In early 2020, Techcrunch published a story wherein it made known the announcement by Stribe, that it had raised $600 million to invest in product development, global expansion and strategic initiatives. On the expansion front, Stripe wanted to move into more geographies. As part of that geographic expansion, it announced the acquisition of Paystack, a Lagos based startup in the same year.
As I mentioned in my title, investors do not invest in ideas. Investors commit their money to make a profit. As simple as that. To some extent, they may be looking to shelter tax liability. There are also impact investors, who look at investments that add value to the society as a whole, thus with a strong social component. For the vast majority of investors, profit remains the overriding motive. Therefore the market potential and traction will definitely play a greater role in investment decisions, not the idea. Of course the idea plays a key role, but so too is the team that implements that idea. Therefore, in a case where there is no traction, investors will want to look at the market potential and the ability of the team to execute and make the most of that market opportunity.
Going back to Paystack, it was already considered the ‘Stripe of Africa’, with a customer base of 60.000 paying merchants, when Stripe acquired it. Until that point, Stripe had made smaller acquisitions to expand its technology footprint, as Techcrunch reported.
The acquisition of Paystack was a remarkable footprint for Stripe as a company in emerging markets. While this article is not meant to be all about Stripe and Paystack, this is a good example of why investors make investments in one or the other company.
When I started my first venture, I was so into the idea that if you have this great idea and build a product, you can go out and pitch your idea to investors and immediately raise money. That was an illusion, as neither could I provide real evidence of the market potential based on solid homework, nor could I provide any traction. The recipe for failure was already set from the start. I have since learned that investors are not interested in your idea.
Unfortunately, I still see a lot of young Africans still believing that with that great idea, that sounds like it will change the world, they can raise capital. I recently had the opportunity to consult with a young man from Kenya, who had contacted me looking for ways to raise money to develop his idea. I made it clear to him what I had learned from my frist failure in entrepreneurship and what he needs to get right, if he wants to achieve any of the things investors would be interested in: either doing his homework to present a market potential and how he build a team and make use of the opportunity, or look at the challenges the market posses and what he can offer as a solution, by understanding what challenges customers were facing. Sadly, I had to make the conclusion that he did not believe that this was a good starting point. And he is not alone.
If you are going to start a business in Africa, and you do not have the personal finances to bootstrap your business, and most importantly the knowledge and skills to build a business, do not go after investors with just your idea. No one will listen to you and you will just be waiting for your time and energy. Work on presenting a strong value proposition.
Ask yourself some of the the following questions:
- Have I understood the problems people/potential customers face?
- Do these problems offer an opportunity to make a business case?
- How are potential customers already dealing with these challenges
- How large is the opportunity
- Do I have the knowledge and skills to provide a solution or can I bring together a team to face the challenge
These questions will hopefully provide you with a starting point. By the time you find answers to them, you will have figured out if you will be able to offer value to your customers and investors too. And this is key, because that’s what will guarantee you paying customers and hopefully interested investors.
And if you are totally new to entrepreneurship, you may want to start by assessing your entrepreneurship readiness, so you know you are fit to tackle these challenges and build a strong and viable business. At LeanStart Africa, we are working on a pathway to developing your entrepreneurship knowledge and skills, so you can be confident to start and grow a business from anywhere in Africa.
In the case of Paystack, they got it right. They put together a great team that listened to their customers and understood their challenges. This is most probably what led to their first 6000 signups. And by the time they were acquired, they had developed a strong customer base. Customers who saw value in what they were proposing and were willing to pay for their services.
Stop running after investors with an idea. Show them your value proposition!