Running a startup is hard. Not only do you have to come up with a good idea, but you also have to get customers, hire employees, manage your finances, and in this age of venture capital funding, get people to invest in your startup.
On their own, these are challenging tasks for anyone, but for a first-time founder with little or no experience, it can be overwhelming. As a result, we’ve written this article to help you on your fundraising journey. Most investors — whether angel investors or traditional VC firms — receive several pitches daily from entrepreneurs looking to get funded. Therefore, you need to make it easier for them to consider you.
Twice a month, we speak to angel investors and venture capitalists who have invested in African startups to get a peek into what they consider when deciding to invest in startups. So far, we’ve spoken to Idris Bello, one of Andela’s early investors, Maya Horgan Famodu, the Founder of Ingressive Capital, and Dayo Koleowo, partner at Microtraction.
Before we continue, it’s important to note that the fundraising process often depends on what startup funding stage you’re at. For this article, we’ve focused on raising your first round of funding, usually in the first few months of operation.
Determine what type of investor you need
There’s a lot of money coming into the African tech ecosystem, but that doesn’t mean you should attempt to bring every investor in on your cap table. For example, you don’t need to apply to Y Combinator because everyone you know is applying; that’s the wrong approach to take. You need to determine what kind of investor you want on your journey.
The relationship between investors and the startups/founders they invest in is almost similar to a marriage; you can’t afford to get it wrong, or you may regret it. Investors often have criteria that they look out for, and you should also. For example, most people investing in Africa describe themselves as sector-agnostic. That may change as the ecosystem develops, but you need to ensure that your interest aligns with theirs.
Early stage venture firm, Microtraction, has a thing for fintechs. According to Koleowo, “There were just a lot of problems around financial services on the continent, and specifically in Nigeria. And thanks to companies like Paystack and Flutterwave, a lot of people built on top of that. And so, you find different founders trying to solve specific niches of the financial services, which I believe will continue because there are still aspects of financial services that need solutions.”
Angel investor, Yemi Keri could show interest if you have the kind of target audience she likes. Explaining how some businesses won her over, she says…
Angel investor, Yemi Keri could show interest if you have the kind of target audience she likes. Explaining how some businesses won her over, she says, “For Cafe Neo, it was the revenue and expansion model and the target audience (youthful demography). In the case of Big Cabal, the passionate team, the possibility of catering for multiple audiences, and the various products that were in the pipeline when we invested won me over.”
Some investors prefer fintech startups; pitching your edtech startup to them might not be the wisest option. In the same way, reaching out to an investor who specialises in later-stage deals for your pre-seed round would be a waste of time.
Have a solid founding team
When you first begin, you don’t have a lot of credibility. Your finances are either non-existent or too little to help investors make a decision. So, investors would often look at your team when making a decision. The leadership team of your startup is vital, and you should have at least one technical co-founder on the team.
For Mbwana Alliy, Managing Partner at Savannah Ventures, even though there are startups that can be run without a CTO, he prefers investing in startups that have one. “In my experience, the best startups have strong engineering teams. We are seeing more and more startups that could work without a technical CTO, but that is something that we like.”
Besides having a great technical co-founder, all the other positions in your team must be held by competent people who believe in your vision because your first hires could have a massive impact on the success of your business.
Your profile as a founder could also determine whether you get investments in your business or not. For example, some investors might be sceptical about investing in first-time founders with little or no experience in that industry, while that might not put others off.
“We are looking for balanced founding teams, with a bias towards execution, going after a large market with few to no competitors, and a product that users seriously want/need,” Idris Bello, a Managing Partner at LoftyInc Capital Management, says.
Especially in the early stages, your character would be key to attracting investments. Are you trustworthy? Are you teachable? These are all qualities investors look out for.
Ndubuisi Ekekwe, founder of Tekedia Capital, is particular about knowing the people he invests in. “I like to know our startup founders. I don’t want to invest in someone whose motivations I don’t understand. I just want to know if this is a guy that will stop picking calls if you send him $300,000, so we put significant effort into trying to know who our founders are.
While Alabi is known to invest in healthtech startups, she’ll turn down startups in that sector due to the team. She says, “I believe that you need a great team to grow and scale a company. They don’t necessarily need to have all the right answers, but I really have to believe in the team.”
Also, fundraising can be very distracting, emphasising the importance of a strong team. According to Koleowo, “it’s important that if you have two co-founders, for instance, one of them is focused on operations while the other person is handling the fundraising.”
Traction is simply the progress your startup has made since launching. This could be how many customers you’ve gotten, how much revenue you’ve generated, or the volume of transactions you’ve processed. Of course, how much traction you can show would vary depending on where your business is at.
However, if, after a few months of launching your startup, you are unable to see significant interest in your offering, you might want to consider making some changes or shutting down the business. “We want to see that you are moving things fast. I don’t want to be a partner to someone slow or working part-time,” Koleowo says.
Total addressable market
Investors give you money because they believe your startup can get big in the future, and you need to show that. In some cases — such as a B2B startup — your total addressable market might not be huge but could possess a high value.
Koleowo shares this thought. “As VCs, we’re always thinking about scalability, always thinking about how big this opportunity can become. And so when we see companies, we quickly think about the scale at which this company can grow, how big this can become,” he says.
