Building a business is hard anywhere in the world. Perhaps it is even more so in emerging markets where many entrepreneurial ecosystems are not as mature as in other parts of the world such as the US or Europe.
For this reason, accessing smart money through venture capital can be a good idea as it can help to overcome some of the gaps such as acceleration, mentoring, technical assistance and influential networks.
However, accessing venture capital can be incredibly competitive as companies like Seedstars only invest in 15-20 companies per annum which is less than 0.5% from all their applications.
We had the privilege to talk to Charlie Graham-Brown, CIO at Seedstars, about venture capital in emerging markets, what steps businesses need to take to become investable and the best ways for entrepreneurs to lead difficult board meetings.
How does investing in emerging market startups differ from investing in startups in Europe or the US?
Although the landscape is very different, the fundamentals of investing in emerging markets are ultimately the same - sourcing deals, analysing deals and allocating capital based on potential risk and reward.
Additionally, many emerging market investors such as Seedstars add an impact lens to their decisions making the job more challenging. Excluding India and China from my comments, the emerging markets we invest in don’t have the same level of ecosystem maturity as the European/US counterparts. This means emerging market funds can’t just focus their efforts on one country/city (as many US funds do) but have to be regional or global.
Immediately this adds complications such as foreign currency volatility, operational costs and the distance between investors and their portfolio companies. The immaturity of most ecosystems in emerging markets also means that investors have to play an important role of nurturing the startups at an early stage and building up the deal flow. Otherwise there simply won’t be enough good deals.
The majority of investment funds focused on these markets have some way of providing acceleration, mentoring, technical assistance etc. At Seedstars we aim to support the full spectrum with events, mentoring, trainings, acceleration programs and co-working spaces.
With entrepreneurship increasing in popularity around the world and with technology giving you access to more information than has ever been available has investing in good companies become easier or more difficult? Why?
On one hand, I’m pleased that entrepreneurship has become “trendy” as it is building cultural acceptance, mobilising more funds and leading to more startups. On the other hand it is creating a lot of noise, with too many people starting a company without a real purpose, lacking persistence and with a naïvety about just how hard it is and the sacrifices it will involve. The quality at the top is improving though and it is a pretty easy job to filter out non-serious deals.
Access to more information has not yet been adopted by the investment industry and only a few VC are really leveraging data to facilitate investment decisions. We are in the process of developing and training a machine learning algorithm to facilitate the investment decision making although there will always be a large human element involved.
Apart from your focus on emerging markets, how does Seedstars differentiate itself compared to other investment options startups have?
We are positioned as a global tech seed-stage and series A investor. Most funds are regional/sub-regional so already being global is a key differentiator. Our physical presence and market knowledge in so many countries is a valuable asset to founders as they begin cross-border expansion. As mentioned before, we also offer a wide range of services to accelerate emerging market ecosystems and their startups. Startups in our network can easily leverage a few different offerings such as getting visibility through our events, receiving mentoring through our programs and accessing the community through our co-working spaces.
What percentage of startups that you come across at Seedstars do you actually end up investing in?
Each year we receive applications for around 6,000 startups and only invest in 15-20 so that’s less than 0.5%.
What are the steps that a business needs to take in order to become investable for Seedstars?
First off they need to raise some angel money locally. If the founders can’t convince people around them who know the market then there is not much point trying international investors. We then need to see some early traction around $10k MRR, a quality team and defensible market opportunity.
What does your due diligence process look like?
The top of our funnel consists of all the Seedstars activities (startup competition, events, programs etc) and the majority of the deals we do come through here. Typically we get to know about startups via Seedstars World startup competition and have various opportunities to meet the founders during the events and conduct light due diligence.
The next major step in the process is our post-acceleration growth program through which we already make our first investment but use the program as a way of 1) coaching the startups in growth methodology, 2) opening up our network to the founders and 3) validating our assumptions and really getting to know the team and business before committing larger tickets.
Before doing larger ticket investments we do a full due diligence consisting of 2-5 days spent on the ground with the startup in order to meet the full team and key clients/partners.
In your experience, what part of the due diligence process is the most challenging for startups and what can they do navigate this successfully?
The first time a startup goes through professional due diligence it’s always a challenge from a documentation, data and legal perspective. Due diligence is simply opening up all the files for inspection, but if they aren’t organised and complete, the process goes nowhere. Spending some time getting everything in order before starting the fundraising and due diligence process is a worthy investment.
What does the relationship with startups look like after you have made an investment?
We receive monthly updates for our investment companies and attend all the shareholder/board meetings at a minimum. For startups with a specific need/request, we’ll work with them on a more regular basis for a period of time to provide the expertise they need (eg. implementing a CRM, data analytics, cross-borderountry expansion). At least annually, we’ll aim to meet our companies at one of the Seedstars events or when we are travelling.
What is the best way for an entrepreneur to lead a difficult board meeting?
Well we all make mistakes and miss expectations at some point. The key to dealing with these situations is to be transparent and share information as early as possible so you don’t lose the board’s trust. I would also suggest trying to come with the problem and also the solution. A good way to find a consensus in these difficult times can be to contact the board members individually in advance to discuss some ideas for your solution and use the meeting to finalise details.
If you are interested to learn more about Seedstars, read our ultimate guide to Seedstars for African Tech Entrepreneurs or visit one of Seedstars social media channels and website.
Rise Africa Rise is your online guide to tech entrepreneurship and (social) innovation for African entrepreneurs, startups and businesses. Our aim is to provide you with valuable digital strategies, tools and insights to support you in building a world-class and competitive business in the 21st century.