What Do Investors Want? Navigating Investor-Startup Relations in Nigeria's Tech Ecosystem

On the morning of July 1, 2024, whispers of another fallen star rippled through Nigeria's tech ecosystem. This time, it was Mara, a once-promising crypto startup backed by industry giants like Coinbase, that had crashed to the ground. The reports painted a stark picture: a company that had recklessly burned through investors' funds, leaving behind little more than ashes and unfulfilled promises.

This was not an isolated incident, however, as Mara was the latest in a series of startups that have crashed and burned ugly. Through all the reports, a common theme has been found: a lack of synergy between investors and founders, leading to misaligned expectations, poor communication, and ultimately, the demise of promising ventures.

Nigeria has experienced a remarkable tech ‘surge’ in recent years, positioning itself as a vibrant hub for innovation and entrepreneurship in Africa. The country's ecosystem has witnessed an influx of capital from both local and international venture capitalists, fueling rapid growth and fostering a new generation of tech-driven businesses. BenjaminDada reports that in 2023, Nigerian startups raised $477.9 million across 35 deals, securing the second-highest funding in Africa behind Egypt, accounting for approximately 24% of the total funding secured by African startups.

However, beneath this thriving ecosystem lies a complex web of challenges straining investor-startup relations. Reports of fund mismanagement, poor communication, and questionable decisions have led to the downfall of promising startups, leaving investors wary and founders struggling to succeed.

These incidents underscore the need for a deeper understanding of what investors really want from the startups they back and how founders can build stronger, more transparent relationships with their financial partners. To shed light on this crucial aspect of the Nigerian tech ecosystem, we spoke with seasoned investors and venture capitalists, to find out their perspectives on investment criteria, expectations, risk management strategies, and the importance of communication in fostering startup growth.

The Investment Checklist: What Catches an Investor's Eye?

We cannot honestly say that there is a specific quality that will convince every single investor to back founders. This is because investors are human and therefore have their personal preferences, ticks, and interests. However, two recurring factors emerge when investors evaluate founders: The Team and Product-Market Fit.

The Founder(s) and Team

When evaluating startups for investment, the founding team often takes centre stage in investors' considerations. Mide Alonge, Investment & Portfolio Manager at Endeavour, and Johnson Adebisi, an investment analyst, both emphasise the critical importance of the team's composition and background.

Investors typically seek founders with deep domain expertise. As Adebisi notes, they prefer "founders who have experienced the problems themselves or who have worked in the sector for some time." This firsthand experience is viewed as invaluable, providing founders with unique insights into the market and the problems they're addressing.

Interestingly, past failures aren't necessarily a deterrent. Alonge points out that in the VC space, "failure is a potential success," as it demonstrates a willingness to take risks and learn from mistakes. This perspective values the lessons gleaned from previous ventures, seeing them as assets for future success.

When evaluating a founding team rather than a single founder, Alonge stresses the significance of diverse skill sets: "Does the team include members with technical, domain, business, and financial expertise? The founding team must be well-rounded enough to complement each other's strengths and weaknesses." This comprehensive range of skills is essential for successfully addressing the complex challenges inherent in building a startup.

Adebisi adds to this, noting that many investors prefer "a founding team that can build the core product to at least the MVP stage by themselves without relying on external technical expertise." This capability demonstrates not only technical prowess but also the team's ability to work cohesively and efficiently.

However, beyond expertise and skills, there's an intangible quality that truly exceptional founders and teams possess. Yewande Odumosu, partner at HoaQ, an early-stage venture fund, emphasises the importance of problem-solving ability and resilience. She looks for founders who can navigate challenges with creativity and independence, regardless of external circumstances. As Odumosu emphatically states, "We back great founders. Not good, not okay, but great. And so in our minds, the best founders will find ways to solve their problems regardless of whoever is around them."

Ultimately, investors seek founding teams with a deep and empirical understanding of the market, diverse skills, and resilience. They value teams that can adapt to challenges, seize opportunities, and persistently pursue their vision. This combination of expertise and determination across the team is seen as crucial for startup success in a competitive landscape.

