Masterclass on Early Stage Financing

Darius Teter: A couple of weeks ago, we published an episode featuring Botswanan entrepreneur Arun Iyer and one of his primary angel investors, Zach George.

Zach George: Founders that are assertive, but not arrogant that are ambitious, but aren’t cocky, founders that are intellectually curious about business work and life appeal to me.

Darius Teter: Zach George is a leading African angel investor who’s seen the landscape change dramatically, even just over the 10 years that he’s been active on the continent.

Zach George: As the ecosystem has matured. Investors have understood that angel investing requires time, resources, effort, and networks, and smart founders have learned to say no to investors that don’t add any of the value outside of that.

Darius Teter: I’m Darius Teter. And this is a masterclass by Grit and Growth with Stanford Graduate School of Business. The show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs. Today, Zach George shares his expertise on angel investment in Africa. We talk about how to engage in and maintain investor relationships at any stage of your funding journey and hear actionable insights that you can put into practice today. So without further ado over to you, Zach.

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 am also the co-founder of Startup Bootcamp Africa, which is the Africa chapter of Startup Bootcamp, one of the largest accelerators for early-stage technology ventures in the world. Got my masters 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: So tell us a little bit, how did you end up in Africa, Zach?

Zach George: Yeah, the short answer as I was here on holiday in 2010 to watch the World Cup, like a couple of million people from around the world, and outside of how beautiful South Africa is as a country, it’s got Cape Town specifically. I’ve lived here for 11 years now. It reminds me every day of San Francisco, the mountain, the ocean, the sea, the surf, the coffee, the vineyards, even down to Alcatraz and Robben Island. It’s insane how similar these two cities are. And the best part is the cost of living is a third of living in San Francisco. So it’s kind of a no brainer to pick Cape Town over San Francisco.

Darius Teter: You’re really making this… You’re making me want to go, especially the cost of living piece.

Zach George: So I was here on holiday and then I realized very quickly that outside of being one of the world’s top three tourist destinations, it also is one of the most, at the time, underrated ecosystems from a tech perspective. So very similar to Silicon Valley, Cape Town’s got two of the best universities in Africa, the University of Cape Town and Stellenbosch University that are very tech, science, engineering, math heavy. It’s got an incredible network of tech transfer offices, so i.e. helping students get out of these universities and not just remain in academia, but go and work in industry. And the network of, I wouldn’t call it venture capital, because it was at the time fairly new, but the amount of capital available from H&I’s family offices and industrial families in South Africa is quite a lot. And then to add to that, the Western Cape government, similar to the government of California, is very liberal in the way it looks at tax incentives, R&D grants and subsidies for innovation and technology.

So all these factors together made Cape Town and South Africa in general a no brainer from funding and helping grow entrepreneurs. But when I landed up here in 2010, 2011, no one was doing this. It was purely a holiday destination. So I’ve always been a go against the grain, pioneer kind of guy, most of my life. And I figured this is probably a good opportunity. I was two years away from turning 30. I could see myself building an ecosystem for VC when none existed and no better place to do it than Cape Town.

Darius Teter: First of all, the idea that the universities are actually very engaged in helping students take their ideas to market, that’s interesting. It sounds quite a bit like Stanford. The fact that the government policy is sort of pro-business, pro-startup, that’s interesting. But what from a seed funding or investment product standpoint that you saw and also why is it that you could see that? What was it about your professional background that made those shortcomings visible to you?

Zach George: So remember I spent almost two and a half years in Silicon Valley whilst I was at Stanford and for six months after, my master’s working in San Francisco. So I’d seen the likes of the early days of Facebook and Twitter, et cetera, just very smart about combining commercial traction with incredible customer engagement and of course getting access to the right angel investors and early pools of seed capital. So understanding what elements go into creating a sustainable innovation ecosystem, having lived in the valley for a few years, made me realize that if we could recreate that anywhere in Africa, it could be potentially the next Silicon Valley in emerging markets. So I saw a lot of those ingredients in Cape Town and in South Africa as a whole when I came here, but there just wasn’t enough of a glue to bring the multiple stakeholders to work together.

