Efayomi Carr, Principal @ Flourish Ventures
We had a lengthy discussion with Efayomi Carr, Principal at Flourish Ventures. We dive into what investors look out for in startups to invest in them and other issues pertaining startups in Africa
What do you think startups are getting right and what do you think they're not doing in terms of positioning themselves to receive funding?
EC: A lot of startups that I work with, and what I think is actually quite unique to the African ecosystem, do a very good job of collaborating with other startups. Various startups are open to sharing notes about how to do things, about their products and about different solutions. I think that's one thing that African startups do in particular really well.
One challenge is that a lot of the founders that I meet with, are really focused on serving themselves and the business. When you think about developing an ecosystem, one of the goals should be to prioritize the growth and learning of those who are below you. Looking at a lot of the strongest startups in Silicon Valley, for instance, the lower level employees who might not be at an executive level, still have strong experience and go on to self perpetuate a strong ecosystem.
I think there's limited resources and a lot of turnaround in startups in Africa. There should be an emphasis on how we develop those who are at the lower levels and also incentivize them to stick around and to be invested into the businesses that are being created. I think with time there will be more opportunities for that but I think we're not seeing that at the moment.
So it appears main issue is, founders are more more focused on themselves as entrepreneurs?
EC: Yes, I think there's different ways to think about employees and culture. I think this was a very important theme in Silicon Valley for the last five years or so, which is how do you build a company culture and there is a link between company culture and success.
Our ecosystem is maturing and we're trying to build sustainable enterprises and a sustainable ecosystem. In order for that to happen, you need to really value your employees. People are the important aspect of any of these businesses. Because there's really challenging circumstances and there's a lot of turnaround and with developers constantly getting reached out to by other companies, not as much is invested in building a sustainable culture and growing. At later stages, startups start to think about recruiting from overseas or how they can bring in talent that is not even part of this ecosystem, as opposed to how to invest in their own employees or in their own ecosystem to cultivate that talent.
You founded a digital journalism startup. Had you tried fundraising at that time?
EC: I started this company called Transparent Nigeria with a friend of mine from school. The intention was to become like the Huffington Post in Nigeria and develop a platform for a lot of independent journalists to write articles.
We didn't do a traditional fundraising round. This was in 2012, where there wasn't a ton of capital coming into Africa. So the only capital we raised was from friends and family because we didn't have the typical venture funding. When we were around six months to twelve months in, we needed to build a sustainable business and so we started doing things like advertising very early on to be able to get some revenue coming in. Neither of us (the co-founders) took a salary and we did try to keep costs very low.
On that note, do you feel like African startups overemphasize getting funding, more than actually taking time to build the startup first, then look for investors in the future?
EC: It's such a delicate balance, because the reality is, it's more difficult for founders in Africa to get capital than it is founders abroad in many circumstances. That is especially true for these models that are high growth and high scalability, but oftentimes you could have to sacrifice growth for profitability. In Silicon Valley, the model has really been emphasizing growth, bringing on new customers and bringing on new businesses as opposed to building a sustainably profitable company because they believe that money will come later on.
But that's not the case in Africa. For a lot of startups, by the time they get to series A or Series B stage, they either have to be profitable or have a very clear path to profitability. Otherwise they don't get funding. So to answer your question, do African founders emphasize funding more? Yes, but they have to.
Would Flourish Ventures bet on startups that haven't received funding previously?
EC: Absolutely. I think it's depends on the business and what stage they are in. At Flourish Ventures, we do seed and series A investments. So that means at the seed stage, usually there hasn't been institutional capital coming into the business already.
If we look at an early stage company and we see a strong business model, a strong founder etc. we would be be happy to be the first institutional cheque that comes in. That would give us a better opportunity and there's more upside for us as a business continues to grow.
Additionally, in Africa in particular, there is this crowding in effect. If you get one investor that's really reputable to finance an early round then other investors become more comfortable investing in that model. It's a very vast market and for investors, investing is also about trust. So, because we trust another investor, that they've done the diligence, that they understand the model, it makes us more likely to want to work with that company as well.
Is there much difference between startup founders who've gone through incubation and accelerator programs?
EC: There's so many different accelerator and incubator programs even on the continent and some of them do a really good job preparing startups for future funding.
What do you look for in companies that come out of these programs?
EC: The first is what are the terms to be accepted in the program. Some offer grants, which are great since they have access to capital to help them scale. But most of these programs, especially now, offer either a safe note or a convertible note. These might actually hamstring the companies because if an accelerator program takes say 20% to 50% of the business sometimes before you actually go to investor, there's a little pool of equity that we can acquire. So if we look at your capital and you are significantly diluted at a super early stage, it becomes much more difficult for us to invest.
