Last Wednesday morning, a morning like most others these days, I settled down with my coffee in front of my COVID-induced “work-from-home” office and dialed into my first virtual meeting of the day — an introductory call with an entrepreneur who was eager to explain to me the inner workings of her business. As our allotted time neared its end, I steered us toward the conversation’s inevitable final topic: fundraising. I asked her how much she was raising, and she was quick to respond: “Two million dollars, US.” … “And how much of that have you already raised?” I continued. “Well, we have interested investors who want to invest as much as $2.5 million. Our raise has gone really well so far. …[insert long pause]… But, if I’m being honest, there is a problem: we don’t have a lead investor, and that $2.5 million is only interested if we find a lead; they told us they want someone who ‘knows Africa’ and aren’t comfortable without it.”
For the entrepreneurs building businesses in Africa who are reading this, this will be the least revolutionary thing they hear or read this week, this month or this year. At this point in time in the development of the African entrepreneurship ecosystem, this entrepreneur’s final sentiment in our conversation echoes across the continent. I will hear it dozens upon dozens of times this year, and my friends and colleagues hundreds of times more.
So, then, why don’t more early-stage funders actually lead rounds in Africa, and why is that a problem? Let’s first take a short detour into the different ways that early-stage investors work.
Our current fund at VestedWorld is what is sometimes called a “conviction strategy” fund: we will invest in a small(ish) number of portfolio companies, and work alongside those founders relentlessly to help them build their young startups into enterprises that match their bold, ambitious visions. To gain conviction to invest in each one of these companies, we start by meeting hundreds of entrepreneurs per year, and then meticulously track them over periods of as long as 1–2 years to observe how they tackle obstacles, perform under stress, and see what kind of talent they attract to come along with them on their journey. When the company is ready to raise a round that fits our mandate (generally, pre-Series A and Series A), we do extensive due diligence, and our diligence memos extolling our investment thesis, takeaways from interviews with experts, and plans to support the company run close to 100 pages long (* for those entrepreneurs reading this, don’t worry, most of that is on us and generally our process runs smoothly, just ask our portfolio companies!). Then we “vouch” for the company with other investors, and assist them in raising capital until their round is completely full. Because of the strategy we run, we are limited to investing (generally leading rounds) into 3–5 companies per year.
The opposite strategy, an “index” strategy, seeks to invest in a large(ish) number of companies (as many as 3x+ more), often (but not always) at smaller check sizes, and only when another fund is leading the investment round and has established terms. Why, then, is this so much more common?
Four reasons come immediately to mind:
Even though some of these reasons are based on sound judgement, it is, in my view, absolutely critical to have more funds like ours leading rounds into early-stage companies in Africa. I will share a few reasons, but they are manifold: