Efayomi Carr, principal at Flourish Ventures, talks to TechCabal about what he has learned from investing in Africa, how Flourish Ventures invests, and his view on the current state of the African funding landscape.
Although he’s Sierra Leonean and was mostly raised in the United States, Efayomi Carr began his entrepreneurial journey in Nigeria. His first taste of entrepreneurship started with Transparent Nigeria, a media startup he and his friend founded. “We saw an opportunity to disrupt the media space; we saw that many young journalists and interesting reporters just didn’t have an outlet for their stories,” Carr, now a principal at Flourish Ventures, said.
“That was when I got the bug for leveraging entrepreneurship to create interesting products and enable others to facilitate success for other people and encourage other people to have opportunities,” he continued. That bug has led Carr to work as head of marketplace at Jumia, and as chief financial officer at Lori; after which he covered Africa for Quona Capital, a venture capital firm. Between those roles, he served as an advisor to the Sierra Leone government during the height of the Ebola virus crisis.
Carr has invested in 7 African startups at Flourish Ventures, including FairMoney and MaxAB. He also co-founded Madica, a Flourish Ventures investment programme for African startups that focuses on startups “that receive a disproportionately small share of venture funding.” Over a call with me for TechCabal, he talks about what he has learned from investing in Africa and his perspective on venture funding in Africa.
Muktar Oladunmade: What’s Flourish Venture’s investment thesis for Africa?
Efayomi Carr: We’re a global early-stage venture capital firm headquartered in Silicon Valley, but we’ve invested in Africa for over 10 years. In Africa, we focus on the impact of our investments and how the companies we invest in engage with their end users and businesses to create solutions. We’re driven by a core thesis about creating systemic change and building fair financial systems.
Our core mission is to invest in companies and individuals who can create financial products and services that can level the playing field and give opportunities to more people and businesses, which can generate wealth and opportunity. We have invested in everything from digital credit, challenger banks, payments, and embedded finance to achieve this.
MO: What do you look for in founders and startups before investing?
EC: For founders, one important quality that very few have is being detail-oriented. You want someone who is very detail-oriented, can get their hands dirty, and knows their numbers, customers, and product incredibly well. They should have a high-level vision that they can articulate.
We want someone who knows where their industry and customers are going so that their business can anticipate changes and be at the forefront. It’s challenging to find a founder with those overlapping qualities of attention to detail and understanding of intricate problems that can articulate a high-level vision and motivate others as a leader. That’s the most important thing to look for in a founder, aside from the obvious things like integrity and experience.
For businesses, we look for businesses that can affect real change. One of the unique opportunities of working in Africa is that there are a lot of problems that need solutions. We are all in a position where we can impact our communities. So we want to invest in businesses that can affect that change and create solutions. We look at these solutions that can impact people and scale so that they can impact a broad range of people over time.
MO: What red flags do you look for, and how do you perform due diligence?
EC: For founders, their track record is the most critical way to evaluate someone. When doing diligence, we talk to previous and current colleagues, bosses, and employees to understand the founder’s character, how they operate, and how they handled past challenges.
For businesses, we use standard elements like financial, legal, and business due diligence and how businesses interact with their customers. We have an advantage over others because we have a longer track record. We have companies across six or seven African markets with a network of experts and investors that can give us quality intel.
MO: What does your ticket size look like?
EC: We typically invest $1 million to $5 million as our first check.
MO: Besides macroeconomic conditions, are other factors driving the decline in VC investments?
EC: People always point to the amount of capital deployed to show the success of a venture ecosystem, and that’s misleading because venture funding, like any financial asset class, is a returns-based business. It’s not a deployment-based business. If you look at the returns investors see in venture capital, they’ve gone down. We haven’t seen the expectations that investors had two or three years ago.
Everyone needs to reassess what the overall potential is for this asset class. In Africa, every year, the amount of capital being deployed increases, yet we haven’t seen a spike in exits, substantial acquisitions, or IPOs. When we see this money coming in but don’t see investors getting returns, it means that over time, there’ll be more reluctance to deploy more capital.
