Economy
How to Avoid Rookie Mistakes When Looking for Investment
By Philani Mzila
In the startup universe, one of the most valuable (if not the most valuable) finite resources you have at your disposal as a founder is equity. This is because startups generally don’t have the capital to scale in the market or products developed significantly enough to leverage to fund ongoing enterprise growth.
This makes your startup’s capitalisation table (cap table) an integral representation of how your venture is funded from an equity perspective (including convertible notes, warrants, and equity ownership grants). The cap table represents how much of a claim each party has on the value created by the business and what they paid for their ownership stake. Managing the cap table well is, therefore, a strategic imperative for any startup founder. As a startup scales, the evolution of its cap table has serious implications on how easily the venture can attract and raise new investments.
Cap tables and investor risk tolerance
At the beginning of a startup’s journey, the founding team owns 100% of the company. Depending on the resources they have available, founders tend to self-fund the venture as much as possible (called bootstrapping) up to and including the pre-seed stage in order to protect their equity value. At some point, however, the resources they have can only take them so far, and they need to raise external capital.
At the pre-seed stage, a startup hasn’t necessarily found product-market fit, and its revenue is often not the best measure of its potential because founders are honing their minimum viable product. At best, the venture has signals of product market fit, i.e. user growth, engagement and active usage and retention. The lack of product-market fit and bankable recurring revenue is typically a deterrent for investment by later-stage investors due to their inherently lower risk tolerance.
This is where angel investors and early-stage venture capital (VC) firms step in. Angel investors are high-net-worth individuals who are highly risk-tolerant and have the financial means to invest in startups and their potential future returns at the right price. That “right price” is usually an ownership stake in the business, ranging anywhere between 5 and 15%, with that percentage being a symbol of the risk angel investors accept in return for their capital and operational expertise. Early-stage VC firms, on their end, typically provide additional institutional capital, operational and governance support as well as credibility to ventures.
Angels and other types of early-stage investors, like Founders Factory Africa, play a vital role in the VC ecosystem. Without the high-risk tolerance these investors bring to the table, most early-stage startups would not break out of the pre-seed stage due to a lack of funding.
The role of a term sheet at the point of investment
Given the importance of a startup’s cap table in its future trajectory, it’s worth highlighting the vital role a VC term sheet performs at the point of investment. A VC term sheet is a document that outlines the terms and conditions of a VC investment. It includes details on the amount of money to be invested, the equity being granted to investors, the timing of investor liquidity, and investors’ rights in the venture.
Some of the key terms founders and investors must be familiar with when reviewing this document include:
Valuation – The value of the company which is being used as the basis for the investment.
Pre- and post-money valuation – The pre-money valuation is the value of the company prior to the investment, with post-money valuation is the value of the company after the investment.
Voting rights – A representation of how much say investors have in the future strategic direction of the business.
Liquidation preference – This is a clause that determines the order in which investors and founders are paid back in case of liquidation or bankruptcy. Be aware: liquidation preference typically relates to any liquidity event, not just a liquidation.
Anti-dilution-provisions – These clauses can help protect investors from dilution because of a future financing round of financing. They can have the effect of decreasing a founder’s shareholder value.
An alignment of interest with the future in mind
As both an investor and a venture builder that helps startups improve their product and find product-market fit, at Founders Factory Africa, we often advise founders to be extremely careful when exchanging equity for capital. When an investor decides to invest in a startup, they are looking for an alignment of interests where the founders can make a meaningful return for starting and scaling the venture, thereby providing a higher chance of a successful exit for the investor.
Some of the errors we typically see include founders raising their initial funding at too high a valuation. This creates unrealistic expectations for future funding rounds. At times, founders ask for too much capital without deep thought into what metrics and milestones they would like to achieve with the capital, leading them to give up too much equity very early on without considering the need for future funding rounds. These scenarios, in turn, stunt the venture’s ability to raise funding and scale due to the lack of alignment of financial interests with investors.
As a startup matures and goes through its different funding rounds, the equity allocated to founders is diluted as larger sums of investment are raised at Series A, B, or C. If the cap table is not thoughtfully constructed, the startup may find it increasingly difficult to raise capital as questions around incentives for later-stage investors increase.
The startup ecosystem is binary. Either a business grows and succeeds, or it fails. There is no in-between. The value that a startup places on its equity, and the partners they choose on its journey and collectively creates is the golden thread that runs through every startup’s success or failure. A thoughtful cap ensures that a startup can become successful. A badly designed cap table can do the exact opposite.
Philani Mzila is an Investment Manager at Founders Factory Africa
By Aduragbemi Omiyale
The gantry price of Premium Motor Spirit (PMS), commonly known as petrol, has been cut down by N50 to N1,125 per litre from N1,175 per litre by Dangote Petroleum Refinery.
The refinery confirmed this development via a statement on Thursday to newsmen.
Dangote Refinery described this downward review of the product’s price as a reflection of its ongoing commitment to ensuring price stability, improving affordability, and supporting Nigeria’s energy security objectives.