So for example, I mentioned the Western Cape government, which is, sort of, think of it as a state. The U.S. is 50 states. South Africa has nine provinces. Of all the provinces in South Africa, the two largest provinces, Gauteng, which is where Johannesburg is and the Western Cape where Cape Town is, are the most innovative from an ease of doing business standpoint. So when it comes to initial funding from an R&D perspective, when it comes to tax subsidies and tax cuts for entrepreneurs, these two provinces are a lot more open and liberal compared to other provinces in the country. So just understanding how to navigate those relationships was super important. And very few folks have that big picture thinking to be able to talk to the government, to corporates, to startups, to coworking spaces, incubation labs, and bring it all together. And that was what I thought I could do having sort of straddled both worlds before this.

Darius Teter: So can you just walk us through what the startup funding stages are called and who are the main investment players?

Zach George: So you’ve got pre-seed funding, which is essentially your funding companies or founders that are just post-idea. And they’re busy building an MVP, a prototype. That funding is almost entirely driven by founder capital, themselves, friends and family, and maybe the odd early-stage angel investor. 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. That’s 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. So local angel networks from an Africa context, you’d have the South African angel network, the Nigerian angel network, and, sort of, going down to the city. So Lagos angel network, the Cape Town angel network, et cetera. So angel networks, friends and family, and importantly, this is where accelerators and incubators come in.

So most accelerators, obviously the ones that we are familiar with, like the YC’s in the Startup Bootcamps and the tech stores of the world, but regional accelerators play a role in providing anywhere from $20,000 to $100,000 worth of funding. This stage is still predominantly pre-revenue, but post MVP. But you do have quite a few companies that are just post revenue and revenue at that stage could be prototypes, pilots, POCs, proof of concepts. But you do find some companies that have recurring subscription revenue as well. But at this stage it’s still too early for institutional capital. It’s mostly, like I said, angels, friends, family, and accelerators. The one exception to that is hyperlocal regional focused VC funds. So there are a few seed VC funds local to just a city or just a country that may write small checks.

The average size of round at the seed stage is between half a million dollars to, at a stretch, $2 million. And that’s again from maybe an emerging market/Africa context. Then you’ve got 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, that’s very low, to as high as $25 to $30 million rounds. You usually have a lead VC that commits half of the round, at least, if it’s percent on the round size. You then have super angels or large angel groups that sort of finish out the rest of the round, and at the most, two to three other VCs. There are cases where series A rounds can have up to six to seven VCs, but the norm is one lead VC fund, a couple of other VC funds and angels and super angels filling out the rest of the round. That’s series A. Series B and series C is what people often refer to as growth capital, growth and late stage capital.

And those range from anything north of $10 million round sizes, all the way up… Flutterwave last week announced a $170 million series C round. So like I said, $10 million all the way up to $150, $200 million round, so that would be series B and series C.

Darius Teter: So there’s a lot more interest in funding early-stage startups. What can go wrong in that space? I’m in a startup, I’m looking for my first pre-seed round. A lot of people talk about how this is a very predatory place to be when you’re trying to get funding. And I’m just curious, what are still some of the inefficiencies? What are the challenges?

Zach George: One of the things about early-stage investing in Africa, and just emerging markets in general, is if all you bring to the table is financial capital, you shouldn’t be investing early. A, it’s too risky. It’s not worth your time. It’s not worth your money and it’s not worth your resources that you put into it. So as an early-stage investor at the pre-seed and seed stage of a business, as an investor, you have to add significantly more than just capital. So what does that entail? A, you’ve got to understand the power of networks exceptionally well. So if you’re not opening doors to other investors in that current round of future investors, that’s a big red flag. Number two, if you’re not opening doors to corporates, but specifically insurers, banks, telcos, retailers, manufacturing firms, or whatever corporates are relevant to solving distribution for that particular technology startup, again, that’s not a big value add if you can’t do it.

Number three, if you aren’t able to understand the applicability of that particular piece of technology to the industry and be an evangelist for that product in the broader ecosystem, your money ain’t going anywhere. So you have to be adding at least two of these three attributes outside of just your money. Otherwise, there’s no point investing early. So a lot of the investors that approach founders early on assume that their money is the last resource before the startup literally capitulates. So their terms tend to be borderline, like you mentioned, predatory. That’s why VC in Africa, back in the day five, six years ago, used to be called vulture capital, not venture capital for a long time. So you’d have investors writing you a $100,000 check and asking to own 50% of your business or ridiculous terms like that.

