Five years into helping African growth companies raise larger rounds, we’ve seen enough to pattern-match the key ingredients that help get larger deals over the line, through up, down and sideways market conditions. So, we thought it would be timely to share our distilled experience as so many growth companies on the continent navigate the next 12-18 months, which will be a defining window for the whole ecosystem.
Many of you will know we started by helping Cellulant raise their near $50m round led by TPG, and have since worked with M-KOPA, PEG Africa, d.light, Baxi and Twiga amongst others. Our sole focus has been advising CEO’s and boards on raising $30m+ equity rounds and completing successful M&As.
Here are a few thoughts on the some of the key ingredients we think are paramount for CEOs to consider when aiming to raise their next larger round:
Unit economics can make or break
If you’ve been through Y Combinator (YC) you have absorbed this. If you haven’t, you’ll be expected to. Unit economics are basically a breakdown of how much profit you make on each unit sold, shipped, transacted, or loaned. The later stage/larger the round, the more investors focus on unit economics, especially if you are not yet profitable, or profitable enough (which means most companies). The challenge here isn’t the concept, it’s the art in determining and presenting them. And by art we mean art – not in the sense of making anything up, but because there are usually many ways to calculate and show this, and how you choose to show it can mean the difference between investor excitement and a polite no. Take for example “Customer Lifetime Value” or LTV. For most growth companies, it’s an educated guess. They simply haven’t been going long enough to calculate this accurately; if you’ve been in business three years, how do you know if customers will stay with you for four, five or longer? For the same sector, we’ve seen companies use anything from say 3 to 5 years of customer retention. Not surprisingly LTVs vary dramatically if the average customer spends money with you for 2 extra years. Whether its acquisition cost, cost of delivery, LTV or cost to serve, how you calculate and defend the components of unit economics can literally make or break a round. In our experience, most African growth companies either don’t calculate these deeply enough, or don’t think deeply enough about how to present them, and very often literally leave money on the table as a result.
A strong Chief Financial Officer (CFO) is near priceless
This relates to the above point but is broader. Most African growth companies have under-qualified CFOs, even though at early-stage most are very able. But it’s not ability that’s the issue, it’s experience. Most are controllers or accountants, not CFOs. Rarely does a company have a CFO who can act almost as a COO, who can dig into the business, think through how to package, and present growth in a compelling way, and defend their corner in intense due diligence. Also, without the requisite experience very often corners get cut that get exposed in deep due diligence, always to the company’s detriment. Finally, too often a CFO is perceived internally as a “company policeman,” which means salespeople might try to avoid dealing with him or her on key contract clauses etc. It is a challenging job. At the same time, we regularly meet CFOs in the US and Europe who work with multiple growth companies at once, and many would love the opportunity to work in a frontier market like Africa. But very rarely do CEOs focus on the importance of upgrading this function. Particularly in a difficult market, this shortfall kills deals that would otherwise get done.
Corporate marketing is chronically unvalued
African companies need to over-market to prospective investors. Distance, complexity, and perceived risk combine to render an African bet as perceived to be “risky” out of the gate for many qualified investors, and the typical African company needs to over-steer to project itself onto the radar screens of capital that lives thousands of miles away. Most African companies underappreciate this, and grossly underspend on corporate marketing. Many CEOs view it as a waste of money; they would rather invest in marketing their product or service. But to close a large round, the company IS the product. And corporate marketing is never a quick process. Generally, we recommend 12 months of sustained corporate marketing effort to yield a measurable shift in awareness. Luckily there are many cost-effective ways to begin doing this tomorrow. Weekly or monthly thought-provoking content, annual performance updates, monthly news; getting stories or even features placed with international media and selective CEO visibility combined help to enhance a company’s brand awareness and credibility before they start raising, though even today very few African companies consider this a priority.
News-flow during a round is key
Corporate marketing needs to extend deep into the fundraise itself. During the few months when a company is most heavily engaged with investors, the CEO should forward-plan the best possible news-flow and release it on a carefully considered schedule. Keep an eye out for news that will be of most interest to investors: they care more about steps taken to open a new geography, or a key partnership to extend your product (even if that’s at an early stage) than they do about, say, moving to a larger office. The point here is to plan ahead. Often, we advise companies to have milestones during the fund-raising process that show progress and ensures good news is released during the raise if possible. It’s all part of building perception, and generating momentum, that gives investors growing comfort with the opportunity you are offering them.
CEOs must evangelize (credibly)
CEOs often focus on the nuts and bolts of their business, which is unsurprising given how difficult it can be to scale in Africa. But every large investor is never just buying into the company, they are also buying the opportunity as well. Painting a credible picture of what the company should look like 2-3 years after investment, what the company’s mission is, and ensuring investors really “get” the 30,000-foot picture of what is possible to achieve is literally job 1, 2 and 3 for a fundraising CEO. But most still don’t do this regularly enough, and instead follow investors’ own information-digging trail, down into the weeds.
A key job for the CEO even while investors are digging into details is to keep everyone focused on the ‘why?’ of the deal – the objective, the opportunity, and how exactly value will increase post-investment. For example, investors might dig and dig into geographic expansion plans, and debate the risks (to no end). The CEO at the same time needs to keep prospective investors focused on the outcome: for example, “we will be Africa’s only [X] in two years” or “this achieves our mission to deliver [X] to [X] million Africans in 3 years” or whatever the key objective is of the fundraise. It sounds simple, and it is. But CEOs are only human, and prone to try and front-run investor concerns issue by issue, often losing sight of the main point of the whole exercise which they articulated so clearly at the start of fundraising.
Engage investors as people
Investors are not funds. You don’t engage with a fund, you engage with one maybe two partners, and a couple of people below them. In fact, you may not realise it, but you also engage with a few other people sitting in the Investment Committee room (IC) when a decision gets made. If you can reach more of the people who will be around that table, take every opportunity. If not, then build as personal a relationship as you can with the partner(s) who will go to bat for you. Offer to present at an IC meeting if possible. Go see key investors and take them for dinner. Ask them questions and genuinely think about their views, and debate issues while they do their work on the deal. In a nutshell, if you effectively begin working with them before a round closes, the probability of a close can shoot through the roof as a result.
Profit potential at escape velocity is underappreciated
When a US or European company hits escape velocity (often getting a “market pull” to faster growth), margins may well reduce over time. It can simply be the price of scale, including serving newer customers who might be less valuable (whether they are corporates or consumers). It may also arise from greater competition, often the reason in markets like China. Unusually, in Africa growth companies often INCREASE margins when they hit escape velocity. A key reason is they’ve done so much of the hard work early on, built the key components themselves, and can layer on additional revenue without much extra cost. Also, there is far less competition at scale in many African sectors than comparable sectors in the US or Europe. Investors, usually based in the US or Europe, often find this hard to believe or appreciate because it defies their pattern recognition. African growth companies first need to appreciate this potential fully; many still don’t. They then need to articulate this clearly, and many also don’t. But this is a key reason for converting interest into funding; revenue generated post-funding is most likely to be more profitable than revenue pre-funding. This also compensates, and sometimes more than compensates, for any extra African risk an investor feels they are taking, be it macro, FX, or even security.
Your vertical integration so far is underappreciated
What underpins profit expansion at escape velocity is often that so much of the hard work has to be done early in an African company’s growth journey. If you operate digital logistics, you most likely have had to set up your own warehouses or owned some vehicles. If you do payments, you may have had to set up kiosks or on-the-ground teams to serve merchants. If you sell renewable energy products, you’ll have had to build at least some of your distribution yourself. Rarely can an African company “ride on existing rails” of any type (financial or physical), simply because they often don’t exist! It’s easy to view it as a negative: the company is too vertically integrated, it is not digital enough, it’s too complex etc. etc. When raising a larger round, its critical to turn this into a positive. The payoff for doing this may well be that you also build that proverbial moat around your business at scale; a serious competitor must build all this to compete successfully. And once you’ve set up your infrastructure, escape velocity can be much more profitable. Given how different Africa still is, it’s critical that CEOs take the lead in framing why what might be different in Africa is in fact better, not worse.
A strong chairperson makes a huge difference
The CEO job, as the saying goes, is the world’s loneliest job. In fundraising, that can lead to poor decisions. While an investor board is helpful, and of course as advisors that’s part of our job, nothing compensates fully for having a chairperson that a CEO can really rely on as a true coach. Too often the African template for a chairperson is an investor or someone external who is “well known.” Both have value, but nowhere near the value of an experienced chairperson willing and able to share experience day in and day out. The same point earlier about CFOs applies here as well: the US and Europe are filled with experienced chair-people eager to get involved in interesting, frontier companies who simply never get asked. What’s the criteria for an effective chairperson in raising a large round? Someone who has done it before, who investors view as another “grown-up” voice around the table, who has time to coach a CEO, and, finally, who the CEO grows to trust. It’s fair to say hardly any African growth company appreciates the value that single individual can add, and most don’t even consider the idea.
Take a last-round “no” as a “maybe” for this one
A large number of declines in your last round end by saying something like: “keep us in mind for the next raise.” Sometimes it’s just being polite, but often they mean it, at least to some degree. So, take them at their word. Immediately after a round ends, begin communicating with that group, go see them when you’re not raising, and keep selling the story. It regularly amazes us how many term sheets we receive from investors in this category, who actually do step up into the next round. But in nearly all cases it’s because the CEO made time to cultivate them in between. It’s an adage but also happens to be true: a fundraise process is the culmination of a lot of previous steps, not just the beginning of new ones.
Budget double the time to raise
Whatever timeframe you plan, just double it. This gives you time and space to do many of the things we’ve set out in this note. It may be counterintuitive, but taking extra time up front is a much surer way to build real momentum by term sheet stage. Investors also want and often need to be developed in stages in a raise; many simply balk at being given a deadline to hit, and others are just turned off by the whole idea of manufactured competition. To create real competition, treat investors as unique, develop them to serious interest, and only then turn on the process after-burners. It sounds simple, but so many companies want us to accelerate, accelerate, accelerate, without valuing our view that sometimes going a bit slower at the start literally revs up the fundraise engine, and is often a key ingredient in getting to term sheets efficiently. Perhaps it’s the tortoise and hare analogy applied to the incredibly high stakes of larger fundraises.
In writing this, we’ve had to leave out as many things as we have put in, simply because there are so many lessons, many of them micro or nuanced, that we apply every day in our work. But we believe that applying even some of the above, thoughtfully, and carefully, will increase every African company’s chance of closing larger fundraises on attractive terms.
We also believe that this next fundraise window will challenge every company’s fundraising ability, no matter how successful they’ve been so far. The next 18 months are going to be a serious test of the entire ecosystem. We believe every African growth company needs to get most things right, and take every step they can take, to maximize the chance of success. At the same time, we think there is no more exciting or rewarding continent to work in and feel every day that we are privileged to be helpful to developing the ecosystem, company by company, deal by deal.
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