Early Stage Financing
Learn what it takes to raise capital from friends and family to angel investors, to venture capitalists, and beyond.
Like most entrepreneurs, Arun Iyer relied on friends and family to get Alpha Direct, his Botswana-based insurtech company, off the ground. But bringing insurance to the masses — both within Botswana and across the region — required more substantial sums. And thinking small was preventing him from making it big.
“I believed that only these three people would finance my business. Today, I’m raising money from funds that are located across the world. You know, part of our pre-series A was a fund from Switzerland, Launch Africa Ventures is in. So now the whole world has been opened up. And technically you can do that at any stage, there’s nothing preventing you. The only thing that was preventing us from doing it was my mindset. And once I removed that self-doubt, the world became my oyster.”
Iyer learned that building relationships based on mutual trust is key to securing capital. And Zach George, general partner at Launch Africa Ventures, agrees — along with what he calls the “napkin test.” George looks for founders who can explain in just a few minutes how they plan to get to $100 million. “The majority of founders can never do that. They fail miserably at it, or they’ll say, ‘hey, can I open up my spreadsheet or I’ll talk to my CFO.’ If you give me the, ‘let me talk to my CFO,’ you’ve lost me.”
Listen to Arun’s capital raising strategies and Zach’s investor insights to help fund and grow your own company.
Grit & Growth is a podcast produced by Stanford Seed, an institute at Stanford Graduate School of Business which partners with entrepreneurs in emerging markets to build thriving enterprises that transform lives.
Hear these entrepreneurs’ stories of trial and triumph, and gain insights and guidance from Stanford University faculty and global business experts on how to transform today’s challenges into tomorrow’s opportunities.
Arun Iyer: I simply wanted to know, is this guy somebody that I can trust and I can partner with and we can take this journey together, whichever way it goes.
Darius Teter: Entrepreneur Arun Iyer has certainly been through the fundraising ringer.
Arun Iyer: If you’ve got a partner that’s putting in energy of, I want to try and make the most amount of money as quick as I can, and you’re thinking, hey, how can I have the biggest impact in the world? It’s very unproductive.
Darius Teter: Raising capital is not for the faint of heart. For the majority of entrepreneurs, their startups wither on the vine, unless they can find people and institutions willing to bet on them and their big idea. Raising capital is a constant requirement for growth, and it just gets more complicated with every round as the bets get bigger and the scrutiny gets more intense. But if you get it right, you will emerge stronger and positioned for success.
I’m Darius Teter, and this is Grit & Growth with Stanford Graduate School of Business. The show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs with insights from Stanford faculty and global experts on how to tackle challenges and grow your business.
Today, we meet Arun Iyer, CEO of Botswana’s Alpha Direct, to hear about how he secured angel and venture capital to grow his young company. Our story begins in the Republic of Botswana in Southern Africa, home to just over 2.3 million people. Botswana is one of the most sparsely populated countries in the world. The limited size of this domestic market is a major challenge, but with 130 million people living in neighboring countries, any Botswana based firms seeking growth and scale must expand regionally, and that costs money. Raising capital quickly became a priority for Arun Iyer.
Arun Iyer: My name is Arun Iyer. I am the founder and CEO of Alpha Direct. It is a Botswana headquartered Africa-focused, risk carrying insurtech. When we started our business back in 2015, fundamentally we identified that insurance was not distributed very efficiently. So there was a plethora of intermediaries that were distributing insurance. They were costing a lot to the end consumer, but they weren’t adding as much value to the actual product delivery. And so, we decided to start the first direct insurance company in Botswana. Hence, the name Alpha Direct.
Darius Teter: I think it’s safe to assume that nobody just stumbles into running an insurtech company, but Arun was trained as a certified public accountant, which came in handy later in his journey. But the entrepreneurial seed was actually planted much earlier.
Arun Iyer: I was one of those people who has known nothing other than entrepreneurship my whole life. I grew up in a small town called Lobatse, just south of Gaborone in Botswana. I used to read Fortune Magazine, The Economist, and so on and so forth. You know, I read Warren Buffett’s biography when I was 10.
