Raising funding is, obviously, important for high-growth startups, and difficult in the current climate. But does focusing on securing investment distract founders from thinking about what taking on venture capital will do to their business? How do startups change once they have investors on board?
Speaking as part of episode 18 of Disrupt Africa “The month in VC” podcast series, powered by Atlantica Ventures and Goodwell Investments, Wim van der Beek from Goodwell Investments said once a startup secures VC funding, there will be changes in the way it organises itself.
“We will see changes in governance, and we will bring about those changes. We will demand more strict procedures around what decisions need to be taken at board level,” he said.
Sometimes these necessary changes in corporate housekeeping are tough for founders to accept.
“Typically, entrepreneurs are used to taking decisions on the go, on their feet, and now they need to get used to it that major strategic decisions are not taken on the go, but are taken in a board setting,” he said.
“They used to just moving fast; acting fast. And now some decisions take more reflection, take more time. And that is a healthy kind of tension that you see on the growth journey of a business.”
Another change is often in the way startups approach their markets.
“Typically funding is raised in order to grow the outreach, the ability of the company to actually go into the market,” van der Beek said.
“And typically you will see go-to-market strategies evolving, because with more substantial funding, they’re able to reach a larger market. But that requires also a different way of going to those markets. Revenue growth doesn’t just come from doing more of the same.”
Founders also need to realise that they are embarking on a journey where, hopefully, one round of funding follows another, so they are as much on a funding roadmap as they are on a growth roadmap.
“When you close your round, you’re already in the pre-marketing stage for your next round. And thinking in a structured and strategic way about your funding roadmap is incredibly important in that early stage,” said van der Beek.
“That is something that tends to get less attention. It seems for many entrepreneurs that fundraising is just a distraction from their real job of growing the business, and they only start really thinking about the next funding round when the end of the runway is in sight again.”
A structured approach and a longer-term perspective are required here.
“Founders need to really think about this properly on a long-term basis, and also put effort and energy into it between funding rounds, and not just just when it’s time to start raising again,” he said.
There are plenty of differences, then, in the way post-funding ventures operate compared to pre-funding ones, that can be tough for founders to swallow. Do enough founders realise the extent to which their day-to-day will change after securing VC? Not according to van der Beek.
“But I think it’s also a bit of a tall order to ask entrepreneurs to know all that. For the entrepreneur, this is the one thing that they do. And especially in the African continent, we don’t have many serial entrepreneurs who’ve already done it a couple of times, so they know what to expect. There’s only so much research that you can do into that. It’s just about experiencing the journey,” he said.
There are, van der Beek said, occasions when the right CEO for a pre-VC company can be the wrong one once capital has been raised. This makes due diligence on the team beforehand even more important.
“It does crop up from time to time. Our experience is that it’s only in a few cases that you find that actually the CEOs and the founders are not capable of taking the business further,” he said.
“When we do our due diligence before we invest, this is something that we really look at. We do not only look at where the company is right now, and what the market prospects are, but also what the capability of the team is in order to actually achieve the growth. Because that’s one of the largest risks that you take when you invest in that early stage. You’re essentially investing based on your assessment of the future, and and a large part of the assessment of what the future potential for the business is is the assessment of the execution capability of the team.”
Investors need to make sure they are doing their bit when it comes to ensuring the newly-funded startup proceeds in the right direction with a united front.
“It takes two to tango. You need to understand that when you invest in a business, you don’t want to be sitting in the entrepreneur’s seat. You want to be the one who is a facilitator, but you’re not the one who is building the business,” said van der Beek.
“To be honest, sometimes in the venture capital community, I see two approaches. On the one extreme it’s just sort of investing but not really looking after the business, these spray and pray approaches where the entrepreneur is just still left to their own devices. That can be a deliberate strategy or it can be just that the VCs don’t really want to spend time. On the other hand you also see cases where VCs believe that because they’ve been successful in some other situations they are the key to the success of a particular business, and they start meddling, and that is also not a healthy situation.”
VCs, then, need to find the balance between those two extremes.
“But that also means that you need to really understand and adjust your approach to the actual business circumstances of the startup, and also be a good listener, a good observer, and not just think that you know it all because you’ve been successful in other businesses,” van der Beek said.
“Sometimes that means that you adjust your approach, and that you really only look at those things where you think you can really add value, and don’t interfere in areas where you know you’re not competent and don’t have value to add. It requires a level of modesty that is sometimes hard to find in the venture capital community.”
