Mistakes Made by Early Stage African Startups when Preparing for a Raise

By Malaika Judd  |  December 3, 2014

 

This past July, Savannah Fund partnered with Knife Capital and University of Cape Town to host a VC Course in Nairobi. The goal of the course was to teach startups in Africa how to attract and sign investment capital. That course ran for two full days and went into extensive detail on everything from understanding the investment ecosystem, to outlining the Due Diligence process, breaking down the valuation metrics, and picking the right investors. If your startup is about to raise its first significant equity round, I’d highly recommend enrolling yourself in a similar course – as it teaches you everything you need to know to take control of your raise. But of course, if you’re like me – and you tend to save things until the last minute – I have some quicker tips for you.

At Savannah Fund, we focus on extremely early stage startups. This means most of the time we find our portfolio companies before they’ve closed their first raise. Thus a large part of my role is dedicated to helping our portfolio (or potential portfolio) teams prepare for fundraising and the due diligence process of investors. I’ve now seen the same mistakes one too many times across African startups as they prepare their documents – so I’m here to warn you up front – don’t do these…!

Don’t round your current financial numbers. Make the numbers real. I know it sounds silly, but I’ve seen a number of ‘Actual Financials” that are filled with incredibly round numbers. You mean you spent exactly $5,000 last month? To the cent? If I was to print out your bank statements for the last year, will the numbers match up exactly? They should.

Focus on realistic Financial Projections. Investors don’t just care about your break even or point of profitability. In fact we care a lot more about how realistic your projections are, if you truly understand how your business is going to grow and scale, and how you can use your resources to grow faster. Remember, we’re looking for high growth businesses. But – that does mean your get to exaggerate your revenue numbers and underestimate your costs. That it an immediate red flag. It tells me you’re trying to play with the numbers to make it look like a high growth business. It’s not good to start a business relationship with an investor based on an overinflated lie. Plus, we’re trained to see through these lies. And that’s just embarrassing for you.

One year of good projections is better than three years of bad projections. Yes, it’s common in the investment space to give three year projections, but they are more important (and more realistic) when the company is older with years of historical data and in a much later stage of fundraising. For  early stage startups, it’s better to focus on building one year of detailed projections where you have cost out every possible expense and revenue stream. Think about the random expenses: travel for expansion? appliances for your bigger office? client dinners? utilities? office supplies? marketing promotional discounts? Etc.

These estimates won’t be perfect, but the detailed numbers will tell investors that you have thought through your business strategy extensively – across every department, channel, employee and month.

Market Opportunity is NOT always all about the number of people online in Africa! Too many startups start their marketing analysis with the % of people in XXX currently online, the penetration rate of smartphones, or the growing rate of Facebook profiles. If your business is selling a premium service or product which targets customers in the higher income bracket – I think it’s safe to assume (yes – even in Africa) that your customers have a computer or smartphone.

Screen Shot 2014-12-03 at 6.42.20 PM Screen Shot 2014-12-03 at 6.42.03 PM

Tell me a story. Think about your Pitch Deck as your note cards for a talk. And organize the slides in an order that would make sense for when you’re on a TED stage. You’re standing on stage talking to an audience about who you are, your interests and expertise, why you started a business, and how that business is the best business for the ecosystem. How you are about to revolutionize an industry. How your startup is a game changer. By the end of the deck – I should be on my feet, clapping wildly, asking how I can get involved. I want in! I want in! If I’m not wowed from the start, why would I put in the time to due diligence something that already doesn’t impress me?

Competition is not a bad thing. A detailed competitive analysis tells me several things. You obviously know your market well. You’ve assessed the other players enough to know what your strengths and weaknesses are and who you’re going up against. You know how to position yourself to grow the pie or steal a slice. And you know the market is big enough (even with all the competition) for another high growth enterprise. When you tell me ‘no one else is doing anything similar’ that worries me. There must be a reason why.

There is not excuse to not have your documents in order. Do it now. Open a folder on Dropbox, Google Drive, or some other secure file sharing site and dump a copy of all your important business documents. Here is the basic list:

  1. Company Incorporation
  2. Company PIN
  3. Shareholders Agreement
  4. Memorandum Articles
  5. Client Contract Agreements
  6. Team CVs
  7. Customer References

There… you’re done! And your potential investors are going to be so impressed when you send them one shared folder instead of 20 documents in 15 different emails.

Product & Business Strategy should match your Financial Projections. That’s a no brainer! Build your strategy first. Now put more detail in. Make sure you can articulate month on month what is happening in Product, Marketing, Sales, HR, Legal, Financing, etc.. Now you’re ready to build your financial projections. Work month to month and match each business objective or milestone to expenses.

If you’re going to launch in South Africa in July, I’m expecting to see travel costs go up before July. Maybe you need to be out there preparing for your launch? rent an Airbnb room for a month? hire some new employees? buy a license to operate? get a office? purchase a water kettle for your new office? and a new printer? Yup – that’s the sort of detail I’m looking for!

All of a sudden you have two documents which fit perfectly together!

A Marketing Strategy is nothing without its target KPIs. Key Performance Indicators – they help you make sure your marketing activities have objectives and clear measurements of success. Why are you making an e-book? What’s the goal of your Christmas social media campaign? How can you tell if your new video was a hit?

  1. Launch an e-book: To get attention and gain credibility in the academic scene. Target 5 book reviews in academic magazines and 1000 paid downloads.
  2. Christmas social media campaign: Recruit 500 new customers, 1000 app downloads, and 10,000 Facebook likes. Track numbers using christmas promo codes.
  3. Video launch: Target 200 reposts on twitter, 1000 shares on Facebook, 10,000 Facebook likes, and 500 in-video click throughs to App store.

Come with a well calculated Valuation proposal. Most startups I talk to either wait to see what Savannah Fund offers as their valuation or pull a number out of thin air based on ’X startup got this valuation, so we think we should get the same’! Team, product, market size, brand awareness, patents, in-house developer capabilities, industry benchmarks, revenue, growth rate, competition, exit opportunities, geographic location, etc… these all factor into the valuation of your business. An investor is not going to be able to assess these variables as well as you are, thus you’re in a better position to prove your worth. Take control of this opportunity! Do your research. Put values to variables. Come up with a detailed calculation. And walk into the valuation discussion with confidence. You’ll have a much better chance of getting a good valuation if you’ve done your homework in advance.

Following this list isn’t the bible to impressing me or Savannah Fund. In fact it’s only a fraction of the tips I give startups during due diligence. But if you read this list (and then a second time), and do everything on it, you’re about to save me at least one round, if not two rounds of feedback on your documents. And that’s the way to a better due diligence report from me as I report back to the rest of the investment team.

  • This is very informative .. Really learning a lot.. hoping that with this I will be able to raise a nice Series for our startup

  • Georggie Wainaina’s

    this is very informative, thank you, kindly do a piece on how to value a business Malaika Judd