Darius Teter: Okay, that’s weird. Can we just say it right now? That’s weird.
Arun Iyer: It is weird. I didn’t think of it as being weird at the time, but it obviously was. And fortunately I had a very supportive family. When I was nine years old, I was dreaming about being an entrepreneur and those dreams never went away. I’m now 38 and I still dream about entrepreneurship all day long, except now the dreams are a lot more real.
Darius Teter: Paint a picture for me of the state of the insurance industry in Southern Africa. I mean, I understand that formal penetration for insurance products is extremely low in Africa. I’ve seen a number that it’s as low as 3%. Why is that?
Arun Iyer: When I came up with the concept for Alpha Direct, my goal was to try and improve the insurance penetration in Botswana to begin with, which is our home market. But I always knew that we wanted to be at least a regional player if not a continent wide player. Because the same problems that persisted in Botswana, persisted in other countries as well.
Darius Teter: Arun’s idea was simple, to bring insurance to the masses. But the how was not immediately obvious. And it required a deeper understanding of potential customers.
Arun Iyer: We were doing these design thinking exercises, going out to people, asking them why they don’t have insurance. And what they told us is three things. They said, number one, the way that it is sold in this market is not accessible. They wouldn’t know where to go to find a broker or an agent. There weren’t online options, and so on and so forth. And then they told us insurance was not affordable. And so when we delved deeper into the affordability problem, we realized that the way the products were designed in the African landscape was for the top, maybe 5% or 10% of people. And then last but not least, they also said that they had a hard time understanding the legal mumbo jumbo around insurance.
Darius Teter: From this catalog of problems, Alpha Direct first looked at direct distribution through contact centers, digital channels and kiosks and retail outlets. But they also innovated insurance underwriting working with data sources and developing algorithms to provide individual rather than pooled risk assessments. And in early 2019, Arun had a major light bulb moment.
Arun Iyer: We actually came up with a unique concept of insurance in a box. We designed products to begin with that are very simple and easy to understand for a consumer that has not ever had insurance coverage in their life, or has very little exposure to insurance. You can buy a box in your grocery store and take it to the till, and pay your first month’s premium at the till. We integrated with advanced payment rails through APIs, we actually built our own software from the ground up to run this entire operation. And we launched a trial in 2019 with a retailer in Botswana called Choppies. And then COVID struck and of course, physical retail distribution was no longer something that was viable. And so we launched the full digital products on our website and on a mobile app. But since then we restarted the scaling up of our operations on the insurance in a box side. And from June up to February, we acquired 11,000 customers.
Darius Teter: The shrewd move here is to use existing familiar customer channels to sell his product. And Arun had a vision for growing quickly. Behind the scenes there were a series of intricate steps in complex funding rounds. But before we dive into those, I want to introduce you to Zach George from Launch Africa Ventures, one of Alpha Direct’s most recent investors.
Zach George: I’m Zach George. I’m a general partner at Launch Africa Ventures, one of the largest Pan-African specialist seed venture capital funds. I also am the co-founder of Startup Bootcamp Africa, which is the Africa chapter of Startup Bootcamp. Then I got my master’s at Stanford about 16 years ago. I’m an engineer by degree and I’ve lived on pretty much every continent in the world. And I’ve made Africa home for the last 10 years.
Darius Teter: What did the investment landscape look like for startups when you arrived?
Zach George: Pretty much non-existent to call a spade, a spade. In 2010-2011, on the entire African continent there was just over $20 million in venture capital funding, which is two deals in San Francisco on a Tuesday. There’s a lot of capital available in South Africa, but the investing community’s risk appetite is really low. And that was what I took on as a personal journey to sort of transform and change.
Darius Teter: Zach George invests in pre-Series A ventures all across Africa. And he’s clear about what he’s looking for in a company.
