Balogun Danjuma is the founder of 9jaBookings.com, a Nigerian startup that allows individuals to book celebrities for their events from the comfort of their homes and via mobile devices or personal computers – and without the risks associated with dealing with middlemen. As bright as the idea behind the startup is, he said it was really difficult for the company to survive in the ecosystem.
They needed an investor.
“If you leave your paying job to follow your dream, someone got to foot your bill. Startups don’t get to make profit at the beginning, someone got to buy you food when you start,” Danjuma told AFKInsider in Lagos, Nigeria.
Danjumasaid he later got in touch with an investor who in return for his investment got a 70 percent stake in the company.
“My investor owns 70 percent and I own 30 percent. It was a tough battle. Investor told us what he wanted and we had no choice. We needed the money more,” he said.
Danjuma is not the only startup founder in Nigeria and Africa in such condition, the inability of tech entrepreneurs to have access to funds and other forms of support had been a great threat to the survival of startups forcing the founders to take any offer from any investor. Mentorship is another reason why startup founders in Nigeria are always seeking investors.
“Most investors here are already successful in one business or two. Flowing funds and mentorship are the major reasons why I needed an investor. I believe having 30 percent stake in your business and making profit is better than having 100 percent of it and getting nothing,” Danjuma said.
But Chika Nwobi, Managing Partner, L5Lab, a Nigerian incubator and investor in startups, believe it is wrong for investors to take high equity in startup companies. Speaking in Lagos, Nigeria at the recently held VC4Africa Investor Summit, Nwobi said investors that take 70 percent equity should be ready to join the startup company as the CEO.
“If you do that, the entrepreneurs will be thinking of something else to do – something they will own,” Nwobi said.
Rogue Investors
When presented with this information, tech entrepreneurs said it is not very simple and straightforward to deal with investors.
“Investor-founder relationship is like a marriage, there are gains and pains. Since we agree that an investor has more money and knowledge, they should control the business. They are wiser. Developing something can be sweet; making it grow is not a piece of cake. This is the ideal situation with startups,” Danjuma said.
Bankole Oluwafemi, Editor of TechCabal, one of Africa’s leading tech blogs agreed with Danjuma on the fact that investor-founder relationship in Africa is a marriage. He said all parties would be satisfied if they communicate effectively.
“It’s like marriage, choose well, communicate and be clear about roles and responsibilities,” Oluwafemi told AFKInsider.
He said problems arise when founders are unable to communicate properly.
“Investors are worried about how funds are spent. Disagreements [usually arise] on execution and strategy,” Oluwafemi said.
Deciding the equity an investor should take in a startup often starts with the evaluation of the company which in itself is laborious and another source of argument between founders and investors, according to Adewale Yusuf, Lead Content Developer at TechPoint.ng.
Negotiating with an investor is always recommended but Danjuma insists the ball is not in the court of the startup founders who he said are at the mercy of the investor.
Don’t Change The World
“Customers don’t pay for ideas, customers buy product. Our investor taught us how to do real business and understand what would work and what would not,” Danjuma said.
He encouraged tech entrepreneurs in Africa to focus more on solutions that people around them can relate to and not changing the world.
“I will advise fellow startup founders to quit trying to change the world. Leave that to companies like Apple, Google, Facebook, Microsoft and the likes. Just build something your mother and father can relate with. If your app doesn’t help your neighbor, please don’t build it,” he said.
Oluwafemi believes there is no single model that works for everyone and for all founder – investor relationships in Africa.
“You can’t prescribe equity models for investors and founders; that would be like trying to fix the price of crude oil. There are many considerations, not to mention market forces at work,” Oluwafemi said.
“Different investors, incubators, accelerators and the startups they fund reach different terms depending on things like market size, founder track record, product traction and a ton of other things. If the terms don’t make sense initially, the market will eventually correct.”
While it is the dream come true for many startup founders in Africa to develop products that investors would be interested in, the fear of the possibility of losing of their startup over to an investor is getting stronger considering the departure of the original founders of e-commerce platform Jumia, Afaedor and Kehinde, from the company.
Even though it seems as if investors are the ones with unilateral power to decide the size of equity they would take in a startup company and founders are at their mercy, like the founding partners of Jumia subsequently did, founders in Africa always believe they also have some form of control; they believe there is always a new challenge they can solve, a new startup to build and more money to make from old and new investors.
“The ones that will make money mostly will be the ones that will easily attract investments. Investors will be looking for revenue or at least a clear path to market,” said Oluwafemi.
