💬 In this issue:
- Startups Graveyard: Failure provides founders with valuable lessons they can apply in future ventures.
- Achieving Product-Market Fit: Without it, startups are skating on thin ice.
- Feeling The Pressure: Having more money than is necessary can be distracting.
"I’ll start with a cliche: capital is important to businesses, especially for startups optimising for hyper-growth. The critical role of funding is why there’s unending talk about the funding winter and its implications. These conversations carry weight. But there’s a flip side to the conversation that we don’t discuss as often: money isn’t everything." - Olumuyiwa
🤑 Per one African startup founder who spoke on an Open Banking panel this week, “Money doesn’t solve everything. Many times you need time, effort and the right placement.” His comment answered a question from the moderator asking about whether he was feeling antsy about the fundraising environment. As a founder of an API-startup, he explained that having all the funding in the world wouldn’t make integrations with banks faster or accelerate regulation. There are so many things you simply can’t throw money at.
Money does not buy your happiness or longevity in the startup ecosystem
The conversation is timely because we’ve been reading a lot about the shuttering of well-funded startups. 54Gene, Sendy, and Dash are some of the high-profile startups we’ve seen close their doors this year. Dash, for instance, raised $32.8 million in 2022, the second-largest seed round for an African startup. Float, another fintech startup that also found itself in a spot of trouble recently, also raised $17 million in seed funding. Both seed rounds are several orders of magnitude higher than the typical $500k-$700k that most companies raise.
📈 We’ve seen increases in cheque sizes for seed rounds from around 2021. According to one Y Combinator article, “Most first rounds seem to cluster around $600,000, but largely thanks to increased interest from investors in seed, these rounds have been increasing in size over the last several years.”
That said, should you also set out to raise a lot of money in your seed round? Do the struggles of these companies, despite raising a truckload of money, suggest that as the beat goes, more money more problems?
Answering these layered questions will need us to take a step back. ⬅️
☔️ Money cannot shield founders from the invisible hand of the market
Typically, seed rounds are when companies are in the early stages of product development. With no product market fit yet, founders at this stage are raising money to get a critical mass of people to try their products for the first time. Realistically, a company at this stage will make several tweaks to its products and services or even pivot; nothing is set in stone yet because you haven’t found the winning formula. While some people are convinced their products will win and raise large amounts of money to outpace the competition, the market is the ultimate determining factor. And you can’t simply throw money at the market and find product market fit. 🥲
So, while some founders may choose to buck the trend, it’s often a good idea to raise what’s required at seed until you find your first paying customers. You don’t want to go all in and turn on all the faucets on a product the market has not validated yet.
😮💨 The pressure to raise can lead to its own dangerous momentum
Another sensible argument for being measured while raising a seed round is to prevent excessive dilution and avoid the pressure of needing to raise an even larger follow-on round. While these are all sound reasons, what we’ve seen in the last few weeks shows that raising large amounts of money early on almost certainly leads to excessive spending.
When you have millions of dollars in the bank, it’s easy to go on a hiring spree, spend a boatload of money on marketing, hire that fancy PR agency and add superstar (read expensive) talent to the team. We’ve read about eye-popping salaries for founders whose companies have not yet found product market fit, and while it’s easy to criticise them, it’s wise to remember that having way more money than is necessary can be distracting. 👀
💡 Let’s bring it back to the basics. Money doesn’t solve every problem. Some problems take time, which means that any founder who sets out to solve them must have staying power. Sometimes, staying power can look like sticking with convention, focusing on capital efficiency and resisting the temptation to raise more money than is needed.
📚 What we've been reading:
- This fantastic post-mortem of the fintech startup Braid by those who were there
- Do VCs still believe in VC-ing? The frost is biting.
- The danger of venture capital foie gras - unsustainable growth and narrowing exit choices
🔫 Parting shot
What's on your mind? Drop us a note via firstname.lastname@example.org to let us know. Or, tag us on socials using #africanpreseedpodcast, #APSnewsletter or #APSVibeCheck.
That's it for now. See you next month! — Olumuyiwa