In an African venture capital landscape that is much more competitive than it was a few years back, VC firms often find themselves battling for deals. One marketing angle for firms is GPs that have entrepreneurial experience, who can empathise with founders.
But in reality, how much insider knowledge, and advantage, does having a history starting and running startups give you? To find out, the latest episode of “The month in VC”, Disrupt Africa’s regular podcast on the African venture capital space, chatted to Mareme Dieng, Africa lead at 500 Startups, and Brian Odhimambo, partner at Novastar Ventures.
A solid but by his own reckoning by no means a supremely successful entrepreneur, Odhiambo started his career at Jumia before setting up a renewable energy startup based out of Zambia, which eventually failed. He then moved back to Kenya and ran another early-stage retail business, before his path crossed that of Novastar Ventures. So why switch?
“I think the main impetus for switching the sides was that a lot of my journey, particularly in Zambia and in Kenya, was affected by lack of capital. We ended up raising grant capital because we couldn’t find commercial capital that could match what we were doing, and then inevitably grant capital pulled us in a certain direction which was not necessarily the most appropriate for a commercial business,” Odhiambo said. “I’ve built companies, kind of failed, succeeded a little bit, I see the gap. Let me try and help bridge that gap.”
What real benefits does Odhiambo think his experience as an entrepreneur brings to his new, so to speak, life as an investor?
“One is building a company in Africa. Just having done it, in West, South and East Africa, seeing the different things, and having done it at a time when the payments infrastructure didn’t exist. I think that experience in itself is humbling. The word “empathy” gets thrown around a lot, but I think that that’s really what it is. It’s appreciating and understanding what it takes to build in an environment where a lot of things are still uncertain,” he said.
And, therefore, when an entrepreneur comes to you and says, “the generator was not working and therefore the the servers went down”, or whatever, you can believe that because that’s real. You are able to bring this global perspective of what is gold standard, but also bridge that gap with your local understanding, having done it yourself.”
This empathy helps accelerate the relationship-building process, which is fundamentally what VC work is about.
“It’s about building trust with these guys. And that trust is the most useful currency I have, beyond the capital we invest in the companies. Because ultimately, sometimes when it comes to really hard decisions, what I can lean on is not a legal document that says “you agreed to this”, but me saying “trust me, I’ve been where you are”.”
Dieng comes from a more academic background, but agrees with Odhiambo that there is a real benefit to a VC having a founder background as they can relate to what founders are going through and therefore have a lot more influence within a business as they often have a better relationship with the entrepreneur in question. But…
“On the other side, one of the reasons why venture is such an interesting and different asset class is that it’s not entirely always about having people who think the same way around the table. And when you look at the way that different VC firms are structured, if you look at the way that the firms are actually managing or creating their investment committee, you’ll notice that there is a very strong objective to bring in different perspectives and to put different perspectives around the table,” she said.
“One to be able to identify blind spots, and two to be able to identify opportunities that are not clear just yet. So this idea of basically being able to find these contrarian positions, and contrarian positions can really only be found with diversity of opinion and diversity of background.”
Different backgrounds are helpful, then, both when it comes to analysing investments you might make, and working with those portfolio companies once an investment has been made.
“I don’t think that it’s a “with” or “without” position, where one is necessarily better than the other. I think you need to have those different perspectives,” said Dieng.
Odhiambo agrees here.
“Investment teams are teams, right? You lean on individuals for different things that they bring. I bring the entrepreneurial energy, right? I’m like, “let’s go, let’s go, I see it, I believe it, let’s move”. But then that’s not always the right energy to bring to the table. Sometimes I need the compliance or strict finance person who sees the downside and can pull you back a little bit,” he said.
“And I think entrepreneurs also see that, and appreciate that balance, and can lean and pull onto the strengths at different times.”
A company will also go through many different stages, and require different types of support from its investors at each one of these. VCs with founder experience, therefore, may be more helpful at an earlier stage than later ones.
“At its early stage, a lot of the support that the company needs is really how to put down those foundations and first building blocks. Other founders who are now VCs can be very, very supportive in that, because they’ve gone through that exact process,” said Dieng.
“Now, as the company grows, the need for an operator becomes even more important. And this is even just at the founder level. As a founder, as your company grows, you need to turn in from being just a founder, to really being an operator. And in that sense, they can also really benefit from having the support of VCs who have had operating backgrounds, who have worked in large companies, and have been able to really scale these companies.”
Odhiambo agrees that empathy with founders becomes less important later on in a company’s life cycle, but the relationship established early on endures.
“Even if I’m not able to deploy as much capital as I did in a company in the seed stage, the fact that I had that initial relationship carries you a long way, in terms of your sphere of influence, or your ability to influence a founder or a company’s direction later, when your capital perhaps becomes less relevant, and it’s more a relationship and expertise thing at that stage,” he said.
Having some entrepreneurial nous within your team can also be a good marketing tool for VC firms.
“I think the entrepreneurial piece is a selling point, it helps you attract entrepreneurs. But it is not a thing that is a golden ticket, it’s not the thing that helps you with getting to the best company, or making decisions on what the best company is. I think it’s one piece of the puzzle,” Odhiambo said.
Indeed, sometimes it can be a hindrance, and VCs with entrepreneurial experience can be too dogmatic.
“Once someone sells you on an entrepreneur you want to invest in, you’re like “yes, that’s the solution, let’s go”. You’re more inclined to try to challenge the norm and try to build, regardless of challenges and circumstances. You can be very dogmatic and you can oversteer towards the founder,” Odhiambo said.
“We’ve seen this quite a bit, from people who refer to themselves as “founder friendly”. “Founder friendly”, it’s a preloaded phrase. But does it mean to be founder friendly? I think a lot of those people would describe themselves that way to mean they are more entrepreneurial, they lean more towards the entrepreneur than not. And in some cases we’ve seen the terms they set out do not necessarily protect the downside on the investor side. There are blind spots from a governance perspective.”
As ever, a founder-investor relationship is a bit like a marriage, so decisions on the nature of that relationship should not be taken lightly.
“Some founders may have preference for VCs who have founder backgrounds, and in that case, they should be making that decision when they accept that investment. And some don’t, and would rather have VCs that have had operating backgrounds, corporate backgrounds. And again, that is a decision that they make at the time of investment. I think that there should be equal responsibility in the choice that is being made,” Dieng said.
“It is up to the founders if they would like to discriminate based on that, it is totally up to them. But I think it’s a choice that you make when you accept an investment. So I think that it should be something that is part of the diligence that a founder makes when looking at receiving investment from a firm. And I think that once you make that decision, it’s something that you need to be able to work with.”
