I joined VC smack in the middle of a pandemic. When I joined I had no idea what the next twelve months would be like — the pressures I would deal with, the joys and the disappointments. I still have a long way to go in becoming a fully-fledged VC but in the last 12 months I have learned a few things that I would like to share:
1. Strong views, loosely held
VC in Africa is an extreme sport. Okay, maybe that’s a bit of an exaggeration ;) However, the point is, unlike what is seen in developed countries, VC here is different in that data is scarce, markets (Nigeria, Kenya, Cairo, etc) are radically different, and the consumers extremely price sensitive. For this reason, opinions about what works and what does not vary radically. There is no single source of truth in this market. One might have a strong view about something but is later proven wrong as things unfold. I have found that humility, and willingness to change your mind in the face of new information is a superpower in the world of VC.
For instance, when I joined Lateral I was completely against crypto, having taken a cue from Warren Buffett, who is known to be against the idea of owning an “asset” that does not generate cashflows. I thought it to have no real use case and its volatility made me terribly uncomfortable. I couldn’t quite understand how anyone would be comfortable owning an asset that could so easily, depending on Elon Musk’s mood, go up/down by 20%. There was no way the mass market will ever adopt this; I thought to myself. However, as I dug into the real use cases for crypto and witnessed the growing adoption of it among Africa’s common folk, my strong stance against crypto has softened. I have become a believer even though I think some questions are yet to be answered. (Thanks, Steven)
2. Living with ambiguity
I am naturally risk-averse. As I was starting my journey in finance I landed on value investing, a field of investing made up of die-hard finance fundamentalists — those that will not look twice at a company with no free cash flow let alone revenue. I loved this kind of investing because it’s built on the premise of minimizing the risk of permanent capital loss. To some extent, with this kind of investing, the investor cannot lose money (if he does his homework, of course) but at the same time, it allows the investor to make a fortune if his/her investment thesis plays out as expected. One of the frameworks in value investing often used as a pointer to a great investment is how good the management team has been in deploying capital profitably in the past. The financial numbers of a company often tell a story about management and are usually a good indicator of what will happen in the future. However, if you look at Africa, private equity which espouses the same value investing principles has been relatively disappointing and I have learned that Africa needs technology to break business models and destroy monopolies and create meaningful value.
Consider Flutterwave, a business that did not exist until 6 years ago, now valued at $3bn and taking on incumbents while simultaneously creating new opportunities like has never been done before. My short time in VC has made me not only comfortable living with ambiguity, but it has given me the ability to differentiate between risk and uncertainty whilst being able to dream and envision what could be if things go right. VCs may not have a tonne of financial reports to look at to determine the merits of the founding team, but they sure have other useful frameworks to tell apart the wheat from the chaff. With these frameworks, VCs are able to look beyond the hype and evaluate whether a business/idea is fundamentally sound.
Marc Andreessen explained the process as follows:
“We think you can draw a 2×2 matrix for venture capital. …And on one axis you could say, consensus versus non-consensus. And on the other axis, you can say, successful or failure. And of course, you make all your money on successful and non-consensus. … it’s very hard to make money on successful and consensus. Because if something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.”
These skills are elusive and can take years of practice. Watching Steven, Samakab, and Rob, our Partners, evaluate the less tangible aspects of a deal has been a great way to understand what other indicators are helpful in assessing a venture.
3. Successful companies are not built on vibes and inshallah!
I started my career in VC in a bull market. A time when capital is everywhere and the tap of money never seems to run dry. During this time, less is said about company building, client engagement, and hiring. Most headlines online are about companies that raised huge amounts of capital at unjustifiable valuations. In these times even the best of founders are tempted to go back to the market to raise money they do not need, diverting their attention from what matters most — company building.
For new founders, it seems to me all that one needs to raise money in this market is a pretty deck, a knack for storytelling, previous job experience working for a blue-chip company, and one “big” client. For instance, recently I watched a founder get more excited about raising their Seed round and spend no time thinking about the actual building of the company.
But soon the tide will shift. The market will go cold, investors will shrink back, and when the tide goes down, we will know who was swimming naked. Companies built on weak value propositions, slim unit economics, and without a proper strategy for scale will be exposed. Revenues will dip, and these companies will no longer have the sexiness they initially had to attract investors.