Macroeconomic conditions are a huge driver for seeing capital dry up. The other driver is that there has been a different return profile, so investors are finding that there might be less of an opportunity than they originally had. This isn’t irreversible by any means. That trend can shift, especially as exits happen over the next few years. But that’s really what the landscape looks like today.
MO: Which is more important, the pitch, the leadership, or the business model?
EC: This comes down to the stage. For me, the pitch isn’t a very important factor. It’s a good sign and can show the founder’s credibility if they can attract other investors and rally a team.
At the early stages, leadership is most important. Do they have these qualities we look for in a founder (integrity, keen attention to detail, a high-level vision they can articulate). I look at the leadership team because the business will change as they refine their product and service over time. The early stage is about leadership; when it gets to the later stage, it’s much more about the business model. That’s because the stakes are higher. There has to be a lot more certainty around later-stage business models because, at that point, the strength of the leader or the strength of the pitch has much less effect on the overall success of the business than it does at the earlier stages when it’s determined mainly by the leadership.
MO: What does a successful investment look like to you?
EC: We consider some elements, such as returns and hurdle rate (the minimal rate of return required by an investor from an investment). To prove the success of this asset class, you need to have financial returns that are competitive with those of other regions or asset classes. Otherwise, there will be no more capital. If we prove that people can make money investing in African tech startups, more people will invest in African tech startups. The financial returns are important, not just for an individual firm or company, but for the ecosystem as a whole.
The second element is the structural impact on the financial system. So, as I mentioned, we invest in businesses that can fundamentally shift how people access financial products. We identify these impact themes for each sector that we can chart over time. For instance, with neobanks, we want to understand the impact of neobank investment in Africa. Does it mean that more people have bank accounts and debit cards? Are more people able to access credit? Can more people pay with methods other than cash?
MO: What lessons have you learned from investing in Africa?
EC: There’s a broad way to talk about that and a very detailed way based on each sector we focus on. On a broad level, we’ve learned that there is massive opportunity in Africa, especially in the fintech space. This report from BCG and QED shows that vertical (upward) revenue growth will continue over the next decade or so. We’ve seen some of the original pioneers and fintechs that have made innovations that have fundamentally changed how people operate, like Flutterwave (a Flourish Ventures portfolio company) in Nigeria, which has changed how people can purchase things online.
We have seen that these investments can change people’s lives, and we’re still in the early days regarding innovation, which is encouraging. We have also learned that investments take a lot of time. People always think overnight successes exist, but we’ve been doing this for 10-plus years, and the most successful investments didn’t happen overnight. It took years for teams to solve problems daily by being super resilient, building and sustaining communities and partnerships. There are no shortcuts to success in this industry. It’s been encouraging to see how we’ve had all these amazing success stories by being more patient with our founders and not expecting everything to happen overnight.
MO: What are some trends you have noticed in the market?
EC: Fintech valuations have dropped by 50% in the public markets. That means if, at the later stages, people are expecting 50% lower returns, it will claw its way into the earlier stages, where valuations will come down. The early stages have been the least affected by the temporary market swings, but it’s still happening.
Also, because of the funding downturn, investors have shifted from growth at all costs to finding the path to profitability. Investors have shifted from expanding and worrying about it later to focusing on markets, core products, and product market fit before putting additional money in the tank. This reversion to fundamentals will create stronger and more resilient businesses in the long run. Two years ago, businesses could have bad fundamentals but attract capital because they grew quickly. In contrast, the slow-growing, strong, and resilient businesses could not attract capital. Now, resilient businesses are attracting capital, which I think is a net benefit. It means that the companies that emerge in that race today will have a higher chance of success than those that raised funds two years ago. I think it’s encouraging because it’s forcing people to focus on cash preservation, unit economics, and profitability over time instead of just growth at all costs.
For many of us, this is our first time going through a true economic downturn or even economic instability, especially in venture markets, which have just been going up for the last 10 years. And so it’s a learning experience for all of us. We’re all participating in this. At the same time, we’re all learning these lessons and getting these scars, and it will make us more discerning in the future, which is also a positive thing. We will all be better mentors, stewards of capital, and founders if we can weather the storm.
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