What is Venture Investments? An explainer, Part 1
Unlike Angel investors who are individuals—venture capital funding comes from structured funds. Because they’re bigger, they typically sign bigger checks
Venture capitalists are investors. They invest in ventures, that is, startups and other new businesses.
Unlike Angel investors who are individuals—venture capital funding comes from structured funds. Because VC funds are more sizeable, they sign bigger checks than Angel investors.
Venture Investment is a long-term commitment of investing capital, support and market access to young companies and sometimes, first-time founders. Most traditional venture funds are structured as 7-10 year vehicles. During this tenure, Venture Capitalists are on the hook to constantly update the Limited Partners (LPs).
LPs are the institutional or individual investors that have invested capital in the fund(s) of a VC firm. They include endowments, corporate pension funds, sovereign wealth funds, wealthy families, and funds of funds. These entities provide funds to the GPs or investments vehicles and in turn they get fund reporting quarterly, bi-annually or annually depending on the agreement when setting up the fund.
As the technology space broadens and more essential opportunities become mainstream, we are beginning to see different core segments of the technology ecosystem.
About five years ago, venture investments were just picking up on the continent, and companies like Paystack, Flutterwave, and Andela were the exciting companies on the block. They were among the first set of startups to attend international accelerators like Y Combinator. Also, they participated in global startup programmes like Google for Startups. All of these feats highlight the potential of building global solutions from Africa.
So, yes, the venture landscape was heating up. Most venture investments were made by large companies who saw potential in the African market. The likes of Y Combinator, Mark Zuckerberg, Omidyar Network, Stripe, Tencent, Visa, MasterCard.
Following Paystack’s acquisition, this recent tweet by Paul Graham shows the peculiarities of investing in Africa.
The zeal to invest or channel resources into a future-based venture for exponential capital returns is not new. Over the years, a segment of Nigerians that make enough income find ways to channel some towards financial securities and profit-making opportunities.
A decade ago, most passive investing in Nigeria was done by folks in the Oil and Gas industry. And the investment asset was real estate. According to Kendall Ananyi, the Oil & Gas employees' cooperative society pretty much built most of Lekki, Lagos. Every first quarter they would invest in real estate projects.
Real estate is a popular investment in cities like Lagos and warm states like Vancouver, the warmest part of Canada. House prices continually appreciate significantly in those regions. However, the challenge with real estate is that it’s domiciled in your local currency while technology investments are mostly tied to dollars.
So, if you compare investments into a startup like Paystack to Real Estate, the difference will be clear. Because most startup investments are in dollar terms, you barely ever lose to devaluation or currency flunctuations. For instance, the Return of Investment on Paystack was over 10x, in dollars. In naira terms, that balloons up in further because the dollar got stronger against the naira. But with Real Estate, you can experience an increase in pricing but lose in monetary value.
Before venture investment became sexy, there were founders and market spotlights like Maya Famodu of Ingressive Capital, Leonard Stiegler, Iyin Aboyeji of Future Africa, Gbenga Adegbola, Jason Njoku of Spark, Yele Badamosi of Microtraction, Bosun Tijani of Growth Fund, Mark Essien focused on talent capital with HNG and Tayo Oviosu of Kairos Angels. The names mentioned above were either founders or venture builders who did some form of angel investments.
An article detailing the journey of Nigerian founders now running Syndicate funds shows how different models of venture investments have been explored to scout, invest and engage new companies in the ecosystem.
Models like Rolling Funds which is a fairly new type of investment vehicle in Africa allows fund managers share deal flow with investors on a rolling basis. The fund investors subscribe periodically to the fund while the rolling fund managers get carried interest over a multi-year period. The pooled funds are then invested into a specific company. For example: CcHub Syndicate—investments forums that are open, honest with direct mechanisms to train their community members, they deep dive into business models, monetisation models, product-market fit ideas and strategies for startups success.
Aside from some of these popular models, we have structures like the Indie VC models which have a redemption clause for founders—This is the open period for founders to repurchase equity option using 3-7 % of their gross revenue. These start dates generally range from 12 months to 36 months post-investment. Unfortunately, the fund has closed shop, announcing the roll-up of activity in 2021.
In principle, VCs' ultimate goal is that a startup they invest in will get to the point that they get a high ROI (return on investment) after exiting (selling the shares they bought in the early stage). The models of selling these shares are either through secondaries—selling shares bought at early stages to a later stage investor or waiting for a business to go public via IPO (Initial Public Offerings).
Lastly, Venture funds are put together by General Partners called GPs, but the money they invest into other companies are from Limited Partners (LPs) who invest in these VC funds. These LPs are High Networth Individuals (HNIs). An example of this is Gbenga Oyebode (founding partner of Aluko & Oyebode, Independent non-executive of Nestle Food).
With nearly 10 trillion dollars of stimulus money entering the U.S. economy and trillions more around the world, investors will be looking anywhere for yield, including in frontier markets and early-stage investing. Investing will also be driven by a growing group of “super angels,” fresh from the tech initial public offerings (IPO) craze in 2020, who form their solo general partners, crypto funds, rolling funds, and angel syndicates—all of whom have dramatically different risk appetites.