And they would get away with it because there was no other recourse from a funding standpoint. As the ecosystem has matured, investors have understood that angel investing requires time, resources, effort, and networks and smart founders have learned to say no to investors that don’t add any of the value outside of that. Now on the flip side, good investors are investors that go above and beyond what I just said and help your founders with things like recruiting, with talent sourcing. People often ignore HR and human resources when it comes to helping founders.

A lot of founders are constantly shuffling their time between A) raising capital B) striking partnerships with large corporates from a commercialization standpoint, acquiring customers that are B2C, and hiring. And it’s almost too much to ask. It’s at that point where you turn to your seed investors and say, “Hey, what are you doing to help me with acquiring new customers? What are you doing to help me with my hiring? I’ve given you a ridiculously low valuation to get into my company and what are you doing?” So as an early-stage investor, if you’re not adding significant non-financial value, you don’t deserve to invest in these companies.

Darius Teter: What’s interesting about that is there’s a number of market failures and information failures there that you described. The first was, there was a dearth of supply of people willing to make those early-stage investments. So they in a sense had monopoly or oligopoly power, they’re dictating ridiculous terms, and because they really were the only option. They’re no longer the only option. So now as a founder, I can be smart and look for the right partner. But the other thing I think I heard you say was that those are early-stage venture investors had ridiculous expectations as well. They thought, “You know what? It’s a big, super risky bet. So I’m just going to demand a crazy amount of equity. And if it works, it works. If it doesn’t, it doesn’t.” So it seems like both sides of the transaction have gotten much more sophisticated. There’s actually a bigger supply of potential startups and a bigger supply of potential funders. So it’s just a better functioning market now than it was on both sides.

Zach George: You’re right. You’ve hit it on the head, there was just a disconnect between what VCs or early investors expected from a company and the perception of risk versus return, and the idea of owning a big slice of a pie versus earning a small part of what could be a much larger pie just didn’t exist. People assume that if I own 90% of a company that I would somehow magically still incentivize a founder to go and work and be motivated to work. And that thinking has evolved so dramatically over the last five to seven years. And to a large extent that’s happened because of the competition and the supply of capital. So this sort of leverage rests with founders a lot more than it did just as, as little as three or four years ago.

Darius Teter: Well, and I love the analogy of being willing to take a smaller size of a pie that you really can see growing and helping it grow, versus just taking a big chunk of it and expecting somehow the magic will happen.

Zach George: And I think this also shows how valuations have evolved over the last seven to eight years. And sometimes it’s as simple as econ 101, supply and demand. Ultimately, a tech startup has to be obsessed with two things, product market fit, and problem solution fit. If you can get these two things right, the market and economics will determine everything else. But you’ve got to get these two things right. Know your customers really well, know your target market and know what the unit economics are. Once you understand these three things, the market will figure out the rest. Now in Africa, over the last five years, there’s been a huge surge in economic interest at series A and series B and series C. Back in 2011, there were possibly at best about 25 to 30 so-called VC funds or large angel networks interested in funding tech startups in Africa. Today, that number is closer to 300.

So if you are raising, let’s say, $4-10 million in a series A round, and you’ve got good product market fit, you’ve got a problem solution, and you’ve got an addressable market that’s tested what you’ve done and your unit economics are good, you’ve got a lot of suitors who will line up to potentially back you. So as a result, valuations are now moving towards global averages. So at series A, it’s hard to give you numbers that cut across sectors, but for your average B2B enterprise SAAS company, that has a subscription revenue model in the financial services sort of logistics industry, which is where a lot of money flows into, you can look at valuations from between $10-50 million, pre-money at series A, which is fairly consistent with counterparts in the U.S. and Asia and in Europe. And that has changed a lot in the last few years, because there is a more intelligent pool of capital available.

