Dear Africa VCs: Cats Are Not Small Lions!

What if the total investment a startup needs to bring a product to market is bigger than the total addressable market? Do we still call it a startup? These are tough questions, but they are the kind of questions some VCs fail to ask. I recently sat down with a founder who has developed a great product to help savings cooperatives save time. The problem he is solving makes great sense and great impact, but his business model was hard to defend. His idea: Saving group members spend X dollars on transport to make their loan repayments. The Idea? We will charge X minus Y (X-Y) to collect loan repayments digitally. The problem? X-Y was higher than the interest rate the savings group charges the members. So, this startup was going to take all the interest payments and then add some to digitize loan repayments. But the good news? The startup already had some good VC money in its pocket. God bless the VC that funded this. You are the kind of “charity” Africa needs.

 This is not an isolated incident. Every day, I come across funded startups with low scalability, limited revenue potential, highly localized user bases, and unsustainable customer acquisition costs. These startups have novel ideas and are solving real problems, but they have a hard time functioning as startups. But somewhere along the way, they have been funded by VC money. Many of these startups fail to take off and are quickly added to the list of Africa’s failed startups. In my opinion, it’s unfair to add this startup to the list of failed ventures. These statistics should be added to the list of failed VCs. Any GP that can raise money better than they can deploy it distorts startup failure numbers for both the VC and startup ecosystems.

 Let’s face it: Not every new business is a startup. From my personal experience and sample size, I can ascertain that more than half of the companies that VCs invest in across Africa do not meet the definition of a startup. Startups are not simply new businesses.

 Startups are companies designed to discover and validate scalable business models under conditions of extreme uncertainty. Many businesses receiving VC funding in Africa, on the other hand, operate more like small and medium enterprises (SMEs). While SMEs are important for local economies, they rarely possess the high-growth and high-risk characteristics required to justify venture capital investment. When VCs fail to distinguish startups from SMEs, they waste limited partner (LP) capital and distort statics for the startup ecosystem.

 What’s a true startup that deserves all our VC support to take off? A startup is in the business of exponential growth, market dominance, industry disruption through innovation, and solving problems with scalable solutions that can be replicated across markets. That, my friend, is a startup. Startup founders are mavericks operating in high-risk environments where the potential for failure is high, but the potential for reward is higher. Startups are high-risk, high reward. Failure is part of their modus operandi. The idea is to tackle a big problem, build and test a minimum viable product (MVP) quickly, collect feedback, retest and move fast, succeed fast, or die fast. Don’t die slowly, drugging down all that capital with you. Die fast. The few surviving startups become unicorns or at least market leaders with significant influence to recoup all the VC losses from the failing startups. So, every startup in the portfolio should have the potential to become great, not a lackluster “me too” product that has no plan to become great. Let SMEs handle that.

 SMEs are not startups. SMEs prioritize stability and defensible profitability. SMEs become good at serving local or regional markets with incremental growth rather than rapid expansion. We need SMEs. They are the bedrock of local economies. They employ our cousins and provide great community stability. However, SMEs are not structured for exponential growth or industry disruption. The nature of their growth makes them good candidates for debt financing, grants, and private equity, not venture capital, which requires a higher level of risk and return.

 Separating SMEs from startups is not about diminishing the value of SMEs but recognizing that their funding needs and expectations are different. If you have mistaken an SME for a startup, don’t push the founders (small business owners in this case) to give you 100% annual growth rates or 10x returns. They are not built for that. Africa’s SMEs need funding and need it urgently, but they shouldn’t be expected to perform 10X miracles. And when they fail our misplaced expectations, we better not add them to the list of failed startups because, well, they were not startups in the first place. We can’t expect cats to grow into Simba by calling them small lions.