Zach George: We are a $15 million fund. We look at the industries in the financial services, retail, logistics, e-commerce, health techs, anything that’s tech or tech enabled that’s asset-light. When we invest a dollar into a company, we need to know that 80 to 90 cents of the dollar is just used towards acquiring customers and growing and not spent on fixing broken tech or sorting out your HR or sorting out your IP and legals, because that’s what accelerators help you do exceptionally well.
Darius Teter: Launch Africa comes into Arun’s fundraising evolution a little bit later on, and it has been an evolution, Arun sought funds right from the start. In fact, he never owned 100% of his business. So, let’s explore how he got that first bite.
In 2014, Arun and his brother were settled in Florida, but a serendipitous meeting would change their path.
Arun Iyer: We had just lost our dad who also happened to be our mentor and was based in Botswana and was already an entrepreneur and had a lot of things going on. And we were a little bit lost. I mean, the both of us didn’t really have a path. And my brother was running a medical billing firm in Florida as well. And the software that he used was owned by a guy called Dr. Kiran Patel, a guy in Florida who was born in Zambia and his claim to fame was that he bought and built two billion-dollar insurance companies. And my brother emailed me one day. He said, “Listen, look up this guy on Google. We have to meet him. We have to get to know him.” And so we went and met with him and literally the day that I met him, I told him, I said, “Listen, when I grow up, I want to be just like you.”
And fortunately, he also liked us and we stayed in touch for many years without really discussing any business or doing any business together. But finally, when I decided to move back to Botswana and do something in the insurance space, I went to him, we sat down across the table, we beat around the bush for about five minutes talking about this and that. At that stage, I had already prepared a feasibility study. I’d spent a few thousand dollars getting a feasibility study together for this insurance company that I was going to launch. He didn’t even read my feasibility study and he just said, “How much money do you want?” And I said, “Well, I didn’t ask you. I didn’t tell you that I was coming here to ask you for your money.” And he’s like, “No, I figured that you wanted some money.” And then we had a little conversation and then he got up and he started… He’s got a little golf putting range in his office. So he just started putting golf and I was left sitting at the table. So the meeting was over.
Darius Teter: So basically without really reading your… It’s not really even a term sheet, it was just a proposal. He said, fine. And so how much did he provide?
Arun Iyer: He asked me how much I wanted. And I said, “I want $60,000 from you.” And he said, “How much am I going to get for $60,000?” I said, “I’ll give you 10% of the company.”
Darius Teter: Just like that?
Arun Iyer: Yeah. And he said, “Give me 20 and I’m in.”
Darius Teter: There is a powerful lesson here. If you asked for money first, you’ll probably just get advice. But if you ask for advice, you might get money. With one partnership under his belt, Arun set about to bring in two more angel investors early on, a couple of high net worth individuals who just happened to be friends of his parents.
Arun Iyer: You must remember, I knew nothing about insurance when I started this business, I’d never run an insurance company, never worked in an insurance company. I don’t think reading Warren Buffett’s biography really qualifies you to run an insurance company. So I literally went up to each of them and I said, “Dr. K is investing in this company. And Dr. K has built and sold a billion dollar insurance company. So if you want in, then these are the terms.” Again, there was really no pitch. I went in and I said, “I’m going to do this. This is my calling. And with, or without you, I’m going to find a way to make this happen.”
Darius Teter: Arun had the legitimacy of his first investor, Dr. Kiran, to attract additional angel investors. And that was a serious advantage. When we spoke to Zach George, he said that friends and family funding in Africa is actually pretty prevalent at the pre-seed and seed stage.
Zach George: So you’ve got pre-seed funding, which is almost entirely driven by founder capital themselves, friends and family, and maybe the odd early stage angel investor, right? Those pools of money could range anywhere from $10,000 to maybe half a million dollars at a stretch, depending on what industry you’re in, right? That’s a pre-seed funding. Then you’ve got seed funding and seed funding also has a big friends and family component to it but that’s when you start seeing angel groups and angel networks coming in, and importantly, this is where accelerators and incubators come in. But at this stage it’s still too early for institutional capital.
Darius Teter: The benefit of friends and family is that they may be easier to find, but that doesn’t mean the relationships will be smooth sailing.