It’s not just VCs. It’s family offices, it’s private equity firms that have taken punts in earlier stage private equity, early-stage private equity and late stage VC, big overlap in Africa. So because the supply of capital has gotten up with demand valuations at A, B, and C rounds are relatively fair, if I can use that word. However, at seed, there is still a huge arbitrage because there aren’t enough funds that understand the metrics that go along with early-stage funds that are pre-revenue, or just barely post-revenue. So that is a gap that me and my team across a continent are busy working on and trying to fill. But I just want to get the point across that economics of supply and demand controls, to a large extent, what valuations are.

Darius Teter: Since you’ve been bringing up some of these market questions, I wanted to do something a little fun here. I want to play a game of investing, true or false. So I’m going to read a statement and you’re going to tell me true or false or something else and then explain why. So the first thing is angel or venture investors want their money back in five to seven years, true or false?

Zach George: Angel and VC investors, at least early-stage VC, are looking to constantly create liquidity so they can deploy into new ventures because technology gets obsolete very quickly and not having dry powder for the next generation of startups is an important factor in their decision making process.

Darius Teter: Okay. Next question. Founders will seed at least 20% ownership in each investment round.

Zach George: True. Most rounds account for between 15-30% dilution at series A and beyond. Yes, I’d say 20% is a good, healthy average.

Darius Teter: So founders won’t hold a majority stake of their own business post series A, true or false?

Zach George: It’s a tough one. The benchmark that I say to founders is post series A, you, the founders, together with the ESOP should own at least 50% of your business, so 50 plus one point. Beyond series A, you shouldn’t expect to own more than 50%. So I’d say at series B, founders will not own the majority of their business, but at series A, they probably will still own just over 50%. But that’s founders plus employee stock options. Sorry that wasn’t a direct, simple true or false answer.

Darius Teter: No, this is great. This is not necessarily well known to everybody. In the early funding rounds, the lead investors will ask for a board seat, true or false?

Zach George: Yes, true. It doesn’t happen as much at the pre-seed and seed stage, but definitely at series A, the lead investor will almost always ask for a board seat. What I advise founders to do is to have clauses in their series C documentation that say that a board seat is only held until the next round and at the next round, it is at the discretion of the lead investor of the next round, because leading a seed round does not guarantee a board seed forever. I’ve seen a few vulture capital funds. I use that word on purpose, vulture capital funds ask for that. And those can be quite detrimental to… I’ve seen deals where having or requesting a board seat ad infinitum has killed the next round of funding. The fair thing as a founder is say, “I’ll gladly give you a board seat if you’re leading my current round, but it’s only until my next round, at which point it is subject to negotiations with the new investor at the new round.”

Darius Teter: And will these boards in these early stages of funding, will they have the power to approve budgets, to audit auditors, to approve the key hires?

Zach George: Yes. That is one thing that certainly most sophisticated investors would not invest in early-stage tech companies that don’t have a board that they’re accountable to. That is a big red flag if you don’t have a board that holds you to your projections, et cetera.

Darius Teter: What are some common fundraising mistakes in these early stages? You’ve talked to so many founders, you’ve evaluated so many companies that are raising early-stage capital. What are the most common mistakes that entrepreneurs make during that process of raising pre-seed or early-stage capital?

Zach George: I’m a very active angel investor in African tech. I’ve got a portfolio of more than 70, seven zero. And of course that cuts across my personal investments, my investments through the accelerator that I co-founded, and now through the fund. So I’ve dealt with founders for a long time, and I can tell you, there are a lot of pitfalls that founders make, but it’s gotten better. People have learned from experience and their mistakes. So one of the common mistakes is founders assume that just because they’ve started a particular company that they know the market better than anyone else. That is, I wouldn’t say categorically true, but in most cases, not the case. So a pitfall that a lot of founders have is they just do not do enough research on the market and their competitors as they should be. I’ve been in way too many discussions with founders where I’ve embarrassed the crap out of them because they have no idea who the second, third, fourth, fifth, or even tenth competitors are in their industry. And it goes above and beyond just their industry.

Darius Teter: So that’s fascinating to me. What I think what you’re saying is that they don’t actually have a value proposition yet. It’s not really a fundraising mistake. It’s actually that they don’t have a business yet. They don’t have a solid business idea yet.