It further said it underscores its responsiveness to prevailing market conditions and its efforts to pass on cost efficiencies to downstream partners and consumers.
In the statement, the company said it remains focused on its broader mission of contributing to economic growth, enhancing fuel availability, and fostering a more competitive and sustainable petroleum sector in Nigeria.
By Adedapo Adesanya
Crude oil prices rose more than 2 per cent on Thursday after a cargo vessel was hit by an unknown projectile near Oman, putting an evacuation effort for ships from the key Strait of Hormuz on hold.
Brent futures gained $1.52 or 2.1 per cent to settle at $75.26 a barrel, while the US West Texas Intermediate (WTI) crude chalked up $1.58 or 2.3 per cent to trade at $71.92 per barrel.
The flow of oil and gas has been disrupted since the joint US-Israeli attacks on Iran at the end of February, but the agreement between the US and Iran to end the war has allowed the resumption of traffic through the crucial strait.
The United Nations International Maritime Organisation on Thursday paused its effort to shepherd ships and seafarers through the strait after the cargo ship reported a suspected attack. This reawakened concerns about the worldwide flow of oil.
Reuters reported that Iran fired on the cargo ship as it attempted to pass through the strait after Iranian authorities said the security of vessels passing outside designated Hormuz routes is not guaranteed.
Previously, crude shipments through the strait rose to their highest since the start of the war on Wednesday. Before the war, about 20 per cent of world oil supplies passed through the Strait, located between Iran and Oman.
Key fuel oil producers Iraq, Saudi Arabia, and Oman have moved to increase shipments from ports outside the Persian Gulf. Middle Eastern fuel oil exports are set to jump by 20 per cent from May to about 508,000 barrels per day in June.
US Secretary of State Marco Rubio told Gulf allies on Thursday that any deal with Iran would take their interests into account, as he wrapped up a Middle East trip aimed at winning over regional partners with deep reservations about the preliminary accord.
The US and the six-member Gulf Cooperation Council (GCC) said a lasting peace would mean addressing Iran’s ballistic missiles, drones and support for proxy groups. However, the US also threatened that if Iran threatens or blocks ships in the strait, there will be a “problem.”
The Wall Street Journal reported that Iran estimates charging for security, safety and environmental services in the strait, which would bring in $40 billion a year for the states involved.
In Venezuela, thousands were feared dead after two powerful earthquakes affected the capital, Caracas. The quakes could slow the increase in Venezuelan oil exports expected by US President Donald Trump’s administration after it captured Venezuela’s President Nicolas Maduro in January.
By Adedapo Adesanya
The Eggs Sellers and Distributors Association of Nigeria (ESDAN) has kicked against the proposed plan involving the production of egg powder to tackle the glut of eggs.
The National President of ESDAN, Mrs Olaide Graham, made the position clear in an interview with the News Agency of Nigeria (NAN) this week.
Egg glut occurs when egg production exceeds consumer demand, resulting in a surplus that often forces farmers to sell at reduced prices to avoid spoilage.
The Lagos State Government recently announced plans to establish an egg powder processing facility as part of efforts to address seasonal egg glut in the poultry sector.
Mrs Graham described the initiative as a welcome development but maintained that it would not address the fundamental challenges facing the industry.
“The establishment of an egg powder factory in Lagos to address the egg glut situation will have a positive impact if it is properly implemented and the product meets market standards.
“It could help reduce waste and, to some extent, stabilise prices temporarily.
“However, egg powder may not be widely accepted as a substitute for fresh eggs in this part of the country because of differences in taste, texture and consumer perception.
“Many consumers still regard fresh eggs as more nutritious,” she said.
According to her, the major issue is identifying and addressing the root causes of the egg glut rather than focusing solely on processing surplus eggs.
“We have a population of over 200 million people. Why should there be an egg glut?
“We need to examine what farmers, distributors and other stakeholders are not getting right and provide the necessary support.
“Egg powder is not the cure for egg glut in Nigeria. Stakeholders should come together to identify sustainable solutions,” she said.
Mrs Graham noted that egg powder could serve as a raw material for the production of other goods, but should not be viewed as a long-term remedy for the challenge.
She emphasised the need for improved distribution systems across the egg value chain.
“Effective distribution can go a long way in addressing the problem.
“We should remember that Lagos distributes not only eggs produced within the state but also eggs brought in from other parts of the country.
“In every challenge, there is always a solution, but egg powder is not the major solution to egg glut,” she said.
The ESDAN president also dismissed concerns that egg distributors could be negatively affected by the proposed factory.
“Distributors have nothing to fear because Nigerians are accustomed to consuming fresh eggs.
“The number of consumers who will continue to prefer fresh eggs will still be higher.
“Even if egg powder production affects access to fresh eggs, there will still be ways to address that challenge.“If the purpose of producing egg powder is to reduce glut, then that is why distributors have joined the conversation,” she said, according to the news agency.
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