Arun Iyer: They didn’t become ultra high net worth by giving away money. They’re very shrewd businessmen. They are incredibly smart and switched on. There were some of these angel rounds where I believe that the business was worth a lot more and they believed it wasn’t they tried to squeeze me out on one round which I remember very distinctly because after that meeting, I told myself that I will never, ever put myself in a position where I’m at the mercy of an investor.
Darius Teter: What do you mean when you say that in that meeting, they tried to squeeze you out?
Arun Iyer: This was like in year one after our launch. So it was around 2016. The business ran short of cash because I was doing everything at that time. I didn’t have a CFO and all of that stuff at that point in time, I kind of went to them last minute when I realized, okay, wait a minute, if we don’t raise the money that we need now, in three months time, we’re not going to have a business, we’re going to crash. And I went to my angel investors and I said, look, we need to raise… It was half a million dollars that I wanted to raise. And I said, “Look, I believe we can raise at a two and a half million dollar valuation.” Which was not a very rich valuation. And they said, “No.” They said, “We’ll invest if it’s at a million dollar valuation.”
Darius Teter: How did they come up with a million dollars? They were just toying with you or they were just figuring out this is how desperate he is so that’s the number.
Arun Iyer: Yeah. Yeah.
Darius Teter: So they walked away with half the business?
Arun Iyer: Well, not exactly. What happened was we reduced the size of the round. So I said, “Okay, we don’t quite need a half a million right now.” We reduced the size of the round. We’ll take $200,000 and then we’ll go out and invest it. Ultra high net worth individuals generally tend to have really big egos. At least in my experience, they will try to use their money power. When they realize that you’re doing something good, they want to try and take as much of it as they possibly can. And so I allowed them to do that to me on the previous round of the second round that we raised because of the fact that I wanted what was best for the business, the business needed to survive.
Darius Teter: You were desperate. You were at a working capital shortfall.
Arun Iyer: I was desperate and they knew it and they immediately took advantage of it. So I learned my lesson to never be on the back foot ever again. The next time we needed money, if they said, “No, we’re not going to give you the money.” Then I would be able to squeeze them back, which is exactly what I did
Darius Teter: In this somewhat predatory situation. Arun played defense by reducing the size of the round to keep more control of his company. He took the deal, but the next time he was better prepared.
Arun Iyer: For the next round I planned. My mom mortgaged her property. I got a loan from the bank in my personal capacity. Then I went and I sat with them, I gave them the same story. I said, “We need to raise half a million dollars.” And they again, came up and they said, “No, we don’t want to invest anymore. We don’t think you’re going to make it.“ And then I said, “Okay. So if I put the money down, are you okay with it?” And they said, “Yeah, we are okay with it.” Then they said, “Okay, what is the valuation?” So I said, “I’m going to give it to you at a million dollar valuation. That’s the same value you gave me on the last round.” And I took back the shares at the million dollar valuation, but it took a lot of planning. And I was fortunate that my mom was willing to do that for me. And till today I’m still paying that loan off.
Darius Teter: So what’s the biggest takeaway here? One is better financial planning. And of course it helped that you had a family member that was willing to capitalize your business. What else?
Arun Iyer: So despite the fact that these guys came out there and they squeezed me and I felt that we had such a strong relationship that they wouldn’t do something like that to me, that they’d be fair. And they weren’t. I still have no grudges against it because they have allowed the business to survive and to grow and to become what it is today. And so, you have to be very practical when you’re approaching fundraising. You have to understand that you have to leave money at each stage for everybody else’s part of your journey. But at the same token, you’ve got to be super tough by not being dependent on one or two people.
And I think that’s a mindset issue. So if you look back, my brain was like, this is really small. I believe that only these three people would finance my business. Today, I’m raising money from funds that are located across the world. Part of our pre-Series A was a fund from Switzerland, you know, and Launch Africa Ventures is in this. So now the whole world has been opened up. And technically you can do that at any stage. There’s nothing preventing you. The only thing that was preventing us from doing it was my mindset. And once I removed that self-doubt, now the world became my oyster.