Zach George: Yeah. You’re right. They may have a business idea with some customers, but they just don’t know enough about what folks in the industry are doing. The amount of market research that founders do is way too little at the early stage.

Darius Teter: So they don’t know the competitive landscape. They don’t know the total addressable market. They can’t answer this classic value proposition statement that this is the problem. This is my solution. This is why my solution is better. They don’t have that.

Zach George: At the pre-seed stage, that is correct. So this is why accelerators are super important because if you get into a YC or a Techstars or a Startup Bootcamp or a Plug and Play, if at demo day, you don’t have answers to all these questions, guess what? You’re not standing up and graduating. So that’s why these accelerators are so important is because you get schooled in life in three months in what would normally take you three years? So that’s why I’m a huge proponent for founders going through these programs because these programs are relentless. I ran one of these for six years. So that’s why I say founders should really spend a lot of time falling in love with your customers. So that is a big mistake that founders make. And it’s getting better. On the investment side, founders spend way too much time trying to raise money versus focusing on operations.

A good founder spends a lot more time on proving to his or her investors that they understand the market so well, they understand what the average margins are in the industry. They understand what the competitive dynamics are, what the threats are, the opportunities, all of that, they don’t really need to spend more in a few weeks or maybe a couple of months raising money. If you’re spending more than three months fundraising, something’s not right. If you’re doing a big series B or series C round by all means, but during a seed round, you really shouldn’t be spending more than two months fundraising. Something’s not right. The other thing that founders make a lot of mistakes is not doing enough diligence on their investors.

To me, a good founder conversation with an investor goes like this. I walk into an investor’s office. I already know the last 10 investments that fund has made, in what sectors and what sub industries. I know how much they invested. I know what these companies are doing right now. So I go and talk to the investor I’m talking to, and I say, “Listen, I notice that these four companies that you invested in are doing so well or whatever, this is how I can add value to you as a fund. And this is how I can create synergies between ourselves and your portfolio companies.” So knowing exactly what the mandate and strategy of your potential investor is, how their portfolio companies have performed, and creating value for them is something that very few founders do. They just see investors as ATMs, and that doesn’t work. It’s such an easy drop dead giveaway.

Darius Teter: They haven’t done their homework. They don’t know your investment thesis. They don’t even know if they fit and they don’t know their market. So for entrepreneurs who are listening right now, and you want to give them some advice as they’re preparing to raise money from various early-stage players, whether it’s friends and family, angels or VCs, you’ve given a bunch of nuggets already. Know your market. Know your value proposition. Know your target investor. And don’t spend too much time on those early rounds, spend time on actually building the business. So those are the four big ones I heard. When should they start their fundraising process? And how do they find those first potential target investors?

Zach George: I think at the pre-seed stage, you’ve got to start early. You’ve got to start talking to investors whilst you’re building your product. You can’t wait for these contracts with large corporates to materialize to start talking to investors. So a good analogy that I give, which is often used in the industry, is ask for advice and you may get some money, ask for money and you may get some advice. So a lot of founders that are mature enough in the market will come to see, “Listen, Zach, I know you’ve done a ton of angel investments. This is what I’m doing. Can you give me some advice on who I should be talking to? What should I be pivoting it into?” And honestly, I’ll spend a few weeks, when I can, just giving them advice and I will open doors for them.

And maybe a month later, I’ll write them a check, but I wrote them a check because they involved me in their business planning. And the right founders will come to you and say, “Thank you very much for helping me think differently. Here’s a small half a percent stake in my company in advisory shares. I’d like you to also be an angel in my company.” That’s how you get people. And trust me, there is a lot of brand and perception intangible aspect that founders, the right founders, can really leverage off of properly. So getting a prominent angel investor or a prominent mentor on your advisory board early on that also drops you a $5,000 or a $10,000 check is worth so much more than the money they give you. You should be talking to advisors whilst you’re building your product, not asking them for money. Do not ask people for money before you’ve built your MVP, but ask them for advice.

It’s what the best tech companies do with early adopters. If you’ve read Crossing the Chasm, one of the top books in marketing, they say, “Go and talk to your early adopters, go to Reddit, go to the top tech blogs and find those people that are obsessed about what your industry and your product and get them to give you advice for free.” They’ll do it for free because they just want to be heard. Get them out of the dark web and into your offices and then they will open doors for you. It’s crazy advice, but it works.

