Against the backdrop of 2023 which was termed as a “funding winter”, Founders Factory Africa hosted a live version of The African Pre-seed Podcast. According to Disrupt Africa’s African Tech Startups Funding Report, investment in African startups fell by around 27% in 2023, while the number of investors dropped by half.
The event brought together media personalities, founders, investors, and technology lovers in Kenya. Panelists for this live podcast episode focussed primarily on the “Good and Bad of Funding”.
Lorraine Achar-Ogada, a Senior Investment Associate at Founders Factory moderated the discussion. She was joined in the conversation by the founder and CEO of Senga Technologies, June Odongo. Alongside the two ladies was Co-founder and General Partner at Seedstars Africa Ventures Bruce Nsereko-Lule, and Chief Financial Officer at Rology Jason Musyoka.
Startups Need Clear Roadmaps
Investors’ shifting priorities was the apposite topic that opened the discussions. It was made apparent that founders today must have a clear roadmap with achievable milestones (pilot, funding rounds) and contingency plans.
Nsereko-Lule pointed out that, “Founders need to understand the steps they need to take to make the business sustainable; set milestones to achieve profitability. 18-24 months is ideal to raise funds.“
The clear roadmap has also to have a constant review and changes made when needed. June Odongo spoke of continuously validating aspects of the Business Model as one builds a startup. She says, “At one point, we were going to raise money when we had validated our idea and it was growing well,”
June adds “Then we got a lot of competition that was emulating some of what we were doing and they were raising tons of money. At that point, we were going to raise and I decided not to because it was clear to me that things were not going to turn out well. So we retreated and pivoted to a new niche,”
It is in the spirit of continuous business model validation that the panelists agreed that accelerated growth that characterized the post-2008 financial crisis is not the way to go. Startups should choose a low-interest environment and aim for sustainable growth.
READ: Navigating the Turbulent Waters of African Startup Funding
Founders Choice of Investor
Even when investment cash is not free-flowing, founders must be prudent in choosing an investor. Musyoka spoke of the need for founders to look at their niche and discern if they need a local or international investor. Preference should not always be international investors.
This is because certain business niches require an investor who understands the local business context. “The beauty about local investors is that we understand context,” says Musyoka.
“And not just context but we also have networks. There are doors that the senior-level executives and CEOs that they introduce you to can open for you or businesses that they can enable for you that they can enable for that you wouldn’t be able to open for yourself.”
Equity Dilution
Musyoka also went on to speak on investor demands and their quality. He pointed out that bringing in investors opens the door to equity dilution. As such, each time capital is raised or shares are issued, the founder’s ownership stake decreases.
On the issue of dilution and what it means to founders, Odongo said, “A lot comes down to the quality of the investor. There are some investors who I’ve felt more flexible with, and it’s always about what they can bring to the table and what if any, trade-offs there are.”
Even with these considerations in mind, it’s still important that founders pay attention to the investment offers in front of them.
“If you’ve got two competing term sheets in front of you, always go for the one that offers the least dilution,” says Musyoka.
Musyoka believes that founders should strive to always operate within their known business framework. That may mean accepting a smaller investment but, Musyoka believes that this isn’t always a bad thing.
Odongo was keen to point out that getting to the right quality of investor may also mean pausing funding rounds, as Senga has had to do a couple of times over the past few years. Her advice to founders is that they should always consider bootstrapping.
Startup Sustainability and Profit
The panelists also spoke of startups burning investor cash and seeking to raise. With the current environment, the panelists advised founders to always operate within their means. “Always run lean,” says Odongo.
Investors are uneasy coming into companies with low runaways. In addition, founders need to have a plan B and a plan C. Ultimately, they have to be very realistic.
To add to this, Musyoka is keen to dissuade from the constant raising, he says “For startups, Raising VC money is not a sign of success. We should go back to the fundamentals,”
In the end, a startup is a business and sustainability means a business has to make money to scale.
The highlight of the live podcast was Musyoka’s statement, “Revenue is vanity, profit is sanity, cash is king“
