Aadil Mamujee

Like many venture investors worldwide this year, I’ve scaled back my investing pace and adjusted my approach to backing African startups at the earliest stages. 

I aim to be the “first money in” to early-stage startups, and there needs to be sufficient follow-on capital available to help these startups continue to grow. Over the last year, all the funds backing series A/B rounds have pulled back, and fewer companies have been (and will continue to) able to raise follow-on capital. As a result, I need to be even more thoughtful and disciplined when picking early-stage investments that will hit the next milestone (product, traction, hiring) so that they will be able to secure the capital needed to grown.

I remain optimistic about backing founders at the earliest stages in Africa. The current vintage of founders understands that capital is no longer a commodity available in abundance. They tend to be more disciplined executors who think through the return on investment of their decisions more carefully than we saw in the past with an environment of excess. 

I’ve modified my approach over the last year to better fit the current economic conditions. Here are some of the things I look for, which I think most first principles seed investors should consider regardless of market condtiions: 

1. Founder “quality”
2.  Sufficient capital
3.  Strong fundamentals
4.  “Reasonable” entry price

Founder “Quality”

There are a few things that I look for when I meet with founders building businesses in Africa:

1. A clear why:  What is their “why” for building their company? I look for depth and authenticity in their founding story.
2. Communication: Would they successfully pitch the best investors in the world? Are they succinct communicators both in speaking and writing? Can they portray a clear vision while being on top of their metrics? 
3. Evidence of excellence: Founding teams with some combination of Tier 1 education, world-class operating experience, a history of building things together, and show execution excellence often build better companies. 
4. Ramp: Rate of learning, malleability, and curiosity towards new ideas are also something that I’ve noticed correlate well with better outcomes. Founders’ roles evolve significantly as their companies scale so rate of growth is critical to success.

My typical process for assessing these qualities is (with the caveat that most of my deal flow comes from a trusted network of co-investors and entrepreneurs): 

• Focus the first conversation on the founding story to understand the “why” behind the company.
• Share a new mental model or some of my own experience to see if the founder is open/curious to a new perspective.
• Follow up over email with a few written questions that test their ability to synthesize something complicated about their business in an explainable way. 
• Ask founders to send over prior updates to investors – look for structure, frequency, and clarity of communication. 
• Reference check with a trusted network – current customers, co-investors, former colleagues, and founder peers. 

It’s not a perfect system, but these touchpoints typically give me enough information to develop the confidence to invest (or not). 

Strong Fundamentals

The next thing I look for after excellent founding teams is strong business fundamentals. These will all depend on the specifics of the company, but here are a few general rules:

•  Positive unit economics: Products need positive unit economics (incremental sales do not lose the company incremental money), which is surprisingly uncommon in many low gross margin businesses. This means that customer acquisition cost (CAC) should be lower than lifetime value (LTV), and the payback period should also be short (under six months) as markets can change fast. If this is not true on day zero, we need a clear, short path to positive unit economics that does not solely rely on “credit products in the future”. If the core businesses will lose money for a long time, it simply requires too much capital to be attractive in this environment. 
•  Technology leverage: Technology should provide operating leverage as the company scales so that each incremental sale has lower fully loaded costs (from fixed or central costs). Ultimately, there should be a point where incremental sales generate operating cashflow, and the business does not constantly require more capital to grow.
• Big enough market: Determine if the core market is “big enough” to reach profitability. Many African VCs push companies to expand too early over using a proven model at scale (and corresponding cashflow) from the core market to fund expansion, leading to distraction and a weak core business. 
• Disintermediation risk: For middle-layer software (common in fintech) it’s essential to understand the risk of going direct and cutting the company out, especially as customers scale, and making sure that the pricing structure supports scale. 

Sufficient Capital

Funding rounds now take longer than before. We must assemble the right mix of investors who can support the business in the early stages and pull together enough capital for companies to survive for at least 18 months, but preferably 24 months. 

This requires more investment from both founders and first-cheque investors like us, who develop conviction early in the fundraising process. I spend more of my time than before talking to co-investors and facilitating introductions even after I’ve committed to a round. 

I hope this deeper engagement from founders and seed investors will lead to stronger relationships between equity holders that can weather ups and downs together and build more durable businesses that can get to profitability faster with lower amounts of total capital than we’ve seen in the past.

“Reasonable” Entry Price

When negotiating with founders, I only optimize for the entry price (typically, no other terms). Although I can’t always control this entry price as a small(ish) investor, it’s the one area where I stay fairly disciplined. 

Some of the best teams may command higher entry prices, and it can make sense to “pay up” if I think they can build a big business and have have some asymmetric information on the team (e.g. worked with them in the past). However, there is more pressure on founders who raise high prices for their seed rounds to perform, which can rear its head in future fundraising rounds when they’ve not hit their goal. In these cases, raising additional capital at higher prices can be difficult, resulting in a bridge round at best, possibly a down round, and occasionally a full recap of the company. 

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My approach will continue to evolve as the market evolves. Writing this down helps me document how my thinking evolves, keeps the craft of seed investing fresh, and forces me to return to first principles.