Why funding can kill your business fast

by | Aug 17, 2016

In the Nigerian tech ecosystem, you will realise that almost every startup is seeking funding from the Day 1. While I don’t totally discourage that, I think founders are too focused on seeking investors rather than building their processes and brand.

I was recently a part of a panel and almost 90% of these startups couldn’t even provide proof of a viable process. When asked what they planned to use the funding for, the most common answers were marketing and to generate more traffic to their site.

A good product will sell itself without spending the billions on marketing.  It’s so amazing that a startup that has not even spent ₦100,000 on marketing came for an investors meeting and was asking for ₦100 million to be spent on marketing for a 4-month duration.

If you sink ₦100 million into marketing for a company without a process, when the customers rush in, you and your team will crash out, give bad service and eventually mismanage all your new customers.

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Let’s talk about prototype/process

When working on your startup, be very careful not to just adopt the whole process of an overseas company and think it would work in Nigeria. Nigeria is a different environment and even established multinationals will tell you this.

The process that has worked in over 15 countries when adopted in Nigeria can fail. The reason for this is that Nigeria is a unique market and your investors understand this. Study all the eCommerce companies in Nigeria and you will notice they have a unique process in Nigeria.

Some started with international processes but it didn’t take them time to return to the drawing board. Bottom-line is that, when working on your startup, it’s good to have a prototype but takes a deep look into the environment you operating in and tweak the process to fit in.

When you should look for an Investor

A lot have asked me when a startup should start looking for investors and my advice is, start when you know you have a good, scalable process and demand for your product/services. Why will an investor invest in you when you have not even made 1 sale? It happen in some cases but don’t always plan on this from Day 1.

You need to learn some basic skills which will come along while running your startup. You will make initial mistakes and correct them. You will spend in the wrong places and use the wrong processes but in all, just ensure you have smooth operations.

Don’t forget that if investors invest in you very early in your startup, they will ask for a very large equity in your business. Any investor that takes 51% of your startup is ultimately the owner of that business and you do not have control anymore.

If investors see that on your own, you have been able to scale your business from point A to Point B to Point C, they can have confidence in their investment knowing that investing in you at Point C means when you are at Point P, their investment would have matured.  And don’t forget that you have more power of negotiation when your business already has traction.

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Reporting

So many startup founders don’t have well-defined business plans and KPIs. For some, it’s at the point of invitation to pitch that they scribble down something and believe that’s a business plan.

A business plan is detailed and from a glance, we can know what your company is all about, your vision, where your company targets to be in 5 years’ time etc. I encourage all startups to try to have a Business Model Canvass even if they don’t have a well-developed business plan. A BMC can easily help to analyse your business and also put you and your team in focus.

Business Model Canvass explained

Now talking about reporting, as a founder, your reports should be part of your life. It should let you know how well your business is growing, what verticals you are performing well and the ones you need to work on.

I have asked a couple of founders what they track in their reporting and it’s been Alexa Ranking and total site visit. While that is very good, there are very important metrics to track and this depends on the nature of the business you are into.

A potential investor once asked an eCommerce founder how many rejected orders he has recorded in the past 6 months and there was no record of that.

Why are many startups are failing without the investor funds?

I will like to throw this section open for discussion.  How many months should a founder plan for to use his funds to run the business?

I will throw more light on this next week but for now, let’s leave it up for discussion. Let me know what you think in the comments section below. Thanks

Photo Credit: wcn247 via Compfight cc

Múyìwá Mátùlúkò
Múyìwá Mátùlúkò

Chief Servant. I bully myself because I make me do what I put my mind to.

On January 22, 2022, be part of the largest gathering of innovators, startup founders, thinkers, programmers, policymakers, and investors in West Africa. Register free.

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Ihedoro Chukwuemeka
Ihedoro Chukwuemeka
5 years ago

Very insightful, thanks. You have added to what I used to know.

Memkoh
Memkoh
5 years ago

This was a great write-up and eased my fears. Certainly, asking for money too early into the process of building a start-up doesn’t give you room to grow or tweak your ideas, because we all know successful start-ups don’t always end up on the same course they started out on. I think seeking mentors will do a greater good than seeking for investors. But that too can be harmful if your mentor doesn’t see your vision and tries to coach you through “tried and true” methods, instead of letting you step out and take your own risks (and learn from them).
Your advise about investors seeking a huge equity earlier on is spot on. They believe you are clueless at that point, a “high risk” investment. So in their defense, they have to own a greater percentage. Think of a ship captain sinking the ship and the second in command swooping in to steer the ship away from danger, forcefully. That’s what investors are doing. They are buying that power. I wish more young entrepreneurs knew this. I just might share this with them.

Ifeanyichukwu Ohamobi
Ifeanyichukwu Ohamobi
4 years ago

Your blog post is highly helpful..Great Work

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