When you say you fund startups with technical founder, you mean you fund only startups that has technical founders OR you mean you provide startups with a technical cofounder in exchange for equity? Sorry my English has failed me here.
The Interswitch IPO was suspended ostensibly due to FX shortages. It is arguable that it was essentially a vote of no confidence in our macroeconomic growth rate, which raises a few questions including:
- Do you see a similar lack of investor appetite in late stage African xyz-tech tech deals?
- Do you have any evidence that the elusive African unicorn will ever reveal itself? When and in which sector is it most likely?
Hi @yelebademosi – Thanks for taking the time to do this.
Was just curious about these:
1 – "why"did you decide to go after technical founders
2 – has the local ecosystem gotten to a point where there are enough technical founders to make a dent
3 – will you (Microtraction) be doing anything to increase this capacity
Bonus – Will Microtraction invest in a team where the technical co-founder is foreign and the business co-founder Nigerian/African?
The infamous Peter Thiel question — the problem with most answers to this question is that people try to think of response for the sake of it whilst missing the true point of the exercise.
I believe the question is aimed at identifying a “secret” about any specific mental model that you can take advantage of because most people don’t know about it yet.
In the context of startups & founders, I believe the most successful startups do not create markets - rather they find innovative ways to serve that market thereby redistributing how value is captured in the favour of their own ventures.
This is our principle belief at Microtraction - We have a market first approach i.e. we focus on the size of the market, the dynamics of the market, the nature of the competition and the timing of market exploitation i.e. why now.
It’s impossible to build a $100m revenue startup at scale in a market that’s worth less than a billion dollars, unless the markets is growing really fast.
Uber didn’t create the “public transportation” market neither did Airbnb create the “travel accommodation” market
In summary most successful startups do not create markets but exploit existing markets early and usually address non-consumption.
Our objective hasn’t changed — we want to be the first gear for ambitious founders.
However the biggest thing that has changed so far is our application form, we initially started out with more open-ended questions but now the majority of our questions are multi-choice — we realised that it took founders a long time to fill the form and on our end founders weren’t answering questions succinctly and usually had clarify with follