Here is the Savannah Fund investment thesis.
The Managing Partner of Savannah Fund based in Kenya posted his investment thesis in 2 parts, in 2012 and 2013. It is without a doubt the longest investment thesis I have read to date and more in blog format than a precis you would expect LPs to read. One noticeable part is the contextualization of his investment focus, given the dynamics in Africa
Not being the most well known fund, here is their summary:
Savannah Fund is a seed capital fund specializing in US$25,000-US$500,000 investments in early stage high growth technology (web and mobile) startups in sub-Saharan Africa. Initially focused on East Africa, the fund aims to bridge the early stage/angel and venture capital investment gap that currently exists in Africa. The Fund expects to achieve this objective by combining capital with mentor networks both in the region and from Silicon Valley via an accelerator program and a follow-on independent seed fund.
In a recent Forbes article, I outlined the need for investors in Africa of all types to get better at messaging what areas they invest in. Its not enough to just say “we are an early stage tech investor” anymore. The technology scene is getting larger and more and more startups, regions and verticals are interested or building tech ventures. More importantly different investors have different approaches. For instance, it is easy to try lump different types of entrepreneurship (the primary customer of an investor) under one banner. I segmented out the 3 areas the way I see it:
- 1) Survival Entrepreneurship: In Africa’s high unemployment market characterized by low skilled informal/semi formal businesses- impact investors, many with experience in microfinance or financial inclusion, target these entrepreneurs in their mission to help communities climb out of poverty and earn a sustainable income. If not the entrepreneurs directly, they target the base of the pyramid as customers for the startups for basic services like water, solar lighting etc…
- 2) Lifestyle Business: Business of up to 5-25 employees with founders wanting to control their destiny, often the business can be a family one. This is actually a dominant form of entrepreneurship in Africa and around the world, there are very few Zuckerbergs, but there are many entrepreneurs running a small business. Everything from restaurants to increasingly mobile apps with a niche but attractive enough audience generating income from App stores. Closer to tech and Africa, it might be a freelancer at the iHub doing consulting work. These businesses would love to grow bigger, but typically not outside their own borders or scope of founder’s skills and talent.
- 3) High Growth Venture: Typically characterized by a founder with a bold vision, highly skilled technical ability, willing to take a big risk and willing to bring on partners (inc. investors, strong cofounders) to make their mission a reality. Should they succeed they generate high returns for their investors and generate 1,000s of jobs. Paul Graham’s Startup=Growth Essay is an extreme take on this type of entrepreneur and what they should focus on at all costs. Professor Isenberg from Harvard, hits the nail on the head as well with realizing that there is a danger offocusing too much on startup creation vs focusing on their growth.
All 3 are vitally important to African economies and some entrepreneurs may even go through all 3 in 1 venture (although very unlikely- more likely Lifestyle to High Growth) or try all three as separate ventures. At Savannah Fund we are interested in the 3rd High Growth (and consequentially, high risk) type of entrepreneurship which matches up well with technology (web and mobile) sector given the ability to scale out fast and hence achieve rapid growth. It also means we use equity and very little debt initially to get the business going. We bet on the founder and aim to be their business partner, connecting them to both our local and Silicon Valley mentor and investment community who have experience and focus 100% on tech. That’s why for instance, we use a coding test as our filter in the absence of products in the accelerator to ensure that one of the founders is technically outstanding to carry the startup through the long journey and likely many pivots required in iterating the product. Strong technical ability also is a good prerequisite of being able to understand metrics and be coachable in other areas of business- you hope the other founder has these qualities inc. high risk appetite and ability to sell and hire future employees. The founders typically are very “mission driven”, this is very different to impact investors who focus on specific do-gooder goals. One litmus test of this type of entrepreneur is whether they have $1 to their name or $1M, they remained razor focused on achieving their growth goals.
A good book that does a good job further outlining the importance of different approaches to founding a company is Founder’s Dilemma that I reference many times to entrepreneurs and bring up in various slide decks. It’s critically important we apply this type of thinking to African startups since in the early days, entrepreneurs have little local reference of what it is like to grow a VC backed venture- it is also further complicated with the rise of “social enterprises” (more on this later).