Darius Teter: You mentioned that across the African continent, as you get from series A to series B, you’re seeing a convergence in valuations that look more and more like a traditional European or U.S. market. But what about determining valuation in those very early stages? What should the founder worry about or be thinking about?

Zach George: Valuation at the early stages is so hard to measure. I’m not someone who looks at EBITDA multiples, revenue multiples because they all pretty much make no sense. And a three or five year financial model is your guess is as good as mine. So at the early stages, valuations to a large extent are a factor of A, the team, their prior track record, the entrepreneurial ability, the storytelling ability, the charisma. These are so intangible aspects, but I’m going to say it because this is what happens. If you’re a founder, if you’ve gone through Plug and Play or Startup Bootcamp or Techstars, there’s already a bump in your valuation. Now, can you put a finger on it? No, but it’s brand and perception. As a founder, what is your ability to your story about how the market needs what you’re doing versus what really exists?

How are you able to convince investors that you’re able to grow quickly while show them low churn rates and high growth rates, show them how your cost of acquiring customers, often called your CAC, your cost of acquiring customers, get lower and lower every month. How do you show that someone that’s onboarded as a customer doesn’t drop off next month, or doesn’t use your app, or doesn’t use your thing? So it’s these sorts of metrics that really stick when it comes to determining valuation. At the end of the day, I would say this to founders, don’t focus so much on valuation as you should on unit economics. If you can show that, like I mentioned earlier, this is a good metric to keep in mind. As a tech startup, if you can keep your cost of customer acquisition as low as possible, or getting incrementally lower every month and look at how your lifetime value, your LTV, increases and keep that ratio of your LTV to your CAC, to as high as possible, preferably keep it to at least three.

But you want to look at between three to 10 times, that’s a metric, that savvy investors want to look at. You also want to make sure that for every customer that you get, there’s something that in the early-stage VC world, we call the virality coefficient. So for every customer that you onboard, how many more customers can that person bring on? How do you correlate the two and what incentive are you providing to that customer to get new customers? So it’s a whole retention versus referral argument. And how do you balance that versus your churn? So a good metric you use is customer growth versus customer churn. And look at that ratio. You want that to be at least four to one. So when you sort of combine all these metrics, your LTV to your CAC, your growth to your churn, and even if your operating margins are negative, which are normal, by the way, to have negative EBITDA for three or four years, how do your margins progressively get less negative over a period of time?

So a triangulation of these factors is how good VCs and good angels evaluate deals. And somehow that marries into evaluation number. It’s not easy to show, especially when you’re starting from a very low base of customers. But I think what’s important is if you can demonstrate to your investors and your partners that the overall market is getting bigger, and you are taking a, no matter how small, if you’re taking a slightly incrementally bigger part of the market, and you’re smart about your distribution channels, people will buy into that. Facebook didn’t expect to have 4 billion users when they started. But they said, “This is the universe of people that will want to be on social media.”

Darius Teter: So let me ask you, Zach, this is a perfect segue. Tell me a little bit about Launch Africa. What’s your investment thesis? What are you looking at? Give us a little background on Launch Africa.

Zach George: So Launch Africa A, is a specialist seed fund that invests in pre series A ventures, seed and late seed ventures, all across Africa. So we do deals from Egypt all the way down to South Africa and every major economy in between. We look at industries in the financial services, retail, logistics, eCommerce, health tech, anything that’s tech or tech enabled that’s asset light. And we specifically have a strong preference for founders whose companies have been through major global accelerators or world class accelerators, the likes of Startup Bootcamp, YC, Techstars, Founders Factory, Plug and Play, et cetera, or have gone through programs such as Stanford Seed or Village Capital or Google Launchpad, et cetera, simply because 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.