Darius Teter: Arun wasn’t yet confident enough to look at more professional investors and institutional funds, which to be frank in the earliest stage of raising capital are few and far between. Instead, he focused on building his business while putting himself out there as an entrepreneur. And that’s how he first met Zach George.
Zach George: I met Arun on a VC WhatsApp group, and Arun would constantly add a lot of value from just snippets of knowledge, about his business, about the insurance industry, about the VC industry, about founder pressures and conundrums, and is very engaging, just generally a knowledgeable human being. I have a lot of respect for founders that are assertive, but not arrogant. That are ambitious, but aren’t cocky.
Darius Teter: Zach and Arun hit it off. So when Arun was in Cape Town in the summer of 2019, they decided to finally meet in person.
Arun Iyer: We had lunch together and I told him about Alpha Direct. And he was still just starting his fund out at that point in time, he hadn’t had any closes, but I really liked him as a person. I felt that he was a genuine investor who wanted what was best for the founders and for the startups.
Zach George: So I met him for the very first time and was immediately impressed with his, just his charisma, his personality, his impeccability, say what you mean, mean what you say kind of thing. We didn’t even talk about his business, nothing. It was just a friendly chat, a good professional relationship. And then over the months, he kept me posted on what he’s doing and then slowly but surely once we formed a personal relationship based on mutual trust and knowledge sharing, he started slowly asking me, “Hey, so you do a bit of angel investing. You’re running this fund. Would insurance ever be one of your priorities?” And I said, “Of course, send me your deck.” And that’s how it sort of morphed into everything.
Darius Teter: What it morphed into was a bridge to a Series A funding round. Raising capital from an institution is a whole different ball game from three rounds of getting squeezed by his frenemies. But Arun again was better prepared because just before Zach got involved, Alpha Direct had gone through a fourth funding round.
Arun Iyer: We had come up with the concept of insurance in a box. We had already spent money that we didn’t have to build a software and we had no idea whether this idea was going to work. We were sitting thinking, where do we get the money? We’ve got all these big ideas. We need to go out and find the money to do it. And we knew based on our experience that if we go back to the same three people that they’re going to squeeze us, and we said, you know what? Let’s just try and raise money through a public offer. Then when we sat down with the lawyers, they said, “Well, that’s not that simple. You can’t just go out and make a public offer. There’s lots of documentation you need to have in place.”
Darius Teter: Arun wanted to do a public offer, but he realized pretty quickly that the registration requirements for public securities would be steep and expensive. Instead, he presented an investment memorandum to investors, to raise funds for a convertible note. And because it had less than 10 investors, that meant he didn’t have to register the security. The note was denominated in Botswana in Pula. And the terms dictated when the note would convert automatically into equity. This round brought in smaller investors whose positions were purely monetary and at a $5 million valuation. But in the process, two things happened first. Arun realized that there were plenty of people interested in investing in Alpha Direct once they realized that the company was on an exciting upward trajectory. And second, it was an opportunity to prepare for raising institutional capital in the future.
Arun Iyer: When Launch Africa approached us, we were very well prepared to actually take that capital because of the fact that we had already done a semi-professional round just a year and a half before that.
Botswana, as you know, has a very small population. So it’s a great place to test your ideas and get things rolling. But when you really need to execute, you need to go into the larger markets. And we already started laying the groundwork for it. We started doing deals in Zambia and South Africa. So we had set our sights on doing a $5 million Series A round, and I’d already spoken to the existing investors. So I was just scratching my head and kind of wondering where this money’s going to come from. Zach called me out of the blue. I was sitting out one day early in the morning, having a coffee and the phone rings and it’s Zach. He says, “Hey buddy, how are you doing?” And I’m like, “Great, man. I haven’t spoken to you in a long time.”
Zach George: I said, “Listen, if you are looking to raise a round, I might know a few VCs that could be interested, but it could be of interest to us together.”