Product-Market Fit

But even a creative founder and a great team are only as good as the problem they're solving, and the solution they come up with. The product must be viable to convince investors to give founders a chance. This means the solution should address a real, significant market need and have the potential for scalability and profitability.

Mide Alonge emphasises the importance of product-market fit: "I always look at the product market fit of the business. Has the business been able to effectively develop a solution that tackles the problem? What does the traction look like for the business? How many customers are willing to pay for the solution that they've derived? Because no matter how great the business is, if customers are not willing to pay for it, there is no business there, no matter how fantastic it is."

This underscores that investors look for products that offer a unique value proposition or a significant improvement over existing solutions. They want to see evidence of a clear growth path and customer validation. The most adaptable startup can falter if it's targeting a shrinking market, so market opportunity plays a pivotal role in investment decisions. It's not enough to have a clever idea; the market must be ready and willing to embrace it. However, this doesn't mean all hope is lost if an idea isn’t a hit with the market. 

Alonge points out that pivots can be viewed positively: "People don't like to pivot, but it could potentially be good because pivot means that the company is agile enough to adapt to the market's needs." This suggests that investors value teams that can respond to market feedback and adjust their product accordingly.

In essence, product-market fit forms a crucial bridge between a startup's vision and its real-world impact. It's about solving a significant problem in a large market, with a scalable solution that customers are willing to pay for. This combination of factors is what investors look for when assessing a startup's potential for success and returns.

Protecting Their Investments: Due Diligence and Risk Mitigation

Investing in startups, particularly in emerging markets like Nigeria, comes with inherent risks. Investors protect themselves by employing due diligence processes and risk mitigation strategies. Due diligence serves as a critical safeguard, and is the investors' way of saying, "We believe in your vision, but we need to verify the details." This process is far more than a mere formality; it's a deep dive into the very foundations of a startup.

Financial due diligence is particularly crucial. Investors scrutinise the startup's financial statements, cash flow projections, and funding history. Legal due diligence involves reviewing all contracts, intellectual property rights, and regulatory compliance. This is especially important in sectors like fintech, where regulatory requirements can be complex and ever-changing.

For Odumosu and the team at HoaQ, the investment process involves rigorous screening of founders, who must provide detailed information about themselves and their companies. Simultaneously, HoaQ conducts thorough due diligence, such as background checks, product testing, and industry inquiries. This comprehensive approach ensures a thorough evaluation of potential investments.

In the end, due diligence serves both the investor and the startup. For investors, it mitigates risk and provides a clear picture of what they're investing in. For startups, it's an opportunity to showcase their strengths, address any weaknesses, and begin building a strong, transparent relationship with their potential partners.

Building Trust: The Cornerstone of Successful Investor-Startup Relations

Like in any other sort of relationship, trust is fundamental to the investor-founder dynamic. This trust doesn't materialise spontaneously; rather, it must be deliberately cultivated through transparency and consistent communication.

"Communication is always important. I always advise founders that, regardless of whether things are going well or poorly, they have a fiduciary responsibility to keep their investors and shareholders informed of all developments," asserts Dayo Koleowo, partner at Microtraction.

This sentiment is echoed in the cautionary tale of 54gene; an ambitious startup founded in 2019 to bridge the gap in African genomic research, 54gene raised an impressive $45 million from investors, however, by 2022, the company's story took a dramatic turn. A series of abrupt leadership changes, including the departure of founder and CEO Dr Abasi Ene-Obong, signalled deep-rooted issues within the organisation.

As reported by WeeTracker, the rapid succession of three CEOs within a year, coupled with allegations of internal conflicts, pointed to a significant breakdown in communication between the company, its board, and investors. This lack of clear, consistent messaging led to confusion and eroded trust, ultimately contributing to the company's downfall.

