Not all VC firms are 100% returns-driven, but key business fundamentals remain crucial

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Not all venture capital firms are 100 per cent driven by the need to secure the largest possible returns, instead also placing emphasis on societal or environmental impact, yet when it comes to backing winning startups they will all look for the same business fundamentals.

That is according to Maelis Carraro, managing director of Catalyst Fund, an accelerator that supports inclusive tech innovators, and facilitates the growth of innovation ecosystems in emerging markets, who was speaking to Disrupt Podcast for its four-part mini-series  “The essential guide to African VC”.

Catalyst Fund, alongside Quona Capital, 10X Entrepreneur, and Knife Capital, is a partner for the focused series, which really digs into venture capital, looking at its business model, how startups and VCs can work together to build Africa’s tech ecosystem, and what issues still remain to be resolved. 

Carraro said as time goes by the standard definition of a VC company, and what its goals are, is changing.

“These days the range of what you would call VC funds is really expanding, especially as there are a lot more actors looking to enter the space. You have a lot more types of VC funds emerging – you have micro-funds, family offices, HNWIs coming in, and they have a desire of doing more than just realising fund returns,” she said.

Many VC firms are also prioritising other kinds of value, be it societal, or environment.

“So I think it is a description that will evolve over time and keep changing as the landscape changes,” Carraro said.

Indeed, she said it was a common misconception amongst entrepreneurs that all VCs are solely profit driven.

“While that is certainly true in many cases, there are investors that have other goals and are trying to maximise other types of returns. And understanding the full spectrum of things that investors value and what they can bring to you is extremely important,” said Carraro.

Catalyst Fund is one such organisation that looks beyond just returns.

“We try to have an outcome-based approach, and one that can diversify and take risks,” she said.

In doing so, Catalyst Fund balances risky investments in very high potential companies with less risky ones in potentially less impactful startups. “Together it makes sense,” said Carraro.

So is picking winners as an investor an art or science? Carraro says it is a bit of both.

“There are some things that are more science than art. You do have business fundamentals that you have to look at,” she said.

Yet art also comes into it.

“You need to have a lot of EQ to understand a founder’s ability to take a company to scale, and that’s really hard to identify, so it is a muscle that you have to flex over time. And it is only by experiencing successes over and over again that you refine your approach and refine your intuition,” said Carraro.

However they go about it, most investors in African tech these days – including Catalyst Fund – are primarily focused on fintech ventures. Carraro explains why.

“Foundationally access to financial services can unlock so much more for individuals and small businesses.  Fintech can unlock so much more from a growth agenda. It can be embedded into other sectors and drive value for the user and the customer. This is something you don’t see often in other sectors,” she said.

So what best places an investor in deciding which, say, fintech venture to back. Carraro says entrepreneurial experience can be a real bonus when sitting on the other side of the table.

“Operating experience is key to being a better investor because you understand the challenges under which these businesses operate in detail. You can emphasise more with the founders when things go wrong, and often what founders need is a listening ear and someone with the understanding that you will figure it out. If you have been on the other side you can do that a lot more easily,” she said.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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