Arun Iyer: And then he says, “You know what? We just had our first close and we’ve been talking about Alpha Direct for a long time. Would you consider taking an investment from us?” And I was like, ”Absolutely, I would.” And we literally had a five minute conversation about what we were going to do, Series A, what the revenue was like, and sort of a summary view of the business.
Zach George: And then I said that there’s no better way to know an entrepreneur than to go and just visit their backyard. So I got onto a flight in December and spent a week in Gaborone in Botswana, met his entire team. Saw how he works, how he hires. And the one thing about Arun that I really respect is he was just very open to just learning. I think founders that are intellectually curious about business work and life appeal to me.
Arun Iyer: And then he said, “Okay, look, I’ll do a deal at a $10 million valuation.” Which was like half of our Series A anticipated valuation. But he’s like, “I can give you money in like two to three weeks subject to due diligence.”
Darius Teter: This funding was a bridge round in the form of a US dollar convertible note, which they will use to cover their expenses until they closed their Series A. Funding at pre-seed might be sold on the personality of the founder, but for these larger funding rounds, you need to have all your ducks in a row, particularly because of the size of some of these investments.
Zach George: The Series A stage, which is where your first institutional check comes in, that is usually led by a lead VC fund. Series A round sizes range from a low of $2 million it’s very low to as high as $25-30 million rounds. The norm is one lead VC fund, a couple of other VC funds and angels and super angels filling out the rest around.
Arun Iyer: The due diligence process only gets harder and harder as you go along. So right now we’re raising a $5 million Series A and the due diligence requirements are even more than what they were for the pre-Series A.
Darius Teter: So when Zach George requested due diligence, Arun benefited from the work he had already put into the previous round of funding.
Arun Iyer: So we’d already beefed up our governance structures. We’d already done an audit for the last financial year on the holding company level. We had already started preliminarily setting up our data room. All of that stuff was already in place. All our IP was registered properly. We’d already set up the company in Singapore, for example. So a lot of venture capital funds that invest in African tech companies, they want the entity to be either in Delaware or Singapore or UK or something, because it’s just easier for them to understand how investor protection laws work in those countries. Then we went to their investment committee on December 23, and then he called me to say that, yeah, the investment committee has approved the investment. So we decided to do a half a million dollar round.
Darius Teter: We heard earlier that Zach George’s thesis on investment is focused on tech and tech enabled in Africa, but he also just really liked Arun as a person. And I wondered what other factors mattered.
Zach George: One thing that I focus on a lot when it comes to startups is what is your distribution and what is your channel to market? So the fact that Alpha Direct piggybacked off of Choppies, which is one of the largest retailers in Botswana and in Southern Africa.
Darius Teter: That’s the insurance in a box thing that they had on the shelves in Choppies.
Zach George: So you got to understand your target customer exceptionally well. If you start suddenly just spending tons of money on Instagram and Facebook ads and telling these young millennials to start buying insurance in Botswana, they’re not going to do it. People congregate around retail stores, around restaurants, around places of communal interest. There is a huge amount of brand recognition that the African consumer has. So the fact that he had a large distributor and a distribution plan was a big factor in us deciding to back them and also understanding the mentality of how founders get access to distribution.
So with distribution, you have to understand that you will sacrifice margin. So good founders make a judgment call very early on and say, “Hey, how much more volume am I going to get out of this distribution deal versus me sacrificing a tiny bit of margin?” And if the marginal cost benefit analysis of the additional dollar in revenue that I’m giving up versus the customers that I get makes sense, and I should do it. And Arun and his team understood that marginal cost benefit analysis so well, it was a no brainer. I’m like, “Okay, you’re going to shave off a few cents of margin here in exchange for a 10% tire volume or 20% higher volume.”
Darius Teter: Knowing your way around numbers is so important to Zach that he wants to get rid of the elevator pitch altogether and replace it with the napkin test. He asks founders to sketch out in just a few minutes, how are they going to get to $100 million, not in market value, but in serviceable, addressable market or sum.
