What they don't tell you about VC Money
I am not a snitch, I promise 🤞
Hey Startup Curious 💡
Super excited to be in your inbox again.
I trust you are having a great weekend and are getting set for the new week 💪
Before we jump into today’s article, here are the top startup stories in Africa from last week just in case you missed it:
Amazon Prime lays off staff and scales back its operation in Africa (pretty rough 😓)
Iyin Aboyeji’s Future Africa is set to build the “Y Combinator for Africa” following the slowdown in acceptance rate of African startups into the US-based accelerator.
South African Tyme Bank has become profitable for the first time since its launch in 2019.
Now to the matter at hand 🤝
Yes, I would have to admit it, the headline for this post was quite cheeky 😁, so let me clarify a few things:
First off, I am not anti-venture capital.
In fact, from my previous post and even on my Twitter(X) bio, it is obvious that I aspire to be an investor myself.
So why this article?
The truth is that there is little or no awareness of the downsides of VC for the benefit of founders.
Mainstream media have done a great job in almost giving a celebrity-like status to founders who raise VC money and it has almost become a right of passage for new and aspiring founders who just want to raise for their startup without really understanding both the upside and downside of this decision.
So, with this post, I want to bring some level of clarity to the VC funding game.
Founders ought to know the full extent of the responsibility that comes with raising outside funding.
Why is this information important?
Well, I feel every founder has a right to know.
A lot of startups never see the light of day because their founders are stuck trying to raise money.
Yes, there are a lot of problems in Africa that would be hard to solve without a lot of money which right now mainly comes from large VC firms but it’s important to make it clear that this is not the only way.
There are several other industries in need of software products that do not require the “traditional” VC funding path and I hope to explore that in future articles.
Subscribe to Startup Dive to get notified when it drops 😊
I wouldn’t be able to do justice to this topic in just one issue so expect a part two where I would share thoughts from African VCs on what they believe founders should know before raising money.
Answer these questions before you decide to raise VC⚠️
I extracted these ten questions from an amazing book by Greg Head, Founder of Practical Founders.
You need to answer “yes” to all 10 questions before you ever try to raise VC money!
I have added an insight section to each question to help put things in proper context.
Before you raise VC money:
Are you confident you’ll be one of the successful 1% of funded companies with big and well-timed exits?
Insight 💡
In the venture capital industry, there is an extremely important concept called the “power law”.
The Power Law in venture capital (VC) is a principle where one single investment yields returns larger than all other investments combined, often by orders of magnitude.
The entire global venture capital industry’s success often hinges on a few companies that rise to prominence, overshadowing their peers and redefining markets.
-Venture Institute
What this means is that while VCs invest in multiple startups every year, they are certain that only a few will be successful and this is often the case in reality, with only a few startups ever reaching a Billion-dollar or more in IPO value or a 500 million-dollar+ strategic exit.
Do you believe you stand a chance to be in that top 1% of startups considered as “successful” by investors?
Are you ready to commit to selling your company and paying back your investors for a sufficient return on their investment?
Insight 💡
Running a startup can be one of the most emotionally draining things you can ever do.
When you raise VC money, you can’t bail out until you can return your investors’ money and at a valuation to give them a nice return on their investments.
If you get an early offer from a buyer that you want to take, you can’t take it if it doesn’t favour your investors.
It’s just the game 🥲
Do you know that institutional investors won’t let you raise just one round and grow slowly to a sub-$100M exit?
Insight 💡
Raising money is 50% of what you would be devoted to doing throughout the life of the life of your startup.
After you take that first big investment, you can’t stop raising until you reach a successful exit.
Do you know that the more money you raise, the higher your minimum exit value before VCs will allow you to sell your Company?
Insight 💡
This is pretty clear from previous insights.
You can’t exit your company just anytime you want. Only when your investors agree it’s best for them.
Do you know that if you have a lousy year and stock markets aren’t booming, you probably won’t raise a new round and are most likely stuck with no chance of exiting successfully?
Insight 💡
I believe this point lends some explanation to why some venture-backed startups in Africa shut down recently after raising a lot of money.
There was no hope of raising future funding and thus will only become “zombie startups”.
Are you prepared to spend the next 7-10 years getting to a big exit?
Insight 💡
As founders, we are extremely creative people with a ton of ideas.
I have seen some African founders try to run multiple startups at once after raising funding.
This is a completely wrong practice as your investors expect you to commit to returning their investments for as long as it takes!
Do you know that VCs on your board can fire you if you don’t keep up, but you can’t even remove them?
Insight 💡
Yes, you read that right. You can be removed from a company you started if the board feels you are not protecting their interests.
Are you prepared to learn the legal and financial fundamentals so you can negotiate with experienced investors and big legal teams?
Insight 💡
Many founders go on to raise VC money without even knowing something as basic as what a term sheet is.
Running a startup is already hard, and add to that the learning curve that comes with fundraising and managing a board.
I will do a future article on “fundraising for African founders” in the future. To help explain the fundamentals of fundraising.
Make sure to subscribe to get it delivered to your inbox when it drops.
Are you prepared to spend 50% of your time fundraising and managing your investors for the rest of your startup journey?
Insight 💡
Raising money is like getting married.
While it can be incredible, it’s important to understand that investors are your partners and you must keep them constantly updated on the state of the business if you want things to go well.
This is not an option, it’s a must.
Do you understand how big investors make money using the power law, in which a few winners make up for their many startup losses?
Insight 💡
In the VC game, you are more likely to lose than your VC.
You are just one of the many startups they fund every year.
You are one of their bets, but this is your only bet at least for the next 7 to 10 years.
Venture Capital is an incredible tool to drive innovation around the world but as founders, it’s important you know what you are up against before going on to raise VC money.
I hope this helped 🙏
Feel free to drop your questions or comments if any in the comment section.
I’ll be responding to them as soon as I get them.
See you next weekend 👍🏻
-Zikora
Thank you Zik for the precious insights