It is Mark Twain who aptly says:
“ History doesn’t repeat itself but it often rhymes”
From time immemorial the market has always had cycles, it will go up when money is in plenty, and no one cares about business fundamentals and valuations. It will go down when the Fed increases interest rates and makes it hard for companies and households to access credit. The clever founders focus on their customers, build what their customers need, and acquire great talent while simultaneously maintaining relationships with investors as they prepare for fundraising. Companies that focus on these things may not be popular in the short run but will do well when capital winter rolls by. Few are those that understand this. (Thanks, Samakab)
4. VC is more than just giving away money
VCs across the world get a lot of heat as many see them as gatekeepers of who gets funded or not. VCs are demonized and made fun of as people who come out of the woodwork to celebrate the fundraising success of companies they backed early. Without context, it is easy to join the naysayers and look at VCs as the big old enemy that pretends to know it all while having no real practical knowledge. However, this is not entirely true.
VCs, early-stage VCs in particular, are there when companies barely have product-market fit, they spend months working side by side till the company has something to sell; they are there when founders are dealing with key-employee drama, advising on compensation and how to attract and maintain a team that can deliver on a dream; they are there when a company is preparing to raise another round advising on the KPIs that need to be hit to attract investor interest at a high valuation; they are there when a founder needs to move a company from a $2 million a year company to $10 million, helping them formulate and execute winning strategies, and help with dealing with regulators.
For founders, it is essential to find out what investors will do for you after they invested. A good way to know this is to speak with some of the companies that the fund has already invested in — something we encourage new companies to do at Lateral. It’s also for this reason that we are transitioning from being a generalist fund to a focused one (fintech and cleantech) as we have built the networks to really move the needle in the companies we invest in.
While it is more popular to hate on VCs, I have learned that VCs earn their bread through all the work they do behind the curtain. Now that I am part of our fundraising effort, I understand that unless a fund can show how it differentiates itself from the undifferentiated capital offered in the market, it is dead. No LP will give you money unless they are confident that you have a nose for good deals and that you have the ability to help a company become a success.
(Thanks Samakab and Lorraine)
5. The best way to repay kindness is to pay it forward
VC is an extremely hard industry to break into. I remember sending a cold email to a reputable firm in Nairobi asking for an internship and the Partner, in no uncertain terms, said that I did not fit the profile. He said I had no MBA, nor had I worked at a big firm in Kenya. I was deeply disappointed, to say the least.
However, I am very grateful for the recruitment process at Lateral that prioritized case studies, aptitude tests, and the ability to learn during the interview process as opposed to blue-chip experience, and the school I went to. Albeit at that time I thought six interviews are a bit excessive for an internship position but right now I understand why.
I am also grateful to some kind people I met online that were willing to help as I was looking to break into VC. I met Wambu Muigai, who guided me on how VCs think and how my mindset should change if I was to get a job in the industry; I then met Pearl Kwamboka who took me deep into how they look at different investments and evaluate founders. After this, I reached out to Arnold Maina, who not only helped me think through how my previous work experiences would be beneficial to a VC but also helped me re-write my CV to suit the role I was applying for. He also looked at my article, which was part of my interview process at Lateral, and gave me constructive feedback on how to improve it. He then introduced me to Maina Murage who shared his VC story and gave me a few tips on how to add value as soon as I joined a VC firm.
Big shout out to my workmates, Shreyas and Ebby who have not only been a sounding board but have covered for me in more ways than one — I couldn’t have asked for a better team to work with.
It is Issac Newton who says:
“If I have seen further, it is by standing on the shoulders of giants.”
I believe without these guys, I wouldn’t have made it here. I may not be able to repay you for your kindness but what I purpose to do, by God’s grace, is to pay it forward to the next man/woman. Thank you guys, your kindness is greatly appreciated.
VC is a constant learning experience, and I still have a lot to learn — but this far I have come because other people believed in me and gave me their time even though they did not owe me anything. And after making it through a year of internship, I am happy to join the Lateral team as a full-time Analyst. Soli Deo Gloria!!