Zach George: The majority of founders can never do that. They fail miserably at it, or they’ll say, “Hey, can I open up my spreadsheet or I’ll talk to my CFO.” If you give me the, “Let me talk to my CFO.” You’ve lost me. Good founders will say, “Currently we work in Gaborone. Population is X, we’ve got 2% of the market. On average they spend $10 buying this. So $10 times this is that. We’re growing at 10% month to month so that gets us to this. If we were to open up in a new city, we would get to this.” And they can explain to me in a logical way, how they get $200 million. And I’m like, you can explain this in layman’s terms that make sense to a non sophisticated investor. I like you already.
Darius Teter: With his CPA background, Arun had already spent many years running Alpha Direct’s finances. And that came in handy for the napkin test. And like most founders, he couldn’t afford a finance team from the outset.
Arun Iyer: The 2019 convertible note round. That was hard because I’d never done it before. I had no support. I didn’t have somebody to sit and model for me all day. I didn’t have a team that could come in and build a data room in a couple of days. So that was a hard round because I didn’t know how to go about it. And I probably didn’t do such a good job, but the point is, we got it done. Yes, I spend a lot of time on fundraising. I spend a lot of time on pitching now. I spend a lot of time on managing the financial models and all of that stuff, that goes hand in hand with fundraising, but I have such a good team that supports me today. So it doesn’t really feel like I’m… I’m not working harder.
Darius Teter: After the pre-Series A funding with Launch Africa and others, which closed in January of this year, Arun and the team are now preparing for a Series A funding round. And it’s likely to attract a lot of attention because as Arun mentioned earlier, his mind had been opened to the possibilities of all kinds of investors.
Arun Iyer: For Series A, we’ve actually appointed an investment bank in South Africa called Vedanta Capital. They’ve raised hundreds of millions of dollars for financial services and fintech companies across Africa. They’re all ex Deutsche Bank and Goldman Sachs guys, and we’re paying them quite a bit of money about $220,000 out of the money that we raised and it’s a four and a half percent cut. But the beautiful thing is that they do a lot of the work for you. I have found that that has relieved a lot of pressure from us in terms of actually going out and raising the money. And then last but not least, they introduce us to probably about a hundred or 150 institutional investors from across the world.
Darius Teter: What does Alpha Direct look like five years from now? You’ve closed your Series A, you took that money to expand. Who are your customers, what products you’re offering, what is your argument for success?
Arun Iyer: Africa has a massive growth potential and has a very young population base. We all know that. This young population base is going to become wealthier and wealthier over the next 10 years. And what we want to do is we want to get people signed up under our inclusion product line, where we design very simple, easy to understand insurance products that are distributed physically, but have a hundred percent digital backend. So the policies are administered digitally. They’re activated digitally. The communications are digital. Everything is digital except for the initial point of acquisition. Why are we choosing this as an initial point of acquisition? When we could just do it full digital, like come up with an app like Lemonade or whatever, and copy the Americans. Many places in Africa, mobile data is still very expensive. The average African consumer is not buying things on their mobile phone yet.
They’re slowly starting to get there. There’s a certain segment of the population that’s doing it. But the mass market, the people who we really want as our customers are still not there where they can do everything online. And so we use a physical distribution to get there. The second suite of products that we are focused on is usage-based products. So we launched a joint venture with the Botswana Telecommunications Corporation, who’s a mobile network operator in Botswana, and we are developing a suite of usage based products. It’s the full experience. It’s not simplified watered down products.
It’s the full experience of, for example, your car insurance, you’ll get full, comprehensive cover, but you only pay for the kilometers you drive. But for now, a car is usually a very expensive asset for somebody in Africa, particularly a lower middle-class person. Rightfully they should protect that car and they should be able to get back onto their feet after they have an unfortunate event. The key with that product line is how do we fit the product design with people’s lifestyle, like how they’re actually living. And then of course we have the full digital suite as well. When the Mukesh Ambani or the Elon Musk comes and decides to take over all telcos in Africa and give practically free internet for everybody, we’ll be ready with the full digital suite of products, completely customizable products that are ready for the population. But we still think that’s a couple of years away.
