Insider: The Realities Of Raising Money
Welcome to Insider, where you get the scoop on what actually happens in the ecosystem. There is the stuff you may read in the news and there are those things you read on Twitter because you follow insiders on the gist. This is a hotter version of the latter.
For our first piece, we decided to speak with founders of early-stage startups and get an insider gist on fundraising. What happens that we do not hear about? How do they raise? What are the challenges and where does the money go?
Fidia is enabling monetization for creators and Spire is creating infrastructure for businesses to improve customer experience and they are starting with collecting feedback.
The Journey To Fundraising, What Is It Like?
Fundraising is hard, but then in the Nigerian tech ecosystem, we have seen growth in investment volumes. In 2019, over $377 million was raised and in 2020 the figure went up to $4 billion. Keep in mind that all of Africa raised only $1.57 billion in 2019.
It looks like there is a lot of money in the ecosystem for tech startups but can anyone building with some traction actually raise money from investors.
In my conversation with Soliudeen who is one of the cofounders of ODX backed Fidia, he spoke about how challenging it was to get funding before getting into the accelerator. Apparently, the company was running what looked like a venture-backed startup with bootstrapped funds from its founders.
“Your best bet as a founder with no prior track record or connections is to get into an accelerator like ODX, Ycombinator, 500 startups and the rest, after that, you start getting inbound interest from investors” — Soliudeen, Fidia.
Apparently, Fidia reached out to local investors and even VCs, they didn’t get the best feedback and in some cases, there was no feedback.
“Some of them rejected and some of them did not even respond” Soliudeen, Fidia
Soliudeen was not the only one that had something to say, Charles who is building Spire actually stopped reaching out to VCs and raised a Family & Friends round by gathering money.
He found more success by pitching to his friends and colleagues.
“Some of the terms from VCs were very demanding” Charles, Spire
One striking thing Charles mentioned was how it was still difficult for non-fintech builders to get VC funding, but then even Fidia which is predominantly offering financial services for creators via payment links had trouble getting funding from investors.
So what do these guys want?
“VC investment comes with the pressure of them trying to decide how you will build your product or what you should be building or how you run your company”. Charles, Spire
Apparently, early investors may not give you the flexibility to build out what it is you want to build, there might not be enough freedom to experiment and pivot as much as you want to. Your best bet might be to raise a Family and Friends round like Charles from people who trust and believe in you.
“Since we set out to build the product, we have pivoted up to 3 times. VCs might not tolerate that. My guys don’t mind, they even offer to help us build and design the product for free after investing”. Charles, Spire
It just goes on to prove that VCs may not exactly be in support of early-stage experimentation. Angels also have the tendency to be restrictive. These conversations have made it more apparent at the early stage, you have to be wary of who you bring on as an investor.
Mono’s CEO, Abdul had issues with an investor in one of his startups OyaPay.
What Is The Money Spent On?
So normally, you’d read on Techcrunch how companies spend their investment on hiring new hands to propel their growth, expand to other countries, and increase their marketing budget.
Well those aren’t the only things and the guys we spoke to had some truth to tell
“The Tools, you spend a lot on tools, you need to start worrying about taxes too especially if you are incorporated in Delaware “— Soliudeen, Fidia.
As an employee, it’s easy to forget Google Workspace, Slack and Notion are not free, but then Nigerian founders get to pay big bills for these several tools because they are charged in dollars.
“You never spend the way you plan, You may have an emergency and would need to borrow from the treasury, there are founders whose companies get bought out because they got bankrupt” Charles, Spire.
Managing personal finance is hard, you can never seem to execute financial planning. Well, the same goes for business. Also, doing business in an inflation-ridden country like Nigeria makes things even worse.
To wrap this up, let’s take a look at some key highlights:
- Fundraising Is Still As Tough As Hell: We read TechCrunch and several media outlets about founders raising here and there but the truth is that funds seem to revolve around the same circles. You find that the founders that get funded have worked somewhere or know someone who knows someone. Accelerators are still a level playing ground where the builders and their products are the most important factor and not who the founders know.
- Raise From Family & Friends: VCs might fund the popular names because it is easier for them to do due diligence but then if you have friends and family who can give you some part of the money, it is best to pitch to these guys. If you can’t convince friends and families, then you should probably leave the VCs and angels alone.
- Do Due Diligence On Your Investors: There is a need for you to ask questions about VCs or angels that you do not know because these guys may come off as restrictive and not allow you to build as you want.
That wraps the first piece on Insider, let us know in the community what other insider gist you would like to read.