11
Mar

Growing more African startups into regional powerhouses: What makes a good (early stage) investment?

ALN’s COO, Harish Subramanian, spoke at the Thomson Reuters Trading Africa Summit in Cape Town last week on the topic of scaling early-stage ventures in Africa. Below is an adaptation of his presentation.

As an investor, how do you know which companies to back? As an entrepreneur, what do you focus on when building your business? We believe that there are three overarching themes that every entrepreneur and potential investor should take into account:

1. Trust. Choose for and instill trust.

Trust is essential in the business world in three ways. First, you must have trust in people. No business succeeds without trust, yet this is often overlooked in favor of ‘getting a good deal’. In Africa especially, we are in a ‘trust-deficient’ environment. This is precisely what makes trust so important. Investors want companies and entrepreneurs they can trust—especially across borders, trust is the only thing that will give an investor, partner, or customer the comfort to engage in business.

Investors must also be able to trust that entrepreneurs have the right process; in other words, the right way of thinking about and evaluating their business. This way, even if the current path doesn’t work and the entrepreneur needs to change course, the investor trusts that s/he will be able to succeed using a different approach. As an entrepreneur, if your partners and investors trust your motives, they will give you the benefit of the doubt when you take a new direction.

Finally, it is important to build a trustworthy company. In Africa, people are loyal to products and brands because these brands have managed to gain people’s trust. Building a trustworthy company allows the odd misstep; people will forgive easily if you have already gained their trust.
Having a trustworthy brand (like Apple or Amazon) allows you to get favorable terms from customers, who will become willing to prepay for products before ever even seeing them in person.

2. Scale. Focus on scale very early.

When starting a company, it is never too early to think about how you will scale it. Investors are attracted to businesses that they can see as being lucrative at scale. To build a scalable businesses that investors love, we’ve come up with a few rules to follow:

  • The Rule of Five: If your business grows to be five times larger than its current size, will the current business model fall apart? Will the company look fundamentally different? If so, change it to be scalable.
  • The ‘Hit by a Bus’ Rule: What happens if the founder is suddenly no longer able to run the business? If the business will grind to a halt, it is unsustainable and therefore less attractive to investors. Avoid the ‘big man’ syndrome and build a business that will out-last you and continue to function in your absence.
  • The Knowing and Learning Rule: From the beginning, build a mechanism to manage institutional memory, so that major decisions can happen without the founder’s presence. And always learn from your customers and adapt constantly. 

3. Ecosystem. Leveraging ecosystems well is what makes the difference between good and mediocre entrepreneurs.

How well you know and leverage your ecosystem is a key determinant of entrepreneurial success. The way you use your network is more important than who is in your network (which is why inheriting a great network is, surprisingly, not always as helpful as you’d think). As an entrepreneur, you must learn to learn from your peers. Similarly, getting top people (such as advisors and investors) to effectively work for you by advocating you and your company is an essential skill to have. Identify free resources wherever possible (be creative) and use them as much as you can!

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