Startups, just like any other business need funds to operate. The most important funding for startups is seed funding, which gets the business off the ground. However, funding for startups becomes even more important when their demand for goods and services and the need for expansion arises.
Unfortunately, fundraising as a startup is not as easy as we hear or read about it. Some of the factors that affect successful startup fundraising would include lack of a scalable business model or idea, not knowing the right funding options and not knowing the right time to seek funding for the startup. Other factors affecting startup funding are external.
In our recent article, Funding for Zambian Startups in 2021, we pointed out that one of the factors that investors look for before funding a business is the startup ecosystem in which it falls. Startup ecosystems are ranked globally based on the quantity and quality of the startups, supporting organisations, and the business environment. Despite all these obstacles to startup funding, it is motivating to see several startups getting funding from various sources of funding, particularly the Zambian startups.
On Thursday 10 February 2022, we hosted a Twitter Spaces to discuss Fundraising for Startups. We were joined by four startup founders who received notable funding in the past 2 years. There were Evelyn Kaingu- Lupiya, Chilufya Mutale- Premier Credit, Perseus Mlambo- Union54, and Carl Jensen- Good Nature Agro.
During the live chat, the founders shared their experiences on fundraising for their startups, the challenges and lessons they’ve had, and shared advice on how other startups can go about raising funding. for their startups. We have written up some of the questions that were asked during the session, as answered by the founders.
When Is The Right Time To Seek Funding For Your Startup?
If you asked a startup why they need funds for their business, the answer you will most likely get is that they want to expand and grow their business. It does make business sense to want to scale operations once there is a demand for products and services.
Chilufya Mutale shares her experiences raising funds for Premier Credit:
“Premier Credit got incorporated in 2019 and we were able to raise funds in about 18 months from the time we started. We realised that there was a demand on the market for our services, but we couldn’t meet that demand. We were stuck with one branch which we had opened in Kitwe, so we started looking at different kinds of funding options and Venture Capital (VC) funding was not our first option. We started with banks, but we weren’t successful because we couldn’t provide the required three years of audited financials. We had only been in business for a year. It’s at this point that I learnt about pitch decks and VC funding, so I had to sit down with the team and assess the advantages and disadvantages of VC funding. So as Premier Credit, we were able to show traction and that’s how we were able to get funding in less than two years of operations.”
How Do You Prepare For Investment?
Now that you feel it’s the right time to start fundraising for your startup, you have to prepare for it. It is important to note that preparing for investment needs to start from the inception of the business. We now learn from Evelyn Kaingu, CEO and Co-founder of Lupiya who shares how her startup positioned itself for funding:
“Before Lupiya got any form of funding, we put up so many applications and we talked to so many individuals and VCs. We applied for almost every opportunity that we saw from the BongoHive Newsletter and spun our application towards a particular opportunity. We first started with ZMW5000 and our goal was to keep turning it around. From inception, we had a very good accountant who with just ZMW5000 was able to project what five years looked like. The one thing that we’ve always had is a list of requirements of what the bank would be looking for or what the VC would be looking for. Since its inception, every pencil or pen or paper at Lupiya was documented because we knew we would need them. We also grew our loan book because it was the only collateral that we had. The process of fundraising was brutal and going into our 4th year of existence, we knew it was time for us to get funding to scale and remain profitable. The biggest thing for us was been organised from the beginning, and that’s what helped us in fundraising for Lupiya.”
Chilufya also shared some pointers on how startups can get ready to seek funding: “If you are in a business where you’re not a technical expert in the product or service you’re trying to sell, it makes more sense to first grow and understand your business. You would need to assess if you have customers that are willing to buy your product or service for a long period of time. You also need to assess if someone out there can easily compete with you and phase you out of the market within a short period.”
What Is the Role Of Accelerators In Startup Fundraising?
Accelerators have continued to play a pivotal role in expediting the growth of startups by providing them with knowledge and mentorship from industry experts. They have also been instrumental in helping startups raise funds for their businesses. One such business is Union54, a fintech firm that was the 1st Zambian startup to be admitted in Y Combinator (an accelerator that provides seed funding for startups), and it went on to raise $3 million.
