Newsroom > Blog
Browse more
Why I Say No to Holiday Party Pitches: The VC Model Explained
By Lucas Robinson | Mon Dec 16 2024
I’m no Buddy the Elf, but I enjoy a good Christmas party. The decorations, the holiday sweaters and the spiked egg nog. It’s all great in my book.
So, given my general enthusiasm for holiday cheer, I hope this won’t come off as a Mr. Grinch moment.
Photo: Eggnog by Katie Azi_Unsplash
Ever since I joined Renew Capital, an early-stage venture capital firm in Africa a couple of years ago, a few drinks into almost every holiday gathering, someone—without fail—will come up to me and ask, “Do you want to invest in my business?”
So I listen to them describe how they really need outside investment to help their business grow. The passion in these ad-hoc pitch moments is invariably impressive and though I usually think it’s a wonderful business, my reply is almost always, “No, sorry — I won’t invest in your business.”
These entrepreneurs sometimes look a little heartbroken, but as long as the eggnog wasn’t really spiked, I try to explain, usually saying something along the lines of the following:
I work for a venture capital (VC) firm. VC is built on the idea that investors make an outsized amount of their returns from a very small number of their investments. Hence, every deal we make needs to have the potential to be a huge success. Love it or hate it, this is the "VC model."
Photo: Lucas Robinson
For the VC model to work, we need companies that are either creating or working in a huge market, with the potential to capture a sizable share of it. In practice, that means that we seek companies with the potential to expand beyond their current countries of operation (i.e. not entirely focused on dominating one country). What does that really mean? Bluntly, we’re looking for companies targeting total addressable market sizes of more than a billion dollars in Africa.
We also look for companies that are trying to solve seemingly intractable problems, often through the clever use of technology, removing the considerable friction that exists in most markets. This means we, like most VC firms, have a preference for fintech, e-commerce, SaaS, trade/logi-tech and mobile-first solutions.
Can all of Africa’s problems be solved through these technologies? Of course not, but these technologies enable companies to scale quickly and at the risk of sounding like a catchy Mariah Carey Christmas song, that’s what we are looking for.
Is this model right for every company? Definitely not. The economic backbone of every single economy on the planet are the hundreds of thousands of small- and medium-sized businesses (SMEs) that are slowly and steadily increasing their revenue every year. These are fantastic companies. I want there to be hundreds and thousands more of them. I’ve even helped to build a few here on the continent and I’m really proud of them. But they are not (or were not, in some cases) VC-backable companies.
Many solid SMEs and even some multinational companies grow without taking any kind of outside capital initially—they find ways to grow a business without (Mailchimp, Basecamp and Zoho are three such examples).
Despite the frothy VC market in my adopted hometown of Nairobi, there are actually many other investment options to consider: impact investors, debt, local angel investors, revenue-based financing, working capital facilities, private equity (or micro-private equity) and even grants. Each of these is probably a better financing option for most of the business owners that I speak to.
Does that mean I will try to avoid conversations about your new business plans when I see you at the holiday party? Of course not—I love those conversations. It's just that as a VC firm, we may not be the right capital for you.
If you're a growth-oriented founder leading an early-stage startup in Africa, apply to our Renew Venture Lab to gain training and support. We look forward to learning more about your startup.
Lucas Robinson has invested in, founded and run numerous businesses in Africa. He is a Principal at Renew Capital. One of the company’s training topics is focused on this very subject; sign up here.
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.
Related Posts
