Not understanding the way venture capitalists work puts any entrepreneur at a disadvantage – you are dealing with a friend or foe who knows you very well, and you know nothing about them.
Having raised money at Jobberman, 1500naira and currently considering whether to take/not take outside money to grow WhoGoHost, I have seen the same pattern show itself as to how VCs work — strategic Laziness.
It’s not only VCs that exhibit strategic laziness. Nigeria has for a long time been focused on oil. Recruiters exhibit the same behaviour by choosing a MBA Harvard over a smarter OAU graduate.
Strategic laziness means some of the best wheat grains are counted as chaff, but for someone pressured to deliver much in a short period of time – it’s how the world works. Such is the selection process of VCs.
Pressure of the fund tenure
There is also the pressure to deliver within a finite timeline. VCs do not invest their own money (save for angels). They typically get the money from high net worth individuals, banks, governments and big trust funds belonging to associations, government agencies, insurance/pension companies and even universities (think Harvard trust for example). And trust me, they go through the same effort a startup founder goes through to raise this money.
These investments have a duration after which they are expected to liquidate the fund and return principal plus profits to their investors (limited partners). So, a VC handling a ten year fund will only want to invest in businesses where he can exit in less than 10 years.
Pressure of multiple returns
Jason has talked about this – a 3x return is not a good one for a good VC, except we are talking late stage $100M+ investments. You know what is sexy? 20 – 50x returns.
So the key question for VCs is How big can this startup get? How fast can you get to a $100m-for-real valuation?
Time value of money for the venture capitalist
In 2010, Tiger Global, a $2 billion fund was the VC to watch in Africa, investing millions in some of the biggest names in the Nigerian web scene today – Cheki, iROKO, Jobberman, Wakanow. Except for the big ticket $100 million investment in Takealot, no other African startup has seen their green light after that. All they have done since then is follow on their initial investments.
If you look at their latest investments — $50 million in WordPress for example, you will see that they’ve refocused on big transactions that are commensurate to the size of their fund.
Imagine a VC firm with 5 partners and a $2 billion fund that writes $1 million cheques to startups. They will have to deal with managing a portfolio of 2000 small startups, and that will be a nightmare. So if you’re looking for $100,000 – $500,000, you need to know the kind of VC that you should be talking to. You shouldn’t be talking to Kinnevik, Naspers or Tiger.
Venture Capitalists are by no means stupid people. But being a venture capitalist is easier than being an entrepreneur. Please feel free to disagree in the comments.
I’m a Nigerian startup. What is the way forward?
So you’ve been looking for funding for your startup idea for over two years and you’ve talked to tens of foreign and local VCs. Plenty of email exchanges, with VC Jack suggesting this and that, VC John asking how this new fad is going to affect your business and VC Jill keeps asking you to send document after document and for the umpteenth time. (S)he tells you they think you are a hotshot, and that you guys should “keep the discussions open”.
Except you are in the business of fundraising, I suggest you face your work – hacking/growing your business to traction – whichever metrics matter (revenue, users or transactions). To get funded by most of the VCs you’ve seen around – local/foreign (I’m not mentioning names), you actually need to be the bride that everyone wants to be with.
P.S: Y Combinator founder, Paul Graham has a classic essay on how to raise money, it is a must read for startups.