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.
Incentives.
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?
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