Business Lessons - Afrikan Heroes

Investors to Avoid For Your First Fundraise

February 8, 2020

Saptarshi Nath is formerly a co-founder @OvercartInc

First-time founders often have to raise small Angel rounds before they can get enough traction to raise serious money. Typically, such Angel investors will come from varying backgrounds — an ex-boss, a well-to-do friend, an experienced F500 executive, an ex-entrepreneur, or a family-business owner.

You will hear a lot of No’s — maybe dozens, or even hundreds — before you close your first Angel or seed round. So when a first Yes comes by, it is incredibly difficult to take a step back and assess the value of the Yes.

[Fund raising]’s filled with painful no’s: No’s that take your breath away in how quickly and rudely they’re delivered; no’s that are tied up in pretty little ribbons and disguised as “let’s keep in touch”; no’s that come in the form of deafening silence after a series of promising meetings.

Preethi Kasireddy, on What I wish I knew about fundraising as a first-time found

I’ve compiled here a list of by-no-means-exhaustive warning signs that can help you identify Angels that aren’t right for you. Most of the warning signs below assume that you’ve done your due diligence on the investor to ensure that (s)he is relevant to your business in the first place. Most Angel investors don’t like being just a cheque-book for your business — they also want to add value to your business along the way. Possibly through feedback on your product, introduction to clients, or connections to potential hires. If you’ve reached out to an Angel investor who knows she’s not the right fit, you may see all of the warning signs below.

Asks about long-term business metrics for your six-month old business.

Typically Angel investors that have not started businesses themselves are well-versed in how a large MNC operates but not as much about what a fledgling business with a few thousand dollars in the bank looks like. They may naively ask for metrics (such as customer life-time value) that don’t matter to a fledgling startup. They could mean well, but accepting that money could lead to a host of issues in the near future. Imagine struggling to meet your MNC investor’s expectations when trying to sign on the next paying customer, or deploy the next version of your app. As an entrepreneur, it is not your job to educate your Angel investor.

Is a bit too interested in your valuation and exit plans.

Counting the money too soon can ruin your business before you start.

Someone told this Angel how much money she made on an early-stage investment and our man can’t wait to make 10x on his money. Valuation, any valuation, for an early-stage business is meaningless. By default, unless it is illegal in your jurisdiction for some reason, use a convertible note (like Y-Combinator’s SAFE document) to raise your early investments.

Everyone wants an exit — heck, likely even you do! — but no one wants an investor that is in it only for the exit. Such Angels will become a pain in all the rear ends when your runway is short, and will likely try to force you to an acquihire or lowball deal to help save the $20,000 he put into your business. Be polite when showing them the door.

Is stuck on terms of the deal. Or suggests weird Board structures.

Non-standard terms in any term sheet at any round is a warning sign. Typically, Angel term sheets are overridden when you raise a Seed round from professional VCs. Most Angels who have done multiple deals understand this and won’t make a big deal of terms. Be wary of those that do.

This is rare, but once in a while you will come across an Angel that wants to see a Board with 5 Directors and an Independent Director. In those rare cases, it is ok to walk out — polite discourse be damned. While having a governance framework is beneficial, even critical at the appropriate time, it is nothing but an expensive distraction at this point.

Doesn’t respect your views or your time.

Keep reminding yourself — no one knows your business like you do. Unless you’re building the 175,345th copy of Groupon, this is probably true. If an Angel investor who’s just heard your 10-min pitch starts telling you how to run your business, you know you’re signing up for a rough ride if you take his money.

Sometimes, the investor’s perception of you is easier to observe: did he arrive late at the meeting without a viable excuse or apology? Did she get constantly distracted by her phone?

Unwilling to talk about his/her past investments.

Most investors love to talk about their past investments. Some like to talk only about their successes. Others like to talk about their failures. Still others talk about the ones they missed. No good Angel investor is unwilling to talk about past investments at all. Of course, there are exceptions and idiosyncratic characters — but most Angels haven’t earned their way into being idiosyncratic yet.

Offers to introduce you to other Angels without first committing himself/herself.

Of course, some Angel do invest with a friend or colleague — and that’s perfectly alright. Saying “I really like what you guys are doing but I typically invest with my friend, Shark. Do you mind if I connect you to him?” is legit. But if the investor looks like he’s trying to introduce you to as many people as possible to give himself more comfort around the investment, let him/her know as politely as you can that you don’t have too many spots left.

Finding the right Angel investor for your business is often as critical as finding the right cofounder. Your business is the most vulnerable in the first year and the wrong investor can have a lasting impact on your long-term viability. To maximise the impact of the time you put into fundraising, start early, build ongoing relationships, and don’t be afraid to ask for introductions. And, like all good salesmen, always be closing.

