💬 In this issue:

  • Startup valuations: Everything is fair game.
  • Good and Bad Money: Upgrading your startup dating game.
  • Changing Perceptions of the Relative Risk of Assets: Notes from Nvidia.

Two weeks ago, at the demo day of his recently launched accelerator, Iyin Aboyeji—the “2x unicorn founder” per his Twitter bio once upon a time—told the crowd tongue in cheek, “unicorn is a bad word.” 
Predictably, it made headlines, and some of the first reactions questioned why someone who made a name founding two unicorns was telling new founders not to obsess over this industry-defining metric. Instead, he talked about helping startups reach $1 million in revenue. 
While his comment may have been delivered in jest, it’s an opportunity to re-examine an old idea that African founders have held since the entrance of global VC funds: Africa needs its unicorns, and founders have a sacred duty to achieve the $1 billion valuation. - Olumuyiwa (Writer & Contributor, African Pre-seed Podcast).  

📍 Where are the unicorns?

For a while, the rallying cry of “Where are the unicorns?” was answered by convincing VCs to pony up (pun unintended—Ed) large amounts of cash to fund those ambitions. Having created a few unicorns and watched many more businesses crash and burn in trying to reach those aims, the narrative has begun to temper. 

What if you don’t create a unicorn? What if you create a sustainable business that makes many millions of dollars and is sustainable?  

To be clear, there’s nothing inherently wrong with aiming to be a unicorn. Yet, we’re seeing that founders play valuation games, which produces perverse incentives and as Morgan Housel often argues, human behavior is all about incentives.

When you’re incentivised to deliver a valuation, everything is fair game:

  • Ill-thought-out expansions to 14 countries even when it's doubtful if there are large markets in those countries? Check again.
  • Incinerating large amounts of cash subsidising products and services for customers to produce vanity metrics like growth in monthly users? Check again.

🏃‍♂️ It’s about the marathon runner, not the shoe they wear

Of course, there’s also obsessing over narratives and telling a story about unstoppable progress even in the face of instability. 

All these factors have contributed to the failures of some well-funded startups. One Kenyan startup that raised $100 million in its lifetime has gone into administration and may need to raise funding again if it will avoid shutting down. 

While no one has yet analysed the business and its struggles, some of the conversations I’ve had with experts have pointed out that the company’s struggles coincided with the entrance of VC funding. At least two other Kenyan startups that have struggled have alluded to the same thing.

But VC money isn’t the devil. 

💸 There’s good money and there’s bad money

Failures like the ones we’ve seen recently are a combination of pairing ambitious partners with long-held narratives like “I need to build a unicorn” with VC firms that can provide the funding, pressure and advice to encourage them to pursue these incentives. I’ve argued in a previous newsletter how important it is for founders to pick their investors carefully. 

One early investor at a logistics startup that also recently shut down spoke about how the business was sustainable early in its life but that the pressure to deliver on huge valuations led to a rash of poor choices that cost money and eventually the life of the business. 

Human behaviour is all about incentives. 

If you’re unclear about what the takeaway should be from today’s newsletter, here are some bullet points (writer types assure me that readers like you love bullet points):

  • It’s okay to change your position if you have new information or experience 
  • It’s great to build a unicorn, but obsessing over building a $1bn company may provide some bad incentives
  • We’ve seen that playing valuation games can be tricky. In the last week, we saw a startup that raced to an $850 million valuation in a few years shut down
  • The end of the Zero Interest Rate Policy (ZIRP) has reduced the flow of “free money” and has forced a hard rethink
  • Focus on building a sustainable business. If it ends up being valued at over $1 billion, that’s fabulous! Be the camel that is steady as she goes for the long-haul 
  • One smart person I know always asks, “Why do you need a food delivery startup in Africa to be worth a billion dollars?” (Happy to share his email so you can get that argument going)

That’s it on this month’s edition. See you in the next one!

📚 What I’ve been reading:

💥  Parting shot

What's on your mind? Drop us a note via connect@africanpreseed.com to let us know. Or, tag us on socials using #africanpreseedpodcast, #APSnewsletter or #APSVibeCheck.

That's it for now. See you next month! 😉