By RARZACK OLEGEBE
There is no middle level. You must make up your mind. You must be sure from the beginning of your entrepreneurial journey. As a startup founder, you need to know what you want upfront. Do you want to die managing a business that cannot make you rich? Do you want to die with the tag CEO? Do you want to have an ache in your heart because you cannot meet your needs? Do you want to manage a legacy business? Do you want to take the cheque, stock and walk into opulence? These questions are pertinent.
As a fintech startup or otherwise, if you are not clear about what you want in a deal, you may never get it. With private equity or venture capitalists, you have to be doubly sure. Private equity investment is not for all type of companies. In my conversation with an angel investor, he told me that the goal of private equity is to invest in companies. These investors usually get a majority stake. They create value. They stay in the business for about four or five years. They will sell their stake with the greatest gain. Then, they will exit.
Visa and others have interests in Interswitch. The investments have made Interswitch one of the most valuable African fintech businesses with a valuation of $1 billion. However, all the investors are happy. Mitchell Elegbe, the founder is still in the driver’s seat. It means that no one can push out a founder who is making the venture capitalists richer. The founder is richer. The venture capitalists are richer. Everybody is happy. But it is a different case with some startups.
Recently, HealthPlus, Chicken Republic, Wakanow, PathCare and other startups have been locked in ownership tussles with some private equity investors. According to media reports, the local founders have alleged forceful takeover by these investors. Some of these startups are still in courts. The situation portends danger for foreign direct investment into Nigeria. This also exposes the weakness of Nigerian businesses. It exposes the vulnerability of some startups that have received “growth funds” from offshore investment vehicles.
The founder should be sure of what she wants. Does she want to be a king? Does she want to be rich? Does she want to take the cheque, stock and go on holidays in the Bahamas? She needs to be sure.
Well, the funds reside offshore aplenty. In one of my write-ups titled Unicorn, Down Round and Utter Failures, I highlighted that the following companies got some funds. Andela got $40 million. Terragon Group collected $5 million. Cars45 received $5 million. The fund did not come from the Villa. It came from foreigners’ account. In Building Africa’s tech ecosystem from startup, I also informed that in the last five years, the African Private Equity and Venture Capital Association has accounted for 42 per cent of all African venture capital deals. Out of this number, only 20 per cent came from Africa-based investors.
This development has, therefore, forced the continent’s entrepreneurs to seek support from the Westerners. Of the top 10 African-based startups that received the highest amount of venture capital in Africa in 2019, eight were led by foreigners. However, the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in a 2019 report explained that about two million Micro, Small and Medium Enterprises (MSMEs) had access to credit from 2013 to 2017. Others in the neighbourhood of 41.5 million do not get anything. Also PwC Nigeria, in its new report, estimated that the annual financing gap for MSMEs is N617.3 billion.
Methinks to fill that yawning gap, the local founders have taken their dreams in their own hands. That was why Rensource got $3.5 million from foreigners. Flutterwave did the same with $10 million. Paystack followed suit with $1.3 million. The rounds of funding have demonstrated that there is huge potential in the Nigerian ecosystem.
Aha, he who pays the piper will dictate the type of tune he desires. If you cannot play the tune, he may replace you. In fact, he will replace you. He can then fine-tune the pipe and make it sound better. In other words, the investors own the business. I had a conversation with an experienced CEO of a fintech company recently. She believes it makes business sense to source growth funds outside the country. She has not taken the same step, though. But then I raised the question of ownership. She wasn’t thinking in that direction. She responded.
In that wise, she held my gaze and said bluntly: The founder should be sure of what she wants. Does she want to be a king? Does she want to be rich? Does she want to take the cheque, stock and go on holidays in the Bahamas? She needs to be sure. She must be concrete in what she wants from the private equity transaction. Otherwise, she will be holding the short-end of the stick. That is not pretty, you know? I know.
That is why Nigerian startup founders are looking up to foreigners for equity to grow their dreams. But most of them have done so with blinkers over their faces. In the case of HealthPlus, the founder, Bukky George, had been suspended as the CEO. Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), in media reports, asked local founders to ensure that their terms of engagement with foreign investors are clear from the outset.
According to him, it should appropriately cover the interest of the promoter of the business. Yusuf had suggested a review of the Nigeria Investment Promotion Commission (NIPC) Act of 1995. He believed the review would adequately protect indigenous investors.
However, it should also be clear that you cannot microwave business growth. To grow a business takes a long time.
Yes, we need to strike a balance between the quest for foreign investors and the protection of the interests of indigenous investors. “This is not to diminish the importance of foreign investment, but there should be safeguards to protect indigenous players across sectors. We will need to develop our own private equity and venture capitalist colonies. This can be relevant in scaling up our businesses.”
India, Egypt and South African have done the same thing. Brazil has mature in the venture capitalist business. He pointed out that “we cannot have N7 trillion in our pension funds and the local private equities and venture capitalists are unable to access this fund in a secured form to utilise for funding businesses locally.”
Well, let us extract the good out of the bad. Okra, a fintech company that connects bank accounts to apps has been successful with a venture capitalist. Okra had conducted its due diligence. Fara Jituboh, one of the co-founders, explained that the company is selling a stake in the business. The investors are selling money. Both sides need to understand the nature of the terms under which the other is selling and seek to protect their interests.
According to her some of the terms reflected in equity agreements are a direct result of an investor’s negative experience and desire to protect their investment. Often in the rush to complete a transaction, legal documentation is not thoroughly vetted and understood. “Founders should understand the small print and recognise the value that a private equity investor brings to their business,” she advised.
Thank you for the piece of advice. However, it should also be clear that you cannot microwave business growth. To grow a business takes a long time. Here is the hall of Famers. It took SystemSpecs 29 years to get to the Promised Land. Precise Financial Systems got there in 25 years. Interswitch has spent 18 years. Paga, Paystack and Flutterwave are still on the road to paradise. As a startup founder, here are questions for you. What do you really want? Do you want to be rich? Do you want to be a king? Do you want to take the cheque and spend the rest of your days in the sun? Or do you want to be a CEO? There is no middle ground. We have made up our minds. As for me and my crew, we want to be kingmakers.
*Rarzack Olaegbe (email@example.com Tweet @RarzackO Skype:rarzackolaegbe