Darius Teter: Over the past six years, Arun has really put himself out there as an entrepreneur, making connections, seeking advice, and actively learning. The monetary value of seed investment is of course important. But the support and expertise that comes with it is priceless. And for Zach George, that’s part and parcel of being a great investor.
Zach George: If Alpha Direct is looking for a new payment gateway to open up a new market, you should be introducing them to payment fintechs in different geographies. If they’re looking for better software to automate the claims process, you should be looking at the universe of Insurtech companies that do claims automation. These are the hallmarks of really good seed investors, you’re helping them with everything from new capital to hiring, to suppliers, to new corporate acquisition strategies. And when you find investors like that, that are constantly egging you to be the best version of yourself. You get really good terms, right? In exchange for that.
Darius Teter: Arun and Zach’s business relationship is just getting started and Arun is on his way to realizing that entrepreneurial dream, the one that he’s had ever since he first picked up Warren Buffett’s autobiography as a ten-year-old. Arun says he was destined to become an entrepreneur, but growth actually hasn’t been simple. And I wondered what has surprised you most about his journey so far?
Arun Iyer: What’s been interesting is how I find out now that a lot of the people that were around us at the time we were creating the concept of insurance in a box and plowing money that we didn’t have into it never really believed that it would work.
Darius Teter: You mean your friends weren’t being honest with you.
Arun Iyer: Internally, we just had zero disbelief. We were like, “This is the greatest thing since sliced cheese.” And now as it’s actually taken off and we’ve acquired 11,000 customers. We’re on track to do 30 by June and a hundred thousand by December. Now, people are coming out and saying, “You know, I actually never thought that this thing would work.”
Darius Teter: It’s like you said, I mean, early stage investment. And I’ve actually heard this from a number of investors too. They said, “Look, when you’re talking pre-seed round, you’re investing in the person.” Who knows? The idea is a crapshoot, right? It’s like a one in 100, it’s a moonshot, whatever it is, but this person has something and if this idea doesn’t work, maybe the next idea is going to work.
Arun Iyer: Exactly, exactly. Even with VCs, I’m looking more at the type of person that I’m dealing with because really they are partners. So even with Launch Africa, I had everybody around me giving me their opinion on Zach as a person, not as Launch Africa’s GP or whatever the story is. I simply wanted to know, is this guy somebody that I can trust and I can partner with, and we can take this journey together, whichever way it goes, the journey may go great. It may not go great. But the point is, is this the kind of guy that I really can believe in and trust, and who’s going to stick with me as we go through this.
Darius Teter: That is such an important lesson. And it’s just like, they’re looking at you as a character, your character traits, your strengths, your integrity, you should be looking for exactly the same thing in your VC partner.
Arun Iyer: Absolutely. It’s all about alignment, right? So the main thing that I look for, and the main thing I asked other investors to look for, who are looking at us is to say, look, you have a thousand other investment opportunities. And I have a thousand VCs that I could possibly go to, to raise this money. And the opening up of the mind is very important there, right? Like if you don’t understand that you’ve got all these options out there, you’ll never think this way. So how about we try and find the one or two guys in this round that are perfectly aligned with us energy-wise and are perfectly positioned to help us unlock value in our idea and believe in us most importantly.
Darius Teter: Thanks to our Arun Iyer for sharing his journey with us and to Zach George, for his fascinating investor insights. This has been Grit & Growth. And I’m your host Darius Teter. If you want to find out more about pre-seed, seed and VC funding or learn how Stanford Graduate School of Business is partnering with entrepreneurs throughout Africa and South Asia, then head over to the Stanford Seed website at seed.stanford.edu/podcast. And don’t forget to hit follow, to hear new episodes. Grit & Growth is a podcast by Stanford Graduate School of Business, Laurie Fuller researched and developed content for this episode. There’s additional research by Jeff Prickett. David Rosenzweig is our production coordinator and our executive producer is Tiffany Steeves with writing and production by Isobel Pollard and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.
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