Traditionally a VC firm may outline an investment thesis (Example: take a look at Union Square Ventures) – they have to do this formally when they raise money from their limited partners. We do the same. At the same time, technology changes so fast; what was hot last year may no longer be hot today. Entrepreneurs over time should be able to deduce from the fund’s portfolio what type of companies fit and more importantly if the investment firm fits your startup. We have been around 6 months and made 1 formal Seed/Series A investment and as of today we have launched our accelerator with 4 startups selecting down from 170 applicants. But we are still early days, hence the need for this post to better clarify our goals and help entrepreneurs reaching out to us.
In the rest of this and next post, I will start to outline our current thesis more broadly as we see what is out there and iterate on our own thinking:
- Savannah Fund is not a Charity or “Social Enterprise Fund”- 100% for profit: We have tried to make this very clear and it might not be clear enough- we are on the side of for profit private equity- so pitching us a charity or social Enterprise is not a good fit (in fact, we believe many are trying to transition into lifestyle entrepreneurship category with few paths to scale a tech venture)- that being said, I have noticed some founders label their startups “social enterprise” as a marketing strategy to appeal to impact investors, we don’t fall for that since we are not an impact fund. We believe in doing good by doing well, but we want to grow wealth in Africa which in turn translates into social benefits. M-PESA is a commercial service owned by a corporation but is squarely in sight for impact investors interested in financial inclusion for the bottom of the pyramid, TOM’s shoes makes a lot of money selling shoes and donating a pair on the sales level (not legal structure level). The impact investment world is swarming around Africa right now and that’s a good thing, but we want to remain clear and focused on building Africa’s private equity scene, particularly early stage VC/angel networks. What this actually means is that we also are very cautious when we look at areas that have traditionally been donor funded, for instance mHealth or rural energy- in these sectors you might find many players in the ecosystem dependent on donor funding or NGOs to deliver their work, whilst there is a huge impact tech can play here, there is typically a lot of aid money in these areas that makes it hard to invest at risk of being “crowded out” or creating the wrong incentives around the product or service delivery ecosystem. We will still look at strong tech plays in these sectors, but we’ll likely do 5-10 times the homework/due diligence vs say a gaming company. If your business is targeting the Bottom of the Pyramid African “BOP”, for it to be sustainable, substantial scale is required in Africa, meanwhile the emerging middle class is growing all the time and they are more connected online than ever, so distribution to reach them and hence growh is becoming easier. As I mentioned before in reference to Founder’s Dilemma, a founder may create a social enterprise in Africa and not realize the challenges of raising seed funding in that environment with the right tech focused investors down the line when it comes to scaling out or their SMS/feature phone solution which may rely on partnering with multiple mobile operators to reach the BOP segment customer base. Or they may rely so much on grant funding to get going, they completely forget to align incentives or learn what VC investors seek when looking for growth capital because of their legal structure, internal behaviors and incentives of the founder/employees.
- Incorporation + Set up Employee Incentives: Many startups have not done the ground work of getting legally registered as a corporation or limited partnership. Savannah Fund invests in entities not your personal bank account. Again, many startups might be at the prototype or idea stage and probably are eyeing up setting up the company once they secure funding, that is understandable given the cost and time it takes in many African countries. We have lawyers in our network across the continent but being on top of this helps quite a lot. Related to this is spinning out a non profit to a for profit- don’t assume we’ll just be happy funding your spin out without proper thought about setting up the right legal structure to take external capital and finding the right team members for the startups. Related to this is Cap table and vesting/reverse vesting for startup founders. Many repeat the mistakes where cofounders have no skin in the game in the startup or if they decide to bail they walk away with a big chunk of equity. Startups everywhere, including Africa, need to be thoughtful about this- there’s plenty of tips on venture hacks– but at the same time, do what makes sense for your market. Equity as compensation may not be as valuable to employees in Africa as it is in Silicon Valley. That being said, the biggest asset an early stage startup has are its people/founders- be thoughtful in motivating and retaining them (hint: being mission driven helps a lot). In our accelerator, the first session we had for the startups was what I coined “Term Sheet Day”, where we brought in our legal counsel to give a primer on shareholder agreements, boards, secretaries and investment terms. It becomes much harder to do this if we backed a team that has been a non profit for years and used to raising donation money and churns a lot of volunteer staff.