54gene's story underscores this point, demonstrating how a lack of transparency about challenges can quickly escalate into a crisis of confidence. Johnson also believes that communication helps the founders and investors realistically measure success. By opening up about problems faced and progress made, both parties can have a measured view of the startup’s potential and set feasible targets and milestones. 

The life of a founder is incredibly fast-paced, and it's easy to become consumed by the demands of building a product and company. Deliberately establishing and maintaining open lines of communication with investors is crucial. Regular updates serve as the lifeline of these relationships, ensuring all parties remain aligned and informed. This practice is a strategic approach to building trust and fostering a supportive ecosystem.

Financial Transparency

The emphasis on consistent communication naturally extends to financial transparency. Regular updates should include clear, detailed financial information that gives investors a comprehensive view of the company's fiscal health. This involves providing context and explanations for financial decisions, offering insights into how startups are navigating market conditions and leveraging resources to drive growth.

The collapse of Dash, a Ghanaian fintech startup with a mission of connecting mobile money wallets and bank accounts across Africa to facilitate cross-border payments, serves as a stark illustration of what can go wrong when financial transparency is compromised. 

Founded in 2019, Dash initially seemed poised for success, raising $86.1 million over five years, including a $32.8 million seed round that valued the company at over $200 million. However, the promising facade crumbled when internal audits revealed significant discrepancies in the company's financial reporting.

Allegations surfaced that the founder, Prince Boakye Boampong, had grossly exaggerated user numbers and diverted at least $8 million for personal use. The company's unsustainable burn rate of $500,000 per month, previously obscured by misreporting, came to light. These revelations led to a rapid loss of investor confidence and ultimately, Dash's closure in October 2023.

"Always have a data room set up," advises Koleowo. "Have financial folders, business development or partnership folders, keep records of things that you've done in the past." 

Dash’s case highlights the critical importance of accurate financial reporting and the severe repercussions of misrepresenting financial information to investors. It serves as a stark reminder for startups to maintain stringent financial controls and provide regular, honest updates on their financial position, even when facing challenges. In the high-stakes world of startup funding, financial transparency isn't just about compliance—it's about building and maintaining the trust that forms the foundation of successful investor-startup relationships.

Investor Responsibilities: Beyond Capital Injection

Beyond providing money, investors bring valuable industry expertise, and strategic insights, and often play a crucial mentorship role. Drawing from their experience in scaling businesses and observing numerous startups navigate challenges, they can guide founders through complex decisions, unfamiliar territories, and the intricacies of business development. This mentorship and strategic support can significantly impact a startup's ability to navigate the competitive landscape and make informed decisions critical to its growth.

Mide Alonge emphasises the multifaceted nature of this relationship: "There needs to be a balance in the engagement between investors and founders. Investors play a crucial role in mentoring the founding team, but their value extends beyond that. They can leverage their networks to open doors that could significantly benefit the team."

This network effect is indeed a critical aspect of investor value. Investors typically possess extensive connections across diverse industries, potentially leading to partnerships, customer introductions, or even subsequent funding rounds. For Nigerian startups looking to scale regionally or internationally, these connections can be transformative.

However, striking a balance in this relationship is crucial. While investors can provide significant support, they should avoid overstepping or micromanaging. Alonge believes founders are the experts in their business and understand day-to-day operations best. Consequently, investors should resist the urge to provide input on every aspect and entrust the general management of the startup to the founders.

Aligning Expectations for Mutual Success

The Nigerian tech ecosystem has made tremendous strides in recent years, but recent trends highlight the need for better understanding and alignment between investors and founders. Investors want more than just a great idea; they seek exceptional teams, product-market fit, and a clear growth path. Founders want more than just capital; they seek strategic support, guidance, and access to valuable networks. 

The key to fostering these successful relationships lies in open, consistent communication, financial transparency, and a shared commitment to long-term growth. As Nigeria's tech industry continues to evolve, both investors and founders must adapt their approaches, learning from past failures and successes to build more robust, sustainable ventures.

This is a guest contribution by Oluchukwu Nwabuikwu; PR Officer at Reneé PR, a Nigerian tech PR agency.