Saptarshi Nath is formerly a co-founder @OvercartInc

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer.
He could be contacted at udohrapulu@gmail.com

Jack Ma Speaks on Essential Ingredients for Success in Life

December 23, 2019

China’s richest man and e-commerce billionaire Jack Ma has been teaching on the basic traits needed to succeed in life, and in business especially in this age of Internet of Things (IoT). According to Jack Ma who recently relinquished his position as Chairman CEO of e-commerce giant Alibaba.com, there is need for people to focus on continuous education, education he said is the “most important and critical issue” of our time. His concern: the world is changing fast, but education is not. He noted that his formula, however, is not to focus on curriculum or accountability, but on students’ capacity to love.

Jack Ma, Chairman CEO of e-commerce giant Alibaba.com

Speaking on his formula, Jack Ma said that “if you want to be successful, you should have very high emotional quotient (EQ), a way to get on with people”. He highlighted that “if you don’t want to lose quickly, you should have good intelligent quotient (IQ),” adding that “if you want to be respected, you should have love quotient (LQ)—the quotient of love,” he concluded. “The brain will be replaced by machines, but machines can never replace your heart.”

Jack Ma spoke that his formula fits well with the theme of the conference in Paris, where the OECD released the latest results of its worldwide test of 15-year-olds and discussed how to move education systems from traditional exam factories to places where kids learn content, but also self-knowledge, empathy, teamwork and agency.

The head of the OECD’S education unit Andreas Schleicher, applauded Jack Ma’s “radical” approach. Educators talk about the need for holistic reform a lot, but business leaders more often focus on education as a means to train future workers (rather than nurture well-rounded humans). Schleicher said Ma’s key message was spot on: we’ve spent a lot of effort on how we feed people—that is, the education they receive—but not enough on what we feed them.

In the future, Ma said everything had to be on the table: teachers, classrooms, and students. Classes will not be in discreet 40-minute units, teachers will not be the ones with all the knowledge, and educators will emphasize asking the right questions, not just getting the right answers. “If you focus on standardization, everything can be replaced by machines,” he said. Many educators dispute this approach, arguing that knowledge should not be undermined, and that schools should focus on discipline and high academic expectations.

Jack Ma professed himself an “amateur” educator. But he is not without experience: he failed his university exams a few times and eventually got into a teaching school. Back then, he said, people who failed at traditional achievement—top universities—became teachers. He said that teaching imparted important lessons he used as CEO—he even dubbed his job “chief education officer” at Alibaba. “I learned everything I learned from being a teacher,” he said. “Inspire students. Trust students. Believe in students. Enable them.”

Pointing out the essential ingredients for quality education. He suggested investing more in early childhood, when kids are building skills and values, and less in universities, when values are already set. “Please put more resources on the front and not in the back,” he said, suggesting kindergarten and primary schools have tremendous leverage to shape kids. He also advocated supporting teachers more robustly. “If we respect teachers we respect knowledge and we respect the future,” he said. Increase their pay and help headmasters with leadership training, since 60% of teachers leave the profession because they don’t like their headmasters.

He said education needs to change its key performance indicators, namely exams. He often asks students why they work so hard for their exams and they always say it is to get into university and go on to get a job. But at Alibaba, he said, they have to retrain university graduates to do their jobs well.

“University does not mean you are guaranteed a job,” he said, adding that he doesn’t hire from MIT and Harvard because of the names, but because the people come “ready to learn their whole lives.” In a memorable zinger, he said that a university degree was nothing more than a “receipt for the tuition paid.” He joined the zeitgeist by calling for kids to better confront failure. “It is not natural for people to help you,” he said. “You need to learn to be rejected and refused.” Indeed, he was rejected from Harvard 10 times.

Finally, he suggested education had to become more global, and more focused on teamwork. (China, he noted, was terrible at this: it succeeds in individual sports but not team ones.) The way to accomplish this is more arts and dance, painting and team sports. He’s started a school where there is no after-school tutoring but there are after-school sports.

Last century, he said, was won by muscle, while this one will be won with wisdom. Or as he put it another way, “last century we win by caring about myself, this century we win by caring about others.”

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry

Lessons Startup Businesses Can Learn From Nigerian Diamond Bank Merger

May 11, 2019

Hard as it may be, Moody’s has just come up with a report on how and why one of Nigeria’s strongest banks, Diamond Bank failed. The global advisory services firm, in an in-depth report analysed factors that brought about the downfall of the bank (a bank that went from making profits of N28.5 billion in 2013 to making losses of around N9 billion in 2017) and its eventual palliative merger with Access Bank.

Here are key insights that led to a bad day for Diamond Bank, according to the report, and what lessons surviving businesses can learn from it.

“Diamond Bank Aimed to Become The Leading Retail Bank in Nigeria, and Took on Excessive Risk as it Pursued This Objective”

Indeed, this is a case of borrowing Peter to pay Paul in bid to become more attractive to Paul while satisfying Peter also. The report said, although Diamond Bank set out to become Nigeria’s leading bank, it banked its hope on achieving that by letting all its taps open, without properly gauging the risk implication of it. It was like a case of everybody come take a loan, we would take care of that. The result: all business owners scampered in that direction, wielding buckets, ready to pluck out some loans to finance their businesses.

