VestedWorld’s Nneka Eze on how to choose an investor for your startup


Nneka Eze, General Partner and Managing Director at VestedWorld, told me over the phone that startups are really in charge of who comes onto their cap table. "I think that's a good thing, especially given how much new capital is coming into the ecosystem," Nneka Eze said. "Startups are really in charge of who comes onto their cap table."

After raising $2.25 billion in the first quarter of 2022, it appears that African startups are on track to match or potentially surpass the figures they achieved in 2021, which were approximately $5 billion. However, the numbers do not reveal everything about the situation.

Although there are more venture capitalists investing in the continent now than ever before, venture capital is still a numbers game, and in the process of selecting winners, venture capitalists pass on more companies than they invest in. On the other hand, new businesses need to be careful when selecting venture capitalists to accompany them on their path to success.

Eze recommends that a founder select investors who have the experience or network that can assist the founder's startup in achieving its goals, as well as the financial muscle to support the startup in more than one investment round.

" I believe it is important to consider the types of industries in which the investor has made previous investments as well as the investor's level of experience in the industry in which the startup is operating. What kind of connections does this investor have on the continent, be they with the government, with private businesses, or with possible buyers?

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Companies, particularly those in high-growth industries, are facing the question of whether or not they will be able to raise capital not just for this round, but also for the round after that. Therefore, is it possible for this investor to accompany you on the trip? Do they know other investors who would be willing to support you on that journey and help you along the way?"

Even though more money is being invested in African startups, the majority of this capital is coming from investors outside of Africa who have no prior experience in the African market. Eze warns that investors who have experience conducting business in Africa and who are able to provide their portfolio companies with assistance based on their own expertise are essential for startups, particularly in the early stages of the company's development.

It is essential to locate investors who are based in Africa and who are focused on the continent. In recent times, I've been exposed to a number of funding rounds that primarily involve investors from other countries, particularly seed and pre-seed rounds. I believe the question that needs to be asked is, "Will that opportunity be able to attract the later rounds of capital and really execute without partners who are very familiar with the market?"

Everything from financial advisory services to startup funding

Eze worked in the management and strategy consulting industry for more than a decade prior to joining VestedWorld. Her most recent position was as a Partner at Dalberg, and she began her career in this field there. Her time spent in these roles assisted her in developing a thesis that now serves as the foundation for her work in VC. In addition to that, she got involved in angel investing with companies such as Reach, Tomato Jos, Goodloans, and Grassland Africa.

Making the transition to venture capital was driven primarily by her desire to increase the scope of her influence.

"The real reason I moved into venture is that it felt so impactful in terms of being able to invest your money, time, influence, expertise, and networks in companies trying to grow and really change Africa in a number of different ways," she said.

nneka eze for article 1024x682 0 1117Nneka Eze. Source: Supplied.

Management consulting and venture capital have some things in common; both contribute to the expansion of existing businesses, but venture capital additionally offers financial backing. When Eze first started working at VestedWorld, two things immediately stood out to her: first, there were a significantly greater number of men, and second, the interests of founders and investors were typically in alignment.

I would say that men hold the majority of leadership positions in this industry, and it is very obvious. If you look at who is reporting in the sector, who is leading deal teams, and who is leading funds, you will find that it is much more male-dominated than the sector that I come from.

" The other thing is just this alignment of interest — part of what attracted me to investing is that — where you want the companies that you're invested in and the founders to do good work, to build their teams, to scale their companies, and of course, to return the invested capital. "

Why financial technology companies raise the most capital

Eze is of the opinion that the fact that African fintech startups continue to receive the majority of investors' funds, similar to their global counterparts, is indicative of the state of the financial services industry on the continent.

I believe that one of the reasons why fintech is so exciting is because there are so many problems that need to be solved in the financial services industry across the continent. There are still many countries on the African continent that do not have switches like the NIBSS that we have in Nigeria. With this switch, you are able to send money from one bank to another, and it will be settled almost immediately. If you want to send money from one part of a country to another or conduct a transaction that crosses international borders, you can imagine how much time it will take for the transaction to settle and clear.

She also believes that the simplicity of performing due diligence is another factor that contributes to the success of fintechs in obtaining funding.

It is much more difficult to establish how well a company is performing by only looking at the numbers if you are considering investing in a high-growth company, such as one that operates in the healthcare industry, for example. In the case of fintech, it is much simpler to exercise due diligence on the surface level; however, this may be an overly critical assessment. You can see significant growth from one month to the next in terms of the revenue run rate, the number of clients, and the loans distributed. And obviously, that can be a very exciting prospect that's also possibly simpler to value.

 2 1117BFREE is a credit management startup and one of Vested World’s portfolio companies. Source: TechCrunch

However, she makes the point that if investors only concentrate on fintech, they will miss out on opportunities to stimulate growth in other industries that are equally important.

