest that someday their cash has to come home. Managing sometimes contrarian expectations together can be hard. See F. Scott Fitzgerald:
“…the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Despite the slow-ish year for us on the investing front, we are still betting on the continent and Africa’s economic future. Congratulations to our portfolio companies — one more year in the books. On some days that’s enough.