Co-founder and CEO of Union54, Perseus Mlambo shares how his startup has benefitted from accelerators.
“At Union54, we benefitted from going through the accelerators, it was the first time that we understood what we were working on. If it’s the first time in your life that you’re starting a company, it’s only vital that you get some training on how to talk to investors and negotiate terms. Investors speak to hundreds of founders, and so they know exactly how to negotiate. An accelerator gives you the confidence that you need to negotiate terms that are equitable and favourable to you. Ultimately, accelerators play a critical role in connecting startups to investors and that is why you give them 7% equity in your company. So in our case, it was a combination of attracting people who were interested in African fintech growth. We had angel investors, some of whom were based in Zambia who used our product and approached us for investment. That is when we started to grow in ambition and went through Y Combinator. Through that period, we started to attract much more global VCs.”
How Do You Identify And Target Investors
The EQS Group defines investor targeting as the process of identifying and engaging investors to create the most value for your company, as well as for shareholders. We learn from 2 founders, Evelyn and Carl on how startups can get access to a network of investors and how to rightfully target them.
Carl: “A lot of our early conversations with investors were based on growth rates of revenue only and as long as we could show that we were ticking up quickly. We thought we were succeeding. We then got to a point where we had to keep raising debt to have enough cash to purchase crops from farmers that we had engaged, and we realised that it wasn’t very sustainable to keep growing at that pace. We quickly hit a point where we had a very unbalanced balance sheet and a lot of debt and very little equity, and so we made a conscious decision to pump the brakes. And at that point, our investor conversations changed. We shifted our focus to know what we wanted as a business. One of the things that I can tell my fellow startup founders is that it is okay to grow your business with a focus on revenue for a while, but sooner rather than later, find a metric that matters to your business, and stick with that. So for us it was the margin, for others it could be other things, but that’s how we found the right people. I’ll say we found a lot of wrong people just by pushing ourselves out based on our revenue numbers.
Additionally, if you’re going to find funding, don’t chase trends. Start by assessing how your business is going to change customer’s for the better, especially in the social enterprise space. From that point, just start to build upon what you’re passionate about. But if you focus too much on trends and where the money is flowing, you’ll build your business around the wrong things, because by the time you’ve built it up to where investors are interested, they’re not going to be interested in that space anymore.”
Chilufya: “At Premier Credit, we first started with friends and family, and as we started to grow, we looked at so many other opportunities available. Enygma Ventures, where we raised our post-seed round have a very supportive VC and they have made multiple introductions on our behalf. This sort of ecosystem just starts to open up as you grow as a business. You can also find opportunities through LinkedIn. I’m still old school and I still do a lot of cold calling, and so we have a whole list of over 500 VC’s across the world and we are just reaching out to as many of them and seeing if there’s any potential pipeline. If we find something favourable to us, we engage.”
How Do You Negotiate An Investment Deal?
With all the challenges that come with fundraising, it can be tempting to settle for the readily available opportunity. So, how do you negotiate terms that are important to you as a founder, when do you walk away from a bad deal, and what can you compromise on?
Perseus Mlambo shares some insights:
“If you want money quickly, you’re going to be getting really bad terms. You need to walk away if you anticipate that an investment deal will make you lose control over your business. Up until the last few years, there were so many people walking around as investors and offering extremely bad terms to founders. For example, offering a startup $20,000 for a 40% share of the company is forcing entrepreneurs into an early grave. Once you’ve given away 40% for only $20,000, you’ve got nothing left to be able to raise subsequent rounds and be able to attract an investor who can give you the money needed to scale the operations. If an investor wants to get double digits and they’re putting in less than $100,000, then you just really know that they’re not looking out for your interest and they just trying to take control of the company. There is a need to have conversations on what to look out for in an investment deal and people like BongoHive can take a leading role.”
We hope that the experiences and knowledge shared by these startup founders have given you some insight into what it means to fundraise for your startup. Look out for more articles on startup fundraising and other startup resources on our website.