We are a $15 million fund. We invest in 50 to 60 of the largest, most prominent tech founders in the continent. We are a five to seven year fund. So it’s a two year investment cycle, a three year harvest and a two year liquidation cycle. We lead seed rounds and we allow our LPs to co-invest with us for free, no fees and no carry, simply because we believe that founders should not, like I mentioned earlier, spend more than a couple of months fundraising, especially for seed. So if we like a company, they’ve gone through a good accelerator and have a six to 18 month window of doing the series A, we will take out the majority of your seed round. We are Pan-African, all our investments happen through SAFEs, so convertible notes. We don’t spend a lot of time arguing the valuation, SAFE notes and convertible notes cost almost zero in legal fees.

At least SAFEs are so standard. And then we defer valuation discussions until the next round. So it’s either a cap or a discount. So it’s super efficient. We have the option to take liquidity or to create liquidity for us at the next price round. So when we invest in companies and they do the series A and series A extension and B rounds, we create liquidity for our portfolio by having the option to exit either partially or fully through secondaries, which helps the entire ecosystem because the vast majority of good tech startup rounds in Africa are oversubscribed. We minimize founder dilution by allowing a certain amount of liquidity from our initial equity stakes.

So incoming investors get into rounds, founders avoid excessive dilution, and us as early investors get pretty decent returns on our investment without having to wait seven to 10 years for IPOs or M&A activities. We’ve raised $10 million so far, we are closing out the last $5 million pretty quick, the next two or three months, happy to chat to any folks here that want to know more about getting their toes wet in early-stage investing on the African continent.

Darius Teter: Are these smaller markets becoming interesting in the VC space? Or is it more that the technology that the company has is transferable and can be grown beyond that small market?

Zach George: It’s the latter, especially with COVID has been such a big realization for not just us, but a lot of VCs all over the world. A lot of these solutions are so digitally transfundable. You can create tech in Zambia as efficiently as you create tech on Park Avenue, in New York. It doesn’t really matter. You could argue that the cost of developing this tech is exponentially lower in markets like Botswana or Ghana or Nairobi. So as long as you’re able to digitize your product offering, people are consuming so much online. We’re getting degrees on Coursera and Udemy. We’re ordering food through Uber and Mr. Delivery. We’re reading books on Kindles. We’re staying and traveling through Airbnb and booking.com. Everything we look, touch, breathe, smell, and taste is online.

So the scalability of startups is so much more, or is so much less dependent on where you physically are located. And frontier markets like Botswana and Cote d’Ivoire, for example, in Africa, it’s just so much cheaper and so much more efficient. So as long as your solution is subscription and software driven and eCommerce based, these markets suddenly open up. The economics just make a lot more sense. They are challenging, I won’t lie, because you have to have coding academies. You need to have institutions that allow for greater adoption of digital technology, but that’s happening a lot quicker than we expected. So the point I made earlier about in 2010 people not paying any attention to Nigeria, and now all of a sudden, Nigeria is the largest market in Africa, seven or eight years later. So we are going to see similar things happening in Francophone Africa, that I’m personally very bullish on. I’m very bullish on Cote d’Ivoire, Senegal, Morocco, et cetera. And it’s about time.

Darius Teter: And that brings us to the end of today’s masterclass. I want to thank Zach George for sharing his knowledge and experience with us today. Although we were speaking in the context of Africa, I think the key takeaways are universal. Successful entrepreneurs have a deep understanding of their markets and their competitors. They know their value proposition. They know the investor landscape. And they know that fundraising, although painful, is an essential part of their role as a founder. And angel investors should be bringing a lot more than just capital to this relationship. So remember-

Zach George: You’ve got to start talking to investors whilst you’re building your product. Ask for advice and you may get some money. Ask for money and you may get some advice.

Darius Teter: This has been a masterclass from Grit and Growth with Stanford Graduate School of Business. And I’m your host, Darius Teter. If you want to find out more about how Stanford Graduate School of Business is partnering with entrepreneurs throughout Africa and South Asia through Stanford Seed, visit seed.stanford.edu/podcast. If you like this episode, don’t forget to hit follow and share it with your friends. Grit and Growth is a podcast by Stanford Seed from Stanford Graduate School of Business. Laurie Fuller researched and developed content for this episode with additional research by Jeff Prickett. David Rosenzweig is our production coordinator and our executive producer is Tiffany Steeves, with writing and production from Isobel Pollard and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll be back in two weeks with our next episode on managing a family business and succession planning. You’re not going to want to miss it.