Without a large market for your product or service, raising subsequent financing rounds gets more complicated. For Bello, choosing startups with scaling potential is vital.
“Given the robustness of our deal flow, the ultimate differentiator is the ability to pick the ventures that go on to grow and scale and raise additional funding,” he says.
Alliy reveals that Savannah Ventures likes to get a headstart; hence they look out for startups in frontier markets. “The market size the startup is pursuing is another factor we consider. We like to go after frontier markets where there’s not much going on. That’s why I like Ethiopia right now. It’s quite disconnected from the rest of Africa, and with a hundred million people, it’s a big market.”
Know your business
Few things put investors off as entrepreneurs who do not have a thorough knowledge of their business. You would occasionally meet investors who have little to no knowledge of the industry in which you operate. Your understanding of the industry, as well as your ability to show this to them, could be the reason you get funded.
You need to demonstrate an understanding of your finances, how the business makes money, and essential details of your operations.
“I think there are two things a startup should not be doing: the first is that they should not be ignorant of their market and customers, so they are not taken for granted. That’s why I said we prefer serial founders as they know what they’re doing and what kind of problems exist in the market in which they operate,” Laura Li, VP, Investments, Future Hub, says.
Tie your fundraising to specific milestones
Some businesses have a harder time getting support from investors than others. This could either be because they require huge financial investments or because they are in uncharted waters. For example, agritech businesses typically have a hard time raising money because they often have to manufacture or buy costly machinery. On the other hand, a ride-hailing startup does not need all that and so would have more investors investing in it.
If your business requires huge amounts of capital, you would be better off raising money in little quantities and tying them to specific milestones. By doing this, you are able to prove that your idea works and that there is a market for it.
Raising little amounts of money is something Affiong Williams, CEO and Founder of ReelFruit is familiar with. The strategy she says allowed ReelFruit to gain the trust of investors. “Because we were so unsuccessful at raising a large round, it became apparent that people didn’t believe the big picture. So when we claimed we were going to expand by x amount, they found it easier to believe that we could, say, double our sales, hire more people, open new locations, or launch more products. That story was a lot more relatable with investors,” she says.
Have a plan for the money
It is not unusual to see entrepreneurs who immediately use funds gotten from investors to upgrade the quality of their lives. As an entrepreneur seeking funding for your startup, you need to plan what the money would do for your business.
Would it enable you to hire more employees, build your product, or expand into new territories? Investors want to know this, and you have to show it.
“We don’t like founders or startups that only want money but don’t know how to spend it or have no idea what kind of resource or support they need to grow their business,” Li says.
With fundraising capable of taking up a lot of time, Maya Horgan Famodu, founder of Ingressive Capital, advises that startups focus on raising money for long periods. “A startup shouldn’t start fundraising for short periods; they should always be thinking of 12-24 months of fundraising when they raise capital,” she says.
Get legal advice
I know you might be tempted to skimp on legal fees, but you need an experienced lawyer in your corner as soon as you start negotiations. Not every VC out there has your best interest; you need a lawyer to prevent you from getting blindsided.
Aderemi Fagbemi, Partner at Tope Adebayo LLP, advises that founders should ensure that the startup is registered with the appropriate bodies under an arrangement that clearly separates the business from the founder.
“The first step would be something I call legal housekeeping. Before you start looking for investors, you have to make sure that everything is in place such that you are attractive to an investor who would be conducting due diligence. The question to ask at this stage is what would the investor look out for when doing due diligence.
“So first, you need to make sure that the vehicle through which you’re running your business is incorporated as a limited liability company. You’re not looking to invest with a partnership or a sole proprietor. The vehicle must have its own legal entity separate from the founders,” she says.
If there is more than one founder, she cautions that a founder’s agreement with a vesting clause be created. “If you’re a sole founder, it doesn’t mean that all the shares are held by you, although that can be worked out later. If you have co-founders, one of the things that investors would like to see and that protects you is the presence of a founder’s agreement with vesting clauses,” she adds.
Employee stock options are also a great idea as it might be difficult to compete with bigger companies regarding pay at the early stages. In addition, should there be intellectual property rights crucial to the business, it should be owned by the company and not by founders. This way, should there be a split in the future, the company’s interests are protected.
Also, ensure to get any regulatory permits that are required for your industry. Having all this, the next step is to protect yourself during negotiations with investors. Funding is a game of interests, and you must not assume that your interests are similar to that of the investor. For all you know, your company could just be a route to a huge exit.
The first consideration begins with the term sheet, which is the first stage of the documentation process showing the terms and conditions of the investment arrangement. It should be non-binding, although some terms such as confidentiality clauses could be binding.
While negotiating the term sheet, founders must look out for a “no stop” or exclusivity clause, which essentially prohibits them from accepting any investment offers for a specific period. Another consideration would be going after a high valuation which could set unreasonably high expectations for the founder.
If you genuinely can’t afford to pay for a lawyer, get creative about compensation plans. Whatever you do, always get sound legal advice before putting your signature on any deal.
The fundraising process can be a long and arduous one. Therefore you must be adequately prepared for it. Determine how much you need to raise with a realistic timeline of how long it would serve you. That way, you don’t spend your time raising money instead of running your business.