Investor Talk: When should I seek investment?

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Money will make or break your startup. That much is clear. But bootstrapping has it’s place in the life of any entrepreneur; as long as you’re still able to continue building your great product. However there comes a day when you will need that extra cash to push your startup to the next level.  But when will investors take you seriously? Here four of Disrupt Africa’s investor friends answer the question: When should I seek investment?

Paul Cook, founder and managing director of Silvertree Capital:

“We invest in companies that we believe will succeed. At the end of the day, that’s really the only non-negotiable criteria. So, the right stage is when the company has something or has achieved something that makes it much more likely that they will succeed. Not only is that our criteria for investment, it’s also important for the company, as tangible progress is important for being able to motivate a reasonable valuation.

When it comes to some specific things we look at:

– revenue (or even profit) is of course great, as making money is the most effective way of demonstrating that a company can make money;

– some other advantage/deal is often vital. This can be a marketing collaboration which will bring customers cheaply, an operations or logistics arrangement that will solve operational challenges, and so on. Essentially, it’s anything that constitutes an “unfair advantage” – something that anybody else starting the same business won’t necessarily have, and which reduces the number of topics that have to still be solved as the company grows;

– anything that demonstrates the ability to execute is very valuable. That’s why we don’t spend much time on companies with poor documents: not because excellent documents are important themselves, but rather because that’s the only sample we have of the team’s ability to execute. A team with proven executors is key;

– ideas are worth very, very little, especially in Africa. There are so many known ideas that haven’t been executed here, that we’re very unlikely to invest in anything really new to Earth – we’d much rather work on an idea which is already proven. Actual execution requires, of course, a ton of innovation and problem solving, but if the idea can’t be summarised in two sentences maximum, we’re already very sceptical.

From a startup’s perspective, I don’t think anything above is particularly controversial, and any good investor will have much the same opinions. That means that startups need to work quickly on proving their ability to execute, on finding “unfair advantages”, and so on. Don’t try to raise money without those, as you probably won’t succeed, and if you do it will be at a low valuation and at huge cost to your focus on the business. This means, of course, that it is very difficult for first-time entrepreneurs that aren’t able to fund themselves (or from friends/family) for several months at least – this is an unfortunate reality anywhere in the world, and especially so in Africa.”

Brett Commaille, co-founder and lead partner at AngelHub Ventures:

“When they have proven that they have demand for the product – thus they have a basic MVP (minimum viable product) developed and tested and have found some initial customers.  Young businesses face plenty of risks.  If you can reduce some of them slightly, it makes it easier or more attractive for an investor.  Early stage investors prefer to have more market risk that technical risk, so test the product in the market first.  Lots can go wrong so there is till market risk but at least it is reduced.  That way the investor focusses more on the market risk and helping the business gain adoption in the market.

For an investor to look earlier than this, you need to have exceptional circumstances  for exceptional entrepreneurs, known to the investors, with a track record that gives the confidence to for the investors to bend their rules.”

Erik Hersman, managing partner at Savannah Fund:

“It’s attractive to me only after there is a viable prototype that has users on it.  When you get something into the hands of customers and they start showing that there’s real value to them in it by being willing to pay or use it, then it gets interesting.”

Sean Obedih,  founder of NewGenAngels:

“For African based startups, I would say that it depends on the team,location and market size opportunity.

We focus on startups that have a small team of three to five people, a very clear business model and an excellent product with a potential to scale regionally and internationally.

We specialise on that segment of scaleups because I believe that there is enough help on the early stage phase ie from Idea to MVP and proof of concept.

Scaleups are a very interesting space especially across Africa.”

Justin Stanford, co-founder and managing director of 4Di Capital:

“For me, I invest across all stages, so I don’t necessarily have a minimum requirement, such as revenue. But the requirements change, based on the stage of the business. If it is seed stage, there is generally nothing to base the investment thesis off, other than the market opportunity, the product and the team (heavier weighting to the team). If it is later stage, then you want to examine things such as trajectory, market adoption, strength of the team and their proven ability to execute, runrate, etc.
The valuation is the key metric that changes based on the stage and prospects of the business too, and this also has a correlated impact on the quantum of capital that is reasonable to raise.”

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Inspired and excited by the African tech entrepreneurial scene, Gabriella spends her time travelling around the continent to report on the most innovative tech startups, the most active investors, and the latest trends emerging in the ecosystem.

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