And would that mean, automatic disqualification?
EC: No. There's no sort of automatic decisions, but I think it becomes a much more challenging battle. For every investment, we have to do an analysis of the capital going in, the stake that we will achieve, what we need to achieve in say five years and exit in order for this to be a profitable investment. When there's already a high level of dilution, that means it's that much harder for us to get the same returns as compared to if it was 0% dilution.
So it doesn't mean there's not automatic disqualification, but it just means that the numbers have to be even that much more impressive in order for us to invest.
You mentioned a strong founder being something that you look at when you want to invest and the amount of return you would get from investing. What are other factors that you consider when investing in a startup?
EC: The team and the founder are the most important at the early stage and obviously the business model. At the time we invest, we like to see the product-market fit. There has to be something being deployed, there has to be some traction and some level of adoption amongst their customers, or businesses depending on whether its B2B or B2C. We'll look at that traction and look to see if that's sustainable.
Do you also consider the years of operation of the startup?
EC: Yes and no because there are companies that have been in operation for five, six years that have pivoted or have just reached their stride or different models. So even though they're an older company, they might still have the same level of growth as a first year company. I would say that's less important than have they hit that product-market fit? Do they have that amount of sustainability and growth? Another thing we look at very closely, and I think most African investors look at quite closely, is what is the thing that they're trying to solve?
Because there's a lot of problems in Africa, as we all know such as infrastructure. What I've seen in my experience, and what I think a lot of investors have seen in Africa, the startups that are committed to solving a problem have more success because there's many ways to solve these problems.
It's not just about having a great product because that can be helpful for a certain stage but especially as you scale and enter new markets, that product will probably not be effective. What works in Kenya, probably won't work in Nigeria. So if you're dedicated to building the best product, that would be great for certain markets, but it means you have to really replicate that in new areas, as you grow.
As the company grows, the mission becomes more essential than that core product, because the product may not be scalable in Africa due to a wide range of problems that we have to deal with.
I think that mission is so important. It's what we look at at Flourish and we look at whether this team is actually dedicated to the mission and if they have flexibility to execute that in really difficult circumstances.
And how do you measure that ability to execute?
EC: It's pretty much looking at how they responded to adversity. So every entrepreneur you work with, has had challenges. If they're at the stage where they're raising institutional capital, they've already faced challenges.
I love when entrepreneurs, start a pitch with all the beautiful things about their company. But what I actually want to listen to as well is what was the hardest thing that they had to deal with last quarter, especially now during COVID where things are even more volatile. I want to listen to what was the problem that they had to face and how they respond to it. What were the steps they took? How did the team communicate with each other and communicate with customers?
Those are the things that really show me that the founders have the resilience to respond to adversity. So the way that they respond is actually more important, because they'll likely face challenges every step along the way.
What about the effect of policy in making investment decisions?
EC: You can't guarantee high return if your business is in a heavily regulated environment. For instance in Nigeria, there's a huge market for bike-hailing with some startups being Max.ng and Gokada. The government abruptly banned the two-wheelers/ motorcycles. A business could have the best return profile but if the government can shut down the business overnight then there's nothing you can do about it.
What I would say influences investment decisions is how likely regulation will affect a company's ability to operate. There are sectors that are more heavily regulated than others like healthcare where rules don't change as often. So regulatory risk plays a huge role when we're making an investment decision and we look at the risk potential. If your business can be shut down overnight by a change in administration then that's a very high risk investment no matter how good your product is.
It's always better when governments involve entrepreneurs in policy creation. It's important to engage the relevant stakeholders early enough.
In pitching, startups come in with their numbers, to show what they've achieved in a certain amount of years. But in their pitching do they, without you having to ask, include in their pitch the challenges they faced and what they did to counter them? Or is it something that you have to ask?
EC: Very rarely does an early stage entrepreneur highlight the challenges they faced. Perhaps we believe that investors will appreciate us if they just see a rosy story. But in my opinion, every discerning investor knows that there's no such thing as a rosy story. It's all about being nitty gritty, it's all about hustle. It's all about being resilient.
A lot of entrepreneurs do not highlight that but I think there's a good reason for it, though. If you're a local founder you have to do extra work to prove your credibility and showing your challenges and your hiccups, people think that's going to make investors not believe that they're credible.
This is a double-faceted issue because it's actually more difficult to admit your difficulties, because as a founder you've had this uphill battle about proving yourself to investors.
If you were to advise them, would you recommend that they have this in their pitch?
