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Not all startups are in need of cash from venture capitalists

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Summary

  • Getting investment, alongside sound business sense, can make the difference between becoming a hit such as Paystack or Facebook and fizzling out before you take off.
  • Typically, fundraising is an 18-month recurring rollercoaster where you have to hit specific growth metrics and still spend six to 12 months knocking on doors.

To raise funds or not? That’s the eternal question startup founders have to deal with.

Yes, funding is perhaps the biggest question owners will face when contemplating the future of their company in terms of growth.

It dictates the direction of their business from now until liquidity (ie an acquisition). But is venture capital (VC) a necessary path for emerging market startups anyway? The clear answer is no.

Not all businesses need outside funding. Plenty of companies can be built and profitably scaled with little to no upfront cash if the unit economics are right.

A good example is JetBrains – a Prague-based startup that bootstrapped all the way to a Sh700 billion valuation.

REALISE AMBITIONS

What's impressive is that JetBrains is profitable with enough resources to realise its ambitions.

In contrast, many VC backed startups (including several household unicorns) lack positive unit economics. So inevitably, the question all founders face is: is VC funding really necessary?

No doubt VCs can be extremely helpful. They are powerful catalysts for the development, growth and scalability of new companies.

In fact, they are increasingly an essential part of the economic infrastructure around the world.

Getting investment, alongside sound business sense, can make the difference between becoming a hit such as Paystack or Facebook and fizzling out before you take off. Yet VCs are not a must have. To be candid, outside of the fact that some companies simply don’t have the upside to justify venture money (ie., at least a Sh10 billion addressable market, minimum), others are just better suited to slower, more sustainable growth.

Besides, VCs do not always guarantee a million-dollar ending.

In fact, if you take a typical group of 10 companies in which a VC firm invests only one or two will fully pay back their investments..

In a normal scenario, many of those companies will simply be written off and one or two will pay back their investments.

I understand entrepreneurs love big wins. And nothing is bigger than everything. I also understand founders want to scale faster and own the market. And of course, every founder wants to show dad he/she’s succeeding after all the “better get a real job” talk.

But should this quest always lead to the VC door? Of course not. And one more thing. Unbeknownst to many, funding rounds can be quite distracting when all your young business needs is all the attention it can get from you and team.

Typically, fundraising is an 18-month recurring rollercoaster where you have to hit specific growth metrics and still spend six to 12 months knocking on doors. Who needs to give up so much of that time?

NOT BASHING PIECE

Just to be clear, this is not a VC bashing piece. On the contrary, the point is to nudge new businesses to focus much earlier on viable unit economics and even profitability. This is critical considering many startups would never get VC attention.

So, to complain that, “VCs are colour-blind or helplessly gender-blind,” misses the point. Startups need to change their understanding regarding their capital needs. Not all businesses need outside funding.

Mr Mwanyasi is the managing director at Canaan Capital