• Friday, March 29, 2024
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VC Fund: Founders Waterloo or leverage?

VC Fund: Founders Waterloo or leverage?

Venture capital (VC) funding refers to the sum of money investors commit for investment in early-stage companies. It has become one of the popular sources of funding for technology startups across the world and in Africa. In fact, some of the biggest funding rounds African startups have recorded in recent times, have been led by venture capitalist firms both home and abroad. Yet, some startup founders see VC funds as a dive into a blackhole – one never really knows what comes out on the other end.

“As grateful as I am for the opportunity with Iroko TV, I will probably never start or run a venture backed startup again,” Jason Njoku, founder of Iroko TV tweeted to his more than 38,000 followers on Saturday, 12 January. His tweet was in response to a New York Times article by Erin Griffith titled, “More Start-ups Have an Unfamiliar Message for Venture Capitalists: Get Lost”.

In the article, Erin Griffith highlighted a conversation between 50 start-up founders who were united by their unsavoury experiences from dealing with venture capitalists. Most of the founders have decided that the expectations that come with accepting venture capital are not worth it.

Apparently, Njoku’s experience was similar and over the last 18 months since he realised, he said he has advised founders who sought his guidance to avoid raising too much capital, too quickly. He recommends generating strong cash-flow from whichever means necessary.

Olumide Olusanya, founder of online supermarket Gloo.ng agrees with Njoku. For him, any founder that is building his business in such a way that it necessarily will require VC funding does not know what he or she is doing.

Far from being a founder’s Waterloo, VCs can be a real boost – leverage – to a good idea says Adedeji Olowe, CEO of Trium.

“First VCs are in for the money and if you do not have your goals aligned and also share similar values or strategy, it would end up in a load of regrets, it would end up in a load of regrets,” Olowe told BusinessDay in a WhatsApp chat. “If your VC can also not provide strategic advisory and open doors for you, they would not be worth the dollar.”

A Harvard Review Business report makes the case that venture money is not long-term. The idea is to invest in a company’s balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be sold to a corporation or so that the institutional public-equity can step in and provide liquidity. In essence, the venture capitalist buys a state in an entrepreneur’s idea, nurtures it for a short period of time, and then exits with the help of an investment banker.

Collins Onuegbu, executive vice chairman of Signal Alliance and a serial tech investor also told BusinessDay that VCs operate within agreed norms and regulations, just like other financing institutions such as banks. While some businesses will see VCs as life-savers others will have bad experience with them and will prefer to survive without them.

Onuegbu explains that if a startup wants to go the VC route there is a need to first understand the terms, just the way it needs to understand the lines when borrowing from banks.

“I advise startups not to rush in and think venture raising is their business: and then you raise money and they demand returns, you complain,” Onuegbu said. “Venture Capital companies are set to make returns by financing your business. To make returns for their shareholders, they will make sure you have the discipline to keep your side of the bargain.”

Last year, a report by Crunchbase identified 51 viable Africa-focused VC funds globally. These VC funds have between 7-10 investments or more in African startups, from seed to series stage. Of the 51, 22 not only have their headquarters in Africa, they are being managed by Africans.

Ahmed Razaq, founder and CEO of CowryWise told BusinessDay that whether or not a startup decides to take VC funding there are pros and cons waiting in any case. To become a venture-backed company also means to take on the pressure to deliver what is promised and grow as fast as it’s projected.

“The positives for properly sourced venture funds are immense,” Razaq said. The opportunities include getting more capital, mentorship, access to resources, and opportunity to experiment quickly.

“Perhaps, a broad based survey of startups cutting across venture backed and bootstrapped ones can help shed more light into the discussion. It is very important to put the peculiarities and terms of venture funding into consideration when analysing the outcome,” he said.