" I believe that only investing in fintech in Africa misses out on the fact that fintech alone is a really small pool of what is really possible with financial services on the continent. This is something that needs to be taken into consideration when making financial investments in Africa. Fintech is, of course, still very exciting; however, it may not be as exciting for me as some other industries, and I believe that there are linkages to financial services in every industry.

If you take a look at agriculture, logistics, consumer goods, and health, you'll see that there is a significant demand for a multitude of financial services. These services include not only payments, but also what we're now referring to as embedded finance. So how exactly do you go about financing the various operators and players that keep economies moving? I believe that there is a lot to do there, and that is one of the reasons why I am very excited about it. And so, if you only do fintech but don't get to know these other industries that are driving the economy, I think we end up missing out on something."

When are new businesses prepared to accept investments?

As venture capitalists become more open to investing in African start-ups, an increasing number of individuals are pursuing venture capital dollars in the hope of obtaining funding for their businesses. Eze, on the other hand, is quick to point out that not all companies are good candidates for venture capital.

I would say that the majority of startups will never get venture capital investment, despite the fact that there is more money coming into the sector.

Her advice to startups that are looking to raise capital from investors is for them to first get clarity on their vision and be certain that they want the kind of scrutiny and growth that comes along with receiving VC funding. She also advises them to be certain that they want to grow their business.

"In order for startups to become investable by venture capitalists, they need to begin a conversation about their vision. Are they prepared for the rocket ship growth trajectory that is expected over the five to ten-year holding period that a venture capital fund is looking for? If they are, then they have a good chance of succeeding.

Are they prepared to have members of the board from the outside? You may have some advisors that you talk to when you're in the very early stage of your company, but having a board that you're reporting to and that is looking out for the interests of the shareholders is a big shift to that next level of professionalization and growth.

 3 1117Shuttlers is a transportation tech company and one of VestedWorld’s portfolio companies.

She recommends that when founders are unable to tell their story to investors, someone else be hired to assist them in doing so. Founders should be able to share their story with investors.

" Of course, the question is, are they prepared to proceed and relate what happened? Because, whether fortunately or unfortunately, businesses with this type of rapid expansion frequently require multiple funding rounds. Therefore, it is not enough to simply seek out and secure venture capital, and then you can relax for the next five years while the business expands at your own pace.

You are going to need to go out and raise funding if you want to meet these types of growth objectives, and more specifically if you want to get closer to being EBITDA positive if you are not already EBITDA positive. To accomplish this, either a member of the company's founding team or an outsider will need to be recruited to speak with potential investors about the history of the company and the reasons why the product should be supported.

What does the process of conducting due diligence look like?

Before making investments in new businesses, venture capital firms typically carry out due diligence, and Eze went over some of the criteria that Vested World considers important.

" Not only do we want to know where a company stands right now, but also where it plans to go in the future. The current success can be attributed entirely to the founder, the founding team, and the team that was assembled initially. In addition to this, we consider the gender representation and geographic spread of the team.

"What kind of experience do they have in Africa, and do they have any direct experience with the issue that they are attempting to solve? We will never stop trying to figure out what makes the problem so interesting. Not only the fact that it does exist, but also the size of the market and the degree to which the company will be well-positioned to respond to that.

Eze reveals that investors will also investigate the functioning of the team, the state of the company's finances, and the means by which the business intends to realize its expansion goals.

She is of the opinion that startups will be successful if they understand their target market and assemble the appropriate team.

Even if you have a product that is well suited for the market, you may not be able to take your business to the next level of scale in order to make the most of the opportunities presented by the market if you do not have a strong team behind you. If you have a fantastic team, but your product does not meet customer expectations, you are not going to be able to capitalize on the product's compatibility with its target market.

The forecasts and aspirations that Nneka Eze has for the African ecosystem

Eze has high hopes that as the ecosystem develops, more women will be able to receive funding from investors. She would also like to see more attention paid to countries other than the Big Four, which are Nigeria, South Africa, Kenya, and Egypt, and more Africans investing in the startups of their continent.

More venture capitalists should put their money into companies that were started by women, in my opinion. There is data from around the world, and I believe that, in due time, there will be data from Africa showing that businesses owned by women and receiving venture capital are performing just as well as, if not better than, businesses owned by men and receiving venture capital.

I have high hopes that other cities than Nairobi, Lagos, Cairo, Johannesburg, and Cape Town will soon attract investment. The primary cities aren't the only places with thriving tech and startup communities; there are others as well.

" It is my sincere desire that more people from Africa put money into the market, whether they be wealthy individuals or young professionals. In conclusion, Eze said, "I hope that they will be able to amass wealth for themselves and invest it in both other businesses and their communities."