Venture-Backed Vs Lifestyle Business: What’s The Way Forward for Entrepreneurs?
At Spurt! We are always looking to amplify solutions to critical and specific challenges in Sub Saharan Africa. This week, we reviewed The Difference Between Rich Founders and Poor Founders, From an ex-VC written by James Skylor.
The article explores some fundamental reasons behind entrepreneurs starting their ventures. Ideally, anyone who decides to start an entrepreneurial experience would be keen on finding the freedom to control their approach to the problem they choose to solve and how they spend their time.
When starting their businesses, entrepreneurs could choose to go with the venture-backed route, where there’s a 90% chance founders will net out at $0 compared to the 50%-75% chance of success when founders decide to build a lifestyle business.
Building a lifestyle business will force you to create a product or offer a service that customers want. In the short term, the market may value hype and narrative, which the founders seeking the venture backing might capitalise from, but it always loves real traction, revenue, earnings, and margins in the long term.
James Skylor makes a valid point about building a business for durability by providing customer-centric products/services. While there are nuances to the rich founder/poor founder analogy depending on the part of the globe you are in, there’s certainly been a spike in the number of businesses that secure venture funding in Africa.
The growth in the number of venture-backed startups leaves us wondering to what extent founders proactively seek to start businesses for the sole aim of being venture-backed.
Perhaps the investing appetite from these VC funds will provide insight into what the future might look like for African founders. According to a recent report by Partech, African tech startups are experiencing astronomic growth in raising funding. In 2020 alone, there were 359 equity rounds (44% YoY growth) and $1.9 billion worth of venture funding invested.
The VC activity is likely to create an appetite among founders to capitalise on all the hype around acquiring financing. On the flip side, Africa has a longstanding culture of looking to entrepreneurs to solve complex pressing challenges.
Companies that can gain traction and maximise revenue and earnings don’t stand to benefit the founders alone; there’s the emergence of an eco-system where new businesses grow. As a result, there are more employment opportunities. Still, there are several benefits realised with employment opportunities created.
There is a marked boost in the level of commercial activity driven by these companies, leading to a rapid flow of income in the economy, which goes a long way in the continent.
While building businesses with a clear value proposition for the customer is likely to be the norm and not the exception, it is essential to highlight founders still face herculean challenges when building their ventures from scratch. In the past five years, 42% of the venture deals executed in Africa have come from foreign-owned firms, primarily from North America.
African Private Equity and Venture Capital Association cite that only 20% of the funding came from local investors. With very few local investors in the space, most local entrepreneurs will still find that their access to financing will be limited. There are new models of funding emerging as angel investor communities continue to grow. With an abundance of alternative funding avenues, venture capital remains one of the many options African entrepreneurs have.
In Africa, especially now during a global pandemic, being venture-backed and solving a core problem can happen concurrently. Most venture-backed companies win score with investors primarily because they are solving specific fundamental issues at scale.
Lifestyle companies and venture-backed companies do not have to be mutually exclusive. In some instances, building small profitable companies doesn’t necessarily require all the effort it takes to grow a venture-backed company as the end goal is sustenance.
With all the noted constraints of building a venture-backed company, companies on this track already have to care so much about the problem they are solving. This is why entrepreneurs in the continent have to stay put and focused on why they are starting their ventures in the first place.