Why that idea may not be entirely bad, for a bank that was trying to make businesses in Nigeria love it, most of the businesses were not ready for the loans, had no plan of paying back soon. The bank did not appear, however, from the report, to be strategic enough: while endearing itself to retail businesses in Nigeria by allowing them to cut so much flesh off it in the name of loans. It didn’t turn its eyes to a balancer?

The report said that the bank did not attract enough corporate borrowers who are a major moneymaker for banks and that, well, it loaned out more money to the oil and gas sector than the Central Bank of Nigeria thought was prudent (52% versus 20%). So when oil prices fell in 2015 and 2016, the bank came crashing with it.The result is best captured by this point from Moody’s:

“The bank’s Non-Performing Loans (that is, all loans overdue by more than 90 days) reached 42% of gross loans in 2017 (Diamond has not yet reported its 2018 results). The bank’s provisions against these Non-Performing Loans were low at only 19%, weakening the quality of its capital, while high credit losses eroded its profits, ” Moody wrote

There is still hope for the bank, though, as Moody’s noted that Access Bank with which it has merged, is strong enough to reduce the risk of default for former Diamond Bank creditors.

‘‘Diamond Bank’s Weak Governance Structure Compromised The Board’s Ability to Determine The Bank’s Risk Appetite’’

This point was going to come anyway. Moody’s merely captured what was already in the public domain. In 2018, this letter came from Nigeria’s market research and analysis news site Proshare. The content of the letter simply was that a former chairman of Diamond Bank, Seyi Bickerstheth gave some hints why Diamond Bank’s CEO, Mr. Pascal Dozie, should be replaced. It re-echoed the same demand from Carlyle Group’s Carlyle Sub-Saharan Africa Fund (CSSAF) DBN Holdings who also wanted Mr. Dozie shown the exit door.

“A key shareholder CSSAF DBN Holdings demanded an immediate removal of management principally the CEO but the Board favoured a less drastic approach to minimise disruption and also enable the Board secure new leadership,” Bickerstheth wrote in the letter.
“After several discussions, the CEO of the Bank, who is also a representative of the second largest shareholder Kunoch Ltd agreed to resign effective January 3, 2019, but would not tender his letter to confirm his verbal notification.”

The Implication:

You can’t expect a lesser consequence. Moody’s therefore noted that this Diamond Bank’s weak governance structure meant:

A highly compromised board

A board with little ability to assess the bank’s risk exposure and;

And a board that failed to rigorously interrogate management over strategy.

Now watch the follow-up consequence:

The weak governance structure meant the bank’s management would plunge the bank into an unrecoverable loss. There was a sudden decline of profits. After making profits of less than N5 billion in 2016, the bank fell far to losses of N9 billion the following year.

‘‘The CEO’s Family Was The Second Biggest Shareholder In The Bank, Directly Controlling 14% Shareholding’’

It looked like nobody was going to tell the bank the hard truth anyway, and when you don’t have such hard truth tellers in organisations, all boats would be oared to one direction. Moody’s said Diamond failed because it did not have enough independent directors (the objective truth tellers)on its board and this resulted in a lack of effective board oversight.

“By the end of 2017, only one of Diamond’s 13 board members met the Nigerian SEC’s definition of independent (another had retired in August),” Moody’s noted

“We believe Diamond’s board failed to provide an effective check against the bank’s management team. Board independence is important because it makes it more likely that management strategies are subject to rigorous questioning, reducing the risk of directors ‘rubber stamping’ management decisions.”

The implication of this is not far-fetched, Mr. Dozie, whose family was the second biggest shareholder in the bank, directly controlling 5% and another 9% indirectly through its investment firm, Kunoch Ltd (14% in total) was only 4% off the Bank’s biggest shareholder, Carlyle Fund, which controlled 18%. This meant, of course, a huge overbearing influence of one family over how the business of the bank was run. A striking example was the fact that a member of the founding family held the CEO role between November 2014 and March 2019 when it merged with Access Bank. During this period, profits fell by 78% in 2015 and bank deposits shrank by 22% between year-end 2014 and 2017.

“The Board’s High Membership Turnover Hindered Its Oversight Role.”

Indeed, between 2009 and 2019 when it merged with Access Bank, Diamond Bank had three different CEOs and three different board chairmen. This only meant two things:

A continuous erosion of the independence of the Board and;

A badly destabilised board membership

“While new board members can make a positive contribution to a bank’s governance by bringing in fresh insights and experience, the new appointees at Diamond tended to lack sufficient knowledge of the bank. The board’s high membership turnover, therefore, hindered its oversight role.”

As it stands now, it appears Diamond Bank’s fate has been sealed. The merger is merely an official language. Access Bank expects to help Diamond Bank rewrite a different history. But whether the Phoenix rises again is merely a matter of time. The deed has been done and other businesses have to learn their lessons.

Charles Rapulu Udoh

Charles Rapulu Udoh, a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organisations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution and data analytics both in Nigeria and across the world.