What entrepreneurs and investors can learn from each other

The Entrepreneur — Investor relationship is critical to the evolution of the start-up marketplace; however, it comes with inherent tensions. While investors and entrepreneurs ultimately benefit from the success of an enterprise, their incentives along the way may differ. The mindset and skills each side brings to the table are complementary and can be crucial to developing and scaling a successful social enterprise.

The investor community often informally speaks about capital waiting to be deployed in Sub-Saharan Africa. According to East Africa Venture Capital Association research, between 2007–16, global PE funds collectively earmarked USD 2.7 billion for investments in East Africa, a mere 0.06% of their total investments planned globally. During the same time frame, only USD 1.4 billion was actually invested in the region, implying ~USD 1.3 billion is yet to be deployed. The issue of money chasing deals is closely tied to investors’ belief in the growth potential of businesses and affects early stage investors as much as late-stage PE funds.

Last month in Nairobi, we at Beyond Capital engaged a room full of passionate entrepreneurs and impact investors on issues critical for an early stage enterprise to succeed. This article is inspired by the discussion that ensued on three factors that delay capital deployment into a business — competency of the management team, business model and scaling up of an enterprise.

Management Team

A management team is not just limited to the Founders and CEO of a company; it also includes the early talent that supports a business to a viable stage.

What comes first; money or talent?

Entrepreneurs constantly battle with the dilemma of whether the funding or talent comes first. Attracting highly skilled individuals at the stage when the business is merely a few early customers and a product prototype is a significant challenge. Entrepreneurs can bootstrap, crowdfund the first few months, and offer sweat equity to early employees.

Nuts and Bolts

The ability to effectively execute a business plan can be a source of competitive advantage. Cross-functional skills, prior experience in product development, ability to anticipate challenges and plan around them are valued qualities in a management team. More and more founders we meet, are using co-creation to refine their product.

Managing role transitions

As the business scales, a common challenge for entrepreneurs is around how to move people they hired early on into newer roles. While transitions are important to manage and can break an otherwise sound business — it is important for the Founders to keep in mind that their own role will evolve from that of a more hands-on product manager to that of a leader who is capable of motivating the growing team.

Trusting the Entrepreneur

Research has shown that trust has a significant effect on the likelihood that a venture capitalist invests in a company. Investors often come in with an understanding that the business model will evolve and what matters more is a team’s potential to deliver, receptivity to ideas, and commitment to the business.

Business Model

Business model discovery is inherent to any business and requires entrepreneurs to be comfortable with failure, to learn quickly, and to adapt to the needs of the market. However, for social enterprises, the unique profile of their customers and market adds to these challenges.

Risk-averse customers

Due to their limited income, and lack of access to basic needs, customers at the bottom of the pyramid are risk-averse, implying that they cannot experiment with new products in the market. This makes finding “early adopters” or “beta customers” hard for social businesses. As an indicator of success, investors often look for repeat sales and customer feedback as the proof of satisfaction.

Measuring impact varies between different business models

Measuring impact is crucial for a social business to gain serious investor traction. This impact is harder to measure with B2B models, where the impact is either macroeconomic or a business uses an intermediary to reach target customers. Entrepreneurs need to be creative in these cases and leverage technology where possible.

In the Picture: Felista Mutete.

Felista lives in the Mukuru slum of Nairobi. She has two children and runs a barber shop in her community. In 2016, she saved money from her business to start a Fresh Life Toilet (Sanergy), which helps her make additional income. In the process, Felista has made the community around her cleaner and improved her neighbor’s hygiene by offering a more dignified solution to them, than pit latrines, at similar prices.

Beyond Capital invested in Sanergy in 2012. Sanergy designs and manufactures low-cost, high-quality sanitation facilities, which are sold and operated through a network of local residents (Fresh Life Operators). Sanergy collects the waste on a daily basis and converts it at a centralized facility into useful end-products e.g. fertilizer, insect-based animal feed, and renewable energy. 

Policy advocacy as a means to succeed

Entrepreneurs are often swimming against the tide of laws and regulations that stifle growth and make a business model hard to scale. For slow-moving, and heavily regulated industries, policy advocacy is often the only viable means to succeed.

Growth and Scale

A critical inflection point in business is moving from viability to scale. After proving profitability at the unit economics level, businesses look for expansion into new regions to reach customers in socio-economic segments similar to the pilot stage and demonstrating similar needs.

The forest and the trees

A hard balance for entrepreneurs to strike is aligning big picture thinking with focus. Our discussion solicited investors’ and entrepreneurs’ opinion on defining the right time horizon for operational planning vs. envisioning long-term milestones. A broad consensus was to have a detailed plan for a year and have directional visibility into three years. Entrepreneurs need to create time to get out the messy demands of day-to-day firefighting and think about the big picture.

Building partnerships key to succeed

To move the business from viability to scale, a business needs to focus on building strategic partnerships. Strategic partners can lend their networks, provide access to newer markets, help in resource mobilization, and if the relationship is cultivated, they can also serve as advisors to the business.

Balance realism with ambition

Investors are not looking for hockey-stick projections, they like to see projections that are exciting as well as realistic. It is important that entrepreneurs realistically assess their business, and root their projections in tangible, fundamental milestones. Being pragmatic goes a long way in planning.

?About: Mehak is an Associate at Beyond Capital Fund, where she is responsible for sourcing and evaluating investments across East Africa and India.