The sad reality of a venture-backed African startup

The sad reality of a venture-backed African startup

Reacting on Twitter to a New York Times article on venture capitalists (VCs) published a few days ago, iROKO founder Jason Njoku tweeted about his experience with running a venture-backed startup.

“As grateful and fortunate as I am for the opportunity with @irokotv, I will probably never start or run a venture-backed startup again,” his tweet reads

As grateful and fortunate as I am for the opportunity with @irokotv I will probably never start or run a venture backed startup again. My emotions can’t handle it. More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost https://t.co/QgUrO9gzeo

— JasonNjoku (@JasonNjoku) January 12, 2019

In subsequent tweets, Jason explains how pressure from investors has taken a toll on him.

“VC-backed literally absorbs and distorts your entire life and in the end,  is unlikely to be successful. So you end up with nothing. As the first wave of consumer internet companies fail and the founders move on to new adventures, remember those failures were counted in years and millions of dollars wasted with nothing to show for it.”

Corroborating Jason’s stance on the downsides of running a venture-backed startup, Opeyemi Awoyemi, cofounder of Jobberman and WhoGoHost tweeted; “I founded @Jobberman and @whogohost. One was venture-backed, the other bootstrapped. One made me popular, the other made me wealthy”

I founded @Jobbermandotcom and @whogohost . One was venture backed, other bootstrapped. One made me popular, the other made me wealthy.

— Opeyemi Awoyemi (@opeawo) January 12, 2019

Judging by Jason and Opeyemi’s experiences, accepting venture funding could be one of the worst decisions a startup founder can make.

Should more African startups be seeking venture funding?

One of the biggest challenges African startups face is access to funds and venture capitalists provide a solution to that challenge, but not without downsides.

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For many founders, it is a case of choosing between the devil and the deep blue sea, or atleast, it should be. As Jason pointed out, the devil in this case is venture funding while the deep blue sea is the risk of failure due to a lack of funds.

“Venture capitalists are not profit-oriented, they are exit-oriented so they don’t believe in dividends. What they want is to invest, scale your company as quickly as possible so that other investors can come in and put some more money, to enable them exit,” says a Lagos-based entrepreneur who has had to turn down venture funding.

According to him, although the pitfalls of accepting venture funding are the same all over the world, African startups have it worse due to the peculiarity of the African market.

“Venture capitalists want you to play a game of numbers, which is difficult in this (African) market where scaling is hard because nobody has a good enough understanding of the consumer just yet. This is why many startups are getting burnt.”

The fear of suffering the same fate of “unhappy” venture-backed startup founders should however not cause other startups to swear off venture capitalists completely. The trick according to Jason is to tread with caution and focus on generating revenue.

“Over the last 18 months since I realised this, I have pretty much always advised founders who have sought my guidance to refrain from raising too much capital, too quickly and rather focus on generating strong cash flow from whichever means necessary.”

Also reacting to Jason’s tweets, Olumide Olusanya, founder of Gloo opined that if you must raise funding from a VC, a one-and-done funding strategy is the way to go.

I’m convinced that only founders and VCs pursuing a One-and-Done funding strategy can, in the end BOTH have meaningful outcomes in African startup from now till next 7-10years. Different reason for VC compared to founder.

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— D.O (@docolumide) January 12, 2019

As startups in the West are beginning to have conversations around doing away with venture capitalists, African startups cannot afford that luxury because foreign venture firms are largely involved in a majority of the funding rounds on the continent.

On the 26th of January, 2019, over 5000 SME and startup founders, investors and other industry stakeholders will convene at #TechpointBuild West Africa. Register for free or get a VIP pass.  

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This content was originally published here.