EC: I love to have a conversation. I'd love to put the slide deck away, because I think there's a much more authentic experience. Of course, it's great to highlight the success of your business, the traction, the great team, you have etc. That should be in the pitch and that's fine. But I would recommend this for entrepreneurs that are working with especially stronger investors - I think it's really important to feel comfortable showing the difficulties. The entrepreneurs I trust the most, are those that when I ask for instance how a logistics company set up their warehouse and they say the first time they set up the warehouse they wasted a lot of money maybe because they didn't realize how much it would cost to operate but they've now learnt from that.
That for me, is so much more powerful than the perception of running smoothly because I know how hard it is to set up a warehouse in Nairobi. It's more authentic to me and that's actually a way to build credibility.
How do you source your investments?
EC: I think in traditional venture, there's probably two approaches. One is top-down and one is bottom-up.
Bottom-up is if you're looking at a bunch of different investments here and there and is very much more random and one off.
The top-down is the approach where you make a general thesis. For instance we have this strong thesis on embedded finance where we're looking at how logistics companies and B2B e-commerce companies can actually be a platform to offer financial services. So we'll work with a bunch of research and scan the market for these companies, see who is working with them, what is their success record etc. and then we'll reach out to them and engage with them.
I think in Africa, because it's a relatively early ecosystem, it's much more common for investors to do the bottom-up approach. They're just receiving different investment proposals from friends, from incubators, from investors etc. I think there's only a few sectors where there's enough scale and enough depth where you can actually do the top-down approach.
More often for us, it's a lot of inbound proposals and all inbound isn't the same. Networks are important as well. We were talking about accelerators before. I think one of the biggest value ads for accelerators is can they cultivate a network that allows entrepreneurs to have privileged access to investors? Because there are a lot of accelerators that we work with closely and when they refer a company to us, we will always take a call.
Flourish Ventures set up an office in Nairobi, Kenya earlier this year. Why Kenya specifically and not the other ecosystems in Africa that are doing well like Nigeria, Egypt and South Africa?
EC: There's so much happening in the Kenyan ecosystem now. I think there's very practical reasons for us to set up an office here. Generally, you want to have your office close to your portfolio and we have several portfolio companies that are based here. So being close to our portfolio companies is a benefit.
I also think Kenya is a great launching pad for the rest of the continent. The ecosystem tends to be pretty diversified. You have founders that are coming from all over the continent, from Zambia, from Nigeria etc. in order to work here, whereas other markets in Africa are a bit more insulated. So it's things like where we have our greatest portfolio concentration and what gives us access to being on the pulse of the continent from one location that matter.
In your opinion, what would you say are elements that make a startup successful?
EC: Let's look at the ones that have been successful. What they've done really well is they reoriented their model according to their circumstances and where they operate.
Take Jumia or Flutterwave for instance, some of the unicorns on the continent. Jumia has time after time, had to reinvent itself and reinvent its model in whatever location it was in. The same with Flutterwave. They had a very basic premise and as they understood the dynamics of the market, they had to develop their product in a certain way. Even today, at least every country Flutterwave goes into, they have to reinvent because there's different dynamics in the payments infrastructure.
A lot of people think having great product is what's gonna make them successful. But it's about how you can execute and how you can respond to adversity.
That changes across sectors. Having a strong product might be more effective if you're in the payment space in comparison to if the startup is in the logistics, space. Logistics is all about grit and resilience and payments is a bit more about how you negotiate your financing, how you engage with partners and how you redesign your product.
When I see startups doing really well, it's because their teams move really quickly and they adapt to the circumstances really well.
Would you say a company's funding track record is a pointer to its success?
EC: I'll look at it from two perspectives and I'll start from the investor perspective because for investors, there's usually two goals.
If you're like a development financial institution or a government institution, you're looking for impact for the most part and that can be how many customers are you serving? How many lives have you touched with your product, etc?
If you're a commercially minded investor, then your goal is, what the return on investment is.
Both of those are centralized around how much the startup can get because that helps to scale and expand their impact and reach.
Money is just an opportunity for founders to execute on a mission. Their success should be based on that mission and everything else is inputs - any press, any fundraising, any new hires, all of that is in service of this mission. I love when the entrepreneurs show for instance what they unlocked in the past without funding, how their product has improved and how they've made their customers' lives easier.
That's what I think the success metrics should be. Founders should look at funding as just an opportunity to achieve that. Funding isn't a goal in and of itself and the success is when you execute on your project mission.
Funding can also serve other purposes. If a startup raises a certain amount of capital, it does three things to three different types of partners.
The first is investors. It shows investors that there's some kind of track record, there's some kind of confidence in this business and so it can lead to more funding in the future.
The second is to their actual partners. A lot of these businesses may need to work with partners. Usually they're working with like incumbents like banks, logistics companies, or retailers and you need to prove yourself. So if you're a small startup that has no visibility the question becomes the partners should trust you with their customers or product. A big fundraising round adds credibility to the startup which is very important. That signaling is huge for a lot of startups.
