‘We Don’t Want To Invest In Part-time Founders’ – Microtraction’s Dayo Koleowo Talks About Funding Startups
‘We don’t want to invest in part-time founders’ – Microtraction’s Dayo Koleowo talks about funding startups
Startups require funding in order to expand and scale. From business formation to hiring staff and expanding into new markets, funding pervades every aspect of a startup's operations. As a result, Venture Capitalists (VCs) have largely replaced banks as the preferred entity for many startups seeking external financing. However, pitching a venture capitalist does not guarantee that a startup will receive funding.
Indeed, only a small percentage of startup founders who pitch to venture capitalists succeed in securing investment. According to Startuplist Africa, Nigeria has over 250 startups. In 2020, up to 82 Nigerian startups raised $170 million, a decrease from the $377 million raised by 147 startups in 2019.
In an interview with Technext, Dayo Koleowo, Partner at Microtraction, discusses the key criteria that venture capitalists look for in startups before investing. “Investors operate at various stages, but certain fundamental criteria remain consistent,” he explained.
From a Microtraction perspective, Dayo begins by stating that the quality of the team leading a startup is critical to investors. He continues by stating that the team must possess cross-functional capabilities and a thorough understanding of the problem at hand. “Your understanding of the problem is more important than the solution, which is why you must be able to communicate the difficulties that people face before proposing a solution,” he explained.
Dayo explained that venture capital firms such as Microtraction prefer to fund founders with in-house technical teams because the startup saves time and money by not outsourcing senior developers.
Apart from domain expertise and technical competence, he asserts that venture capitalists want to maintain a cordial relationship with portfolio companies over an extended period of time.
“Investing is a relationship game, and so we look at your mannerisms, your personality, and whether you are coachable and receptive to feedback,” he added.
How much money are you capable of earning? A critical question startups should address prior to pitching investors is how much money the business can make. This, according to Dayo, is determined by the startup's target market size.
“You want to solve a problem for a large number of people; that is what the market is all about. The market is literally how many people would be delighted that you have solved this problem and how many of them will pay, because at the end of the day, we are in the business of profiting from the startups in which we invest,” he explained.
“We refer to these businesses as non-venture backed, which emphasizes the critical nature of the market. It may seem insignificant when you first start, but how likely are you to achieve $50 million in annual revenue in, say, five years? How quickly can you expand into additional locations? ' he stated.
Gain traction
Today's world is extremely fast-paced, and this is reflected in the startup ecosystem as well. As a result, Dayo believes that startup founders must demonstrate their ability to move quickly with their solutions.
“We're interested in your execution ability. That is why we are called Microtraction – we truly want to see some traction, to see that your efforts thus far have produced tangible results.”
If you approach us with an idea, one of the first questions we'll ask is when you founded the company and what you've accomplished in that time period. Additionally, Dayo emphasizes that venture capital firms such as Microtraction do not want to invest in a startup that will take three to four years to make significant progress.
Define your business model
Investors are also very interested in the business model of a startup. Venture capitalists want to know how founders intend to acquire customers and generate revenue.
Customer acquisition is one of the most significant challenges African founders face, which makes it critical for a startup to develop a working strategy for acquiring/retaining customers, earning revenue, and being capital-efficient.
In conclusion
Apart from this, Dayo notes that Microtraction pays special attention to the risks inherent in running a business. There is always some level of risk, whether it is regulatory, operational, executional, or competitive. It is critical that founders attempt to devise ways to circumvent those risks.
“Then there's the legal side of things, which includes due diligence, determining the equity split and determining whether you have a legal entity, founders' agreement, and vesting schedule, among other things,” he added. On balance, Dayo believes that startups that meet the aforementioned criteria will have a better chance of convincing venture capitalists to fund their solutions.
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