- Not every Africa content site is ripe for investment- especially monetized via ad networks: By far the most number of startups we have had pitch us are those who have created a website with maybe at most 1,000 visitors a month. Even ones that are at 100,000 visitors a month (particularly in 1 country). The issue with content sites is maintaining engagement, growth and most importantly relying on monetization via adnetwork with low Africa CPMs or a fragmented audience. If you saw the news recently, InMobi, one of the most active mobile ad networks in Africa pulled out. It is incredibly hard to monetize Africa sites on traditional display ads. I recently signed up to iRokoTV over the weekend and I saw 3 video ads of 2 mins each before I was exposed to the free film. Meanwhile, I saw the classic “get Gmail on the go via SMS” about 5 times on different pages. There simply doesn’t seem to be enough advertising spent online in Africa to match those billions of impressions your site might generate. So unless you have a creative way to monetize, there is little interest from us- especially if you don’t even really capture user info and know what demographic they really are. Show us why the users on a gossip site will be worth more than a news site with diaspora readers- I gave some examples in my Valuation for the Africa Startup deck. This may change over time and it becomes even harder to surface ads as Africa is a mobile continent- but at the heart of it, advertisers need to start spending real money to reach African audiences before viable VC backable business built on an advertising business model- and even then, investor appetite, including ourselves looking at global trends (Facebook and mobile anyone?) don’t favor ad based consumer web business currently.
- How you get introduced, referred and get to know Savannah Fund matters a lot: Many startups just contact me traditionally and they will send me e-mail updates with no context. An investment in a company is like a marriage, its not a one time deal and then we walk away, some companies we could be working with for 5-10 years. So building a relationship matters, it allows us both to decide if it might be a good idea to work together. Our first deal, biNu, was 8 months in the making (before Savannah Fund was even up and running). It also takes quite a long time to get Africa tech deals done due to paperwork, synchronizing investors and time it takes to due diligence a startup (more on how to shorten this in the next post). We take a riskier bet and cast our net wide on the Accelerator and even then it took us 2 months to screen and select the startups. So get to know Erik, myself and Paul over time and this improves chances dramatically. It is no secret that I am found around the iHub getting coffee in the mornings from 8am-10am, I am typically also at my most engaged, I am a morning person, so am hungry to hear any interesting news then vs at 3pm when I just battled Nairobi traffic for various meetings and errands and have a ton of e-mail to attend to. Generally, those in East Africa around the iHub community have a better visibility to me. If you are startup in Nigeria or South Africa , its just that much harder to build a relationship, but still possible as we showed in our first deal with the company all the way in Australia. We do travel and we are building strong links with other investors across the continent who share in our philosophy and approach to serving tech startups.
- Tech VC is a global game- we don’t just fund local teams: We turned some heads for funding a Zimbabwean living in Australia with a company with traction in Africa. We did not set up Savannah Fund to be restricted by borders, but we did set up to be in Kenya for a variety of reasons including Nairobi as a vibrant and connected community. Our first deal had co-investors from Australia, Africa to California (3 continents). What is most important is that you are building a startup with an African customer base or are selling something uniquely African to the world. And we can help in building these ventures given both of our expertise and networks. Many ventures abroad might need an investor in Africa to help and inform them here- many African ventures might need connections abroad to help them scale and source further investment abroad- we can help with both. As an example, I like to quote one of our investors Tim Draper of DFJ who has invested in Skype in Estonia and Baidu in China – they have global network of funds in different countries to take a more local approach. Another investor in our fund, 500 Startups, is literally blowing up startups globally with 400 investments so far in 20 countries. We are global to the core- we expect a lot of our startups to be like-minded.
Investment Thesis Part 2: What We Do or Don’t Fund. Ready for the Startup Journey
Business plans and market analysis? No. Get on the Journey to Product-Market Fit
Plans are worth exactly the paper they are written on in the early stage startup world. Plans don’t get funded to succeed, traction and results do– at least for smart entrepreneurs that we want to work with. We have seen the best plans go to waste because startups can’t execute, inspire and grow a team. We have seen startups that think winning awards or having a conference speaking slot is traction vs talking to and working with customers. We have seen startups that spend most of their time talking to mobile operators and corporates vs solidifying their own product and getting customer feedback quickly. The business plan is rigid and it only shows you might be good at writing, heck maybe its someone else’s business plan that you borrowed, cloned or worse that a consultant helped you write that you don’t even believe in. We believe in the principles of the lean startup (Eric Ries) and/or customer development (Steve Blank). Launch, don’t perfect, move fast, get early validation on key assumptions quickly. If you rely too much on a plan, you are not dynamic enough to do a pivot when the world changes around you, or more likely your customers. The best market research is your own customer insight learnt by working on your business not something you researched from McKinsey reports or worse, CIA factbook on Africa. The best market research is when you have a customer who has paid you and is actively using your product, you should slap any consultant in the face when you can show them a repeatable cycle that brings in cash whilst keeping customers happy. In Africa, formal market research can be expensive and stale, so I embed a slide below around different methods of doing this- but its not substitute for 1st hand research as part of the startups. Mo Ibrahim was pretty crazy to launch a mobile operator business in Africa– there was no “market” for cell phones for cellphones in Africa right? Now Smartphones?
Startups, are a journey, with many twists and turns, to product market fit, where things take off- this is often where an accelerator can help- in the Savannah accelerator, we act as a sounding board by bringing on the resources, from iHub UX lab to the mentors to act as a compass guide- the best startups use these resources wisely whilst focusing on the business, not getting distracting- it is NOT AN MBA. If you are not learning something new about your customers and how to improve your product every week you are failing, if you spend the entire time in accelerator time launching and not getting any early feedback and traction you are failing- you are bound to run out of money by demo day and turn into a “zombie” startup.
It takes a team- a solid team- And it starts with a strong technical foundation
By far the biggest filter we have as Savannah Fund is the technical ability within a team- many startups outsource their technology to India or Eastern Europe, even worse some startups cobble something together in wordpress for the purposes of applying to the accelerator. We can see right though this, sometimes we will entertain the startup that has outsourced the tech for practical reasons and has been working on a full time CTO, but that’s the exception rather than the rule. It is possible to show a level of traction without a CTO, but before long that will start to catch up with you when you start to have bugs or need to rapidly pivot the business. A smart CEO will understand that outsourcing means managing “technical debt”. And in Africa, many startups simply won’t scale due to the sheer weight of the technical debt by not having a solid technical foundation. Of course, I am not blind to the fact that it’s hard to find qualified talent, having a great mission and good leadership can inspire great technical talent to join your team. So when a startup is doing something uninspiring like, cloning an existing business and no clear differentiation, they should not be surprised when they can’t attract a good technical leaders and talent. Having a good technical team means that you are well equipped for the ride and often at the end there is a product and maybe even IP to salvage, should things go wrong, most of the time you play the game again by pivoting vs thinking you are rebuilding the castle from the drawing board. Since every business in the future is likely to have a software component in it, this is an important issue for African startups to think about- if you don’t, someone from China, India or Silicon Valley will do so and come into the market. We believe that innovation relies on technical ability, in house ability, to cope with the startup journey.
Business Acumen = Traction and Adaptation
On the business side, its extremely simple- are startups solving a problem or addressing an unmet customer need? Are they doing this better than anyone else and the competition? Typically a unique customer insight or usage with key metrics acts as evidence beyond the idea and a pretty site or app. E.g. We signed up 100 customers, 50 come back every week and 10 are paying is better than 1,000 registered users who signed up the product after the one of many African contests or press articles. Sometimes its obvious when we sign up to use the product and it works like magic, but of course its impossible to test the product when its not even available in the market because some startups have “launch jitters”, which often
- 1) stem from a shyness to launch by perfecting and going against lean startup principles or
- 2) They don’t have the technical chops to release a Minimum Viable Product (MVP)and start measuring results early and validate customer need and assumptions.
Often the case is that entrepreneurs have outsourced core technology so they focus on perfecting for a big launch since they paid so much to developers that they want to get it right vs having a CTO on board that can change course on daily basis as quickly as the “plan changes”. The reality is that many businesses don’t look exactly as they do in the business plan from day one, but its the ability to adapt from new learning that’s the environment that a good startup thrives.
Looking back at our 10 investments to date, this thesis has been remarkably consistent to those that are succeeding vs those who are struggling, particularly when it comes to generating revenue, an all important metric for raising follow on financing to keep staying in the game and to scale out. In future we will post more as to what lessons they have learnt that are unique to the African environment by sharing it on this blog. Even as Savannah Fund, we learn as we go along with every new investment what works and we also urge investors to take more risks in investing startup traits that succeed for the journey vs perfect plans that are never really perfect.
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