The third thing is, it helps to recruit. So if one wants to join a company and you've never heard of them or you don't know anyone that's worked with them or no one's invested in them, you're much less likely to go in, than if you see an article that shows a certain startup got money from really well known investors, and they have this really strong track record.
So there's tangible benefits to funding that I don't want to discount, because it has impact on the business. But that shouldn't be the goal. The goal should be how does this funding help the business, not that entrepreneurs do their business to get funding.
Do you feel like visibility should also be a keen interest for startups? Should they prioritize visibility more?
EC: I'll say they're at a disadvantage if they don't do that. In the West, founders are taught to be very bombastic and it works. It gives them a lot more visibility and that can have an effect of crowding in investors and partners etc. There are such tangible benefits to being visible that it is undeniable. I think there's probably certain companies and certain models that don't benefit as much from visibility, because they're in the background and they don't really need to have as much focus but by and large, I think when someone wins a big tech competition or partnership for instance those signaling effects are huge. They really need to understand the tangible benefits of visibility, because it actually affects their business.
From your experience from Boston Consulting Group, are there things that African startups can borrow from international startups?
EC: I worked at Boston Consulting Group in the New York office and then moved to Lagos to help open an office and work there. One thing I found was that international best practices need to be tailored to local context. I'm always a fan of needing to know the rules to break the rules. In my opinion, I think it's great to know international best practices because then you know what are the systems that work and why they work. Once you know the why you can recreate that for your own local context.
I think it's especially important because for entrepreneurs, you get a lot of credibility by showing that you understand not just your business in your context, but what's happening in the world. If you can demonstrate that you're really sharp on your industry, have studied other geographies and you can show that you've thought through this and developed your own system, then it's a game changer for how investors will look at you.
Flourish Ventures recently invested in an Indian AgriTech startup. Does that mean that the firm is now branching out to other sectors apart from fintech?
EC: We are a fintech investor. Our main thesis is how do we invest in companies and entrepreneurs that are delivering financial services to be more empowering across the globe. AgriTech is adjacent to that, I would say. There a lot of AgriTech companies that offer financial services product to farmers. In Kenya, we've invested in two AgriTech companies. We invested in Kula, which offers crop insurance and advisory services to farmers. We've invested in Apollo Agriculture, which offers a range of services, an agent network and also credit to their farmers to help them increase their yield.
For us, that's at the core of our mission. This financial services product actually unlocks growth and development. In Apollo's case, the yields for the farmers that access Apollo's credit product was 2.5x last year. That's very meaningful and that's actually unlocked through financial services.
I would say we're constantly expanding what financial services means because we're investing in companies that you wouldn't think of as FinTech primarily, but the products they offer are actually financial services.
Are there any other sectors in Africa that you feel have high growth potential?
EC: I think there's a lot of buzz around open banking and open API platforms. Essentially saying that, to date, a lot of these banking sectors and other sectors have been very restrictive. So it's really difficult for a FinTech company for instance to make a credit decision because they can't access the transaction history of a certain company or individual in order to decide if they are credit worthy.
So there's a whole industry, that's essentially been established that wants to open up these platforms. This has happened while governments are also becoming a bit more open to it as well. That has a huge opportunity because if you have these open API's, then FinTechs, or any business like insurance companies etc, can very easily tap into this wealth of data that can help with making credit decisions or with making payments. There are a lot of applications that are really interesting.
I think that remains to be seen with how big the market is in Africa. This might be too early. There might not be enough customers who want access to this data quite yet because it's just a little bit early but I think it has huge potential. We've seen it in the US, for instance, with Plaid, where Plaid is their open open API system where now everyone can make seamless transactions and payments online which are all integrated into a cloud network. That's sort of the dream in Africa as well.
I think that has a lot of opportunity. We've recently invested a lot in embedded finance, which are the more traditional brick and mortar companies that have the opportunity to offer financial services products. And I would say that's sort of a 1.0 of embedded financing, we spend a lot of time thinking about what does the next generation look like.
The core theme is, how can we aggregate as a bunch of users with a core product and then use that base to offer additional products and services. And that can apply to farming and AgriTech, to informal retailers or B2B logistics or even HealthTech. Some of these companies have had huge success, and we've invested in many of them but there's another generation of aggregators that you can upscale additional products, which is really exciting.
Apart from the usual suspects, which other countries are garnering your attention as an investor?
EC: I've been looking into Morocco as an investment opportunity. There are interesting accelerators that are coming up. We're looking into secondary markets which are linked to the big four hubs because are able to get exposure to them through the big four. Other countries of interest include Ghana, Uganda, Zambia.
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