Hi,
Welcome (back) to MWAVC, a newsletter about finance, investing, venture capital and all that jazz. My name is Ato (more about me here and here) and I try to write every single day, inspired by Seth Godin (Seth’s Blog) and Fred Wilson (AVC). I haven’t done the best job over the last few months (read: years 😬), but I’m working to be better and more consistent, even as I manage this crazy schedule.
In case you’re new here. Quick introduction: I’ve been investing in some way shape or form for the last 12+ years and now work with one of the pre-eminent VC firms in Africa - Microtraction, and the family office that acts as the GP - Pave Investments. Read more on us here and here. Most of these writing are stuff I find interesting that I’d like to share and hear your thoughts on. This is also an outlet for my thoughts, lessons, asks etc. and I think you’d find most of it valuable if you’re remotely interested in learning about venture capital.
I’d be developing the content more, including things I think will be helpful and would appreciate any feedback on what’s working vs. not, and what could be helpful for you over the long term. If you’d like to sign up, you can do so here. Or just read on.
And BTW, If you are a (or know any) pre-seed, seed or Series A investor, looking to co-invest in African founders, please introduce them to me (ato@microtraction.com). Happy to learn about the next generation of category-defining businesses.
—
Disagreements re: Company Valuations 👀
Nairobi is always a great time🤩. It’s been a pleasure meeting new friends, and catching up with old ones who I haven’t seen in years from the first day of the #AfricaTechSummit. Last night’s closing celebration was also great. Shoutout to my bro @wizaj for organising the February edition of This Week in Fintech (@TWIF) Nairobi Happy Hour. I ran into one of our portfolio company founders and he had a few fiery words to share about a conversation he’d had with some later stage investors he’s currently engaging on the current valuation of his company. As is mostly the case, investors usually push back on founders’ valuations during due diligence. And it makes sense right? He wants a high valuation and they want a lower valuation. This is where negotiations come into the mix and at the end of the day, each party needs to feel that their needs and concerns have been adequately taken into consideration. He believes these investors are simply looking for more equity in his company (which may very well be the case), but I also had to explain to him that a lower valuation than what he’s projected (not a down round), is not always a bad thing. Especially in this market we find ourselves in. There’s reason behind the push back we (investors) give founders on the valuations of companies, especially when there’s little data and justification to back it. It’s true that everyone is looking out for themselves, but once you find investors you are aligned with in value and mission, it’s less about the price today and more about what you can build together for tomorrow. Remixed this post from a few years ago from a thread by big sister Eloho posted on Twitter. Enjoy!
This morning, a non-technical thread for founders on raising capital, dilution, and the costs of too-high valuations.
Inspired by a few recent conversations and an essay that I read yesterday.
A lot of founders default to selling equity to fund their startups.
Sometimes, that's because bootstrapping isn't an option.
You have ambitions to grow your startup very big, very fast. And you don't have the personal capital to fund it.
So you turn to VC.
VC means having equity investors in your cap table and giving up some ownership in your startup -- dilution.
So, what's the best way to minimise that dilution?
Raise at the highest possible valuation, right?
Yes, and...
…as with all hard things, it's not that simple.
Minimising dilution isn't the only possible outcome to solve for.
Too many founders still miss this part:
Raising at a valuation that's too high could be costly -- for you and your startup.
Too-high valuations can be a distraction, pushing you to lose focus and make successive bad long-term decisions.
Here's how:
Your VC investors need to make big returns on that valuation.
You're incentivised to deliver growth at all costs.
You want to avoid a down round.
You don't want to fail.
The cost to your startup is fewer options, your weaker judgement and misaligned incentivises.
The cost to you, personally, will be long hours, possible sleepless nights, personal relationships and your mental health.
But what's a "too-high" valuation?
It depends.
The higher your valuation, the fewer possible future trajectories for your startup are acceptable.
Options that deliver slower growth are progressively off the table.
You have fewer tactics to choose from.
At a threshold, your market may not even be big enough.
So, if you must raise VC capital, remember:
Maximising your valuation isn’t as simple as preserving optionality by minimising dilution (and being able to sell more equity in future).
You're actually trading one set of options for another.
It's less dilution today for you as a founder, yes.
It's also fewer acceptable outcomes for the startup.
It's a commitment to higher growth.
Maybe a lower quality of life for you & your team.
As an investor, it's difficult to convey to founders sometimes that caution regarding valuations isn't always entirely self-interested.
Especially at pre-seed/seed where there's less of a track record.
The reality is, for a good investor, it's not that hard to walk away if the valuation requires an unreasonable commitment to future growth by the startup.
The returns need to work and the team needs to not burn out.
You want to invest in thoughtful founders.
An investor that pushes back on valuation isn't always mean or greedy.
Sometimes, quite the opposite.
h/t Alec Danco:
"As a founder, the most valuable optionality you have is the equity you haven’t sold, and the dilution you haven’t taken. But the second most valuable optionality you can have is a valuation that’s not too high."
Currently Reading 🎒
Still in shock of Herbert Wigwe’s untimely demise. Check out this ode by Feyi - Unfinished Business: Herbert Wigwe and the story of Nigerian banking.
Currently Listening 🎧
Easy Saturday morning catching up on The Journal before my flight. Check out their latest episode The Spectacular Fall of 23andMe. Ahem, reminds me of one African company that…nvm 😅
If you are a (or know any) pre-seed, seed or Series A investor, looking to co-invest in African founders, please introduce them to me (ato@microtraction.com) and let’s do some work together.
Remember: “Until the lion learns to write, every story will glorify the hunter.”
Please share and subscribe as well.
Till tomorrow,
AB