‘Focus on building your business, investors are watching’ – Iyin Aboyeji to startups looking for funding

Startup funding is becoming incredibly difficult to come by these days. Indeed, 2023 has been a slow funding year, witnessing an overall slump so far, only seeing an uptick in May following some big money investments into M-Kopa, Tyme Bank and Sun King. While the numbers certainly look encouraging, some analysts are wary that they could also give false hope, as was experienced in February.

One of the major reasons for this slowdown in funding is the high failure rate recorded by startups, especially those that have previously raised funding. Startups like Lazerpay and several others have crashed and burned despite the huge promises they held.

Another major reason is a global recession currently ravaging practically every country in the world. This means investors have lesser money to invest in startups and an even lesser margin for error. As such, investors are undertaking a lot more scrutiny than before.

In a bid to make themselves and their solutions attractive to VCs and potential investors, founders, who themselves are direly in need of VC dollars, are becoming too focused on preparing great pitches that would ensure they wow potential financiers with the ideas. 

But then ideas are just that; ideas. What makes a startup is potential. And not just potential, but actual productivity and proven ability to be viable and sustainable. And Nigerian serial startup investor, Iyin Aboyeji, has charged startups to focus on these aspects of their businesses rather than creating wonderful pitches.

“One small tip for startups in these times – the best way to guarantee a fundraise is to focus on building your business rather than pitching investors. Good investors are watching and talking to your customers, investors and competitors. They will reach out.”

Iyin Aboyeji

In essence, founders of viable and sustainable startups shouldn’t go chasing after investors because the investors will come if the product is great. This however seems to negate the widely practiced system of applying to various venture capitalists and funds with great solutions and hoping to be considered interesting enough for funding.

Startups in Africa consider fundraising as a major milestone because, to them, it is a form of validation of years of hard work. To them, funding not only depicts recognition but more importantly, it also depicts trust because investors aren’t just investing their money, they are also investing their trust by backing a team and its dream.

Interestingly, Maxime Bayen, an expert on African tech startup funding made a similar remark in a Technext interview back in January 2022. Asked what he thought about startups rejoicing over having raised funding (which in truth should be a debt), the Venture Builder at Catalyst Fund said they ought to rejoice more when they hit their first major revenue milestone because that is a more convincing indicator of a healthy business.

“Internally, within the startup, you should rejoice probably more when you reach your first $10,000 GMV (Gross Merchandise Value) than when you raise $8 million because your customers are your first investors to some extent. If you can do it without raising money and scale super fast, that’s great. There are companies that are able to scale without raising money and it’s good,” he said.

Don’t go wide, go deep

This overall thinking probably supports the basis of the other advice which Iyin had to give out to startup founders about funding. According to him, startups operating in emerging markets should focus on repeatable revenue margins as this is more likely to attract investors.

If you are in an emerging market do have a plan to get your business to default alive and profitable before you go and raise. Good investors are paying better premiums for repeatable revenue and margins than they are for growth. Don’t go wide. Go deep.

A company that is default alive could make a profit with the assets that it currently has access to without any further investment or input. In other words, the company is likely to start earning profit before it burns through the cash it currently has.

But a company that is default dead is predicted to burn through its current cash and still not have made a profit. It doesn’t necessarily mean it isn’t viable or would never turn in a profit, however, it becomes more difficult to see how it intends to. It could also be a pointer that the market is not ready for it or the other way around.

Investors would rather take a chance with a startup that is default alive than default dead. This is because there’s evidence that the market is strong and that it would likely be a major player in it for a long time.

Surprisingly, a lot of founders don’t even know whether they’re default alive or default dead, according to Growth Mentor. They need to know this if their start-up is going to be a success, and it will also have a big impact on the way that investors deal with them.

“The main reason why entrepreneurs don’t know whether their company is default alive or default dead is that it doesn’t make sense to ask the question at all when they’re first starting. It’s only as they start to mature that it becomes important to take a look at their finances. Unfortunately, by this point, many entrepreneurs are set in their ways and don’t think to start measuring their long-term prospects for survival.”

Shotgun investing might be cool for startup funding in ’22, but it’s old school now

The final tip Iyin has for startups is that shotgun investing is old school and now, investors are more inclined to invest in people they have relationships with and consider friends. 

“Now we are back to regular programming where investors want to build a relationship with you over months or even years before investing. So always be in raise mode but don’t expect quick answers.”

In other words, investors are longer willing to take on the 50-50 approach to funding which used to mostly be the case. Now they are more inclined to make more informed decisions and take well-calculated risks. They are more patient, more willing to know and understand the team members, and more willing to observe the startup like a football scout.

To stand a better chance of eventually landing that funding, you have to be willing to play the long game as well. This would also involve your willingness to talk, relate, share solutions and important milestones etc with the prospective investor.

Many startups struggle to ‘show all working’ and mostly only look good on paper. Even when they are viable at the moment, they soon show a lack of sustainability and quickly peter out. In essence, startups will do better to build a very solid solution that is as ready for the market as the market is ready for it. Once this is in order, investors are likely to come with their cash.