The $20k decision that turned into $7m...

and other lessons learned in 35 investor meetings this week

I just attended AESIS and SuperReturn conferences in Cape Town, South Africa. Here are my takeaways that will save you lots of $$$ and a week of your time:

• Monthly Investor Updates. Investors repeatedly complained about chasing down entrepreneurs for updates. One asked *me* if I had any insight on whether their investee was bankrupt or not. (I suspect they are, but I didn’t say that.) Investor updates don’t need to be fancy. Here’s a template

• Serial entrepreneur (~55 years old) on what he did differently the 6th time: spent $20k on market research before starting the company. He said it saved them millions building the wrong product, and in 3 years, they have reached $7m in annual revenue. The market research included words that turn potential customers off, the underserved people, and many qualitative factors related to their buying decisions.

• Most impact investors can’t fund primary agriculture because it’s too much of an ESG risk. The farms could employ children, e.g., 17-year-olds, and that’s child labor. Sorry, farmers are too poor to be helped, it seems. Farming is considered a category A ESG risk.

• When I mentioned Series A to one investor, he had an allergic reaction: “The moment I hear Series A and Series B, I know the company is overpriced.” It is essential to distinguish between VCs that invest in Series X funding rounds priced at some multiple of revenue and PEs that target “SMEs” with slow, steady growth priced at 5-10x EBITDA.

• Need an exit. Some investors say they are only investing in companies with a clear exit opportunity, which usually means potential strategic acquirers are already waiting in the wings.

• The weak hands are still being shaken out with Sendy, Twiga, Jumia, Copia, Marketforce, and Komaza on people’s lips, and they expect several others won’t make it.

• One investor brought in someone specifically to work with their portfolio companies on “Exit Readiness.” Three things are needed to exit: a list of potential acquirers, internal house cleaning to have sound systems, and cutting costs with uncertain or long-term payoff. There are 4 potential acquisitions: sale to strategic or PE, management buyout, IPO and secondary sale (i.e. early stage investors sell their shares to new investors in an over-subscribed round). IPO investors have concluded that is impossible in Africa. Even Jumia, which is listed on the NYSE, doesn’t have enough liquidity for investors to exit, so they still aren’t able to sell their shares. Investors complained that Jumia had a poor company culture, with high staff turnover, which made them bearish on the already unimpressive financial metrics.

• Non-investor related: 99% of all AI uses Neural Networks, even though there are many other ways to do AI. We know there are much better ways to do AI: neural networks need to see 1,000 pictures of broccoli to identify broccoli correctly, but a human needs only a few. Further, we don’t know how neural networks work, which leads to predictability problems. A new AI would be more predictable and use 100x less energy to train.

• I hosted a Dragons’ Den event: Our Dragons’ Den event attendees said it was the best session they had attended. Getting honest feedback and hearing how the investors thought about the opportunities was illuminating for the entrepreneurs. One entrepreneur learned that they were raising too little money which was a red flag for investors.

• USAID won’t fund construction grants for two reasons: 1. easy to steal bags of cement, etc and 2. They experienced lawsuits for projects they funded in Afghanistan and elsewhere where the grantees had construction disasters and then sued USAID for having funded the project. No good deed goes unpunished. So the result is, because USAID has a target painted on its back and won’t fund otherwise great construction projects, the whole ecosystem loses because of a few frivolous lawsuits.

• USAID and development programs often DON’T want to market the project results to their home countries for the good deeds they do. Raising American awareness might create the appearance that the US government is spending more money overseas than helping its own citizens at home, despite less than 1% going to USAID. Telling USAID you’ll raise awareness for them in the US contradicts their goals.

• GPs seem to hate fundraising. They were all complaining about how DFIs were tight-fisted with money, which they called “T-Rex arms”: arms too short to reach their pockets. I couldn’t figure out what the root cause was. Presumably, GPs didn’t understand the DFIs’ needs.

• I’m increasingly convinced money is a commodity business; the best entrepreneurs will get the capital they need. Funds are generally undifferentiated, with some LP DFIs short-circuiting the funds and going straight to entrepreneurs. What’s differentiated is company building. Often, money is only the first problem an entrepreneur has to solve. Then, entrepreneurs have to increase their assets’ capacity factor from 25% to 85%, remove blockages in their sales funnel, create processes, replace their Excel accounting system with Xero, and hire mechatronics technicians so their CEO isn’t fixing equipment anymore. There is a huge opportunity for all the work after a company receives the money. Throwing money at a problem often doesn’t solve it; it often makes it worse. 

• Massive disparity between entrepreneurs and investors. There was an investor conference (SuperReturn) and an entrepreneur conference (AfricArena) right next to each other. The budget for the investor conference was about 20x higher. One investor complained that some entrepreneurs were paying themselves more than investors were getting paid. But is that such a bad thing since entrepreneurs are doing all the work on the ground? Entrepreneurs are still second-class citizens, and investors will be in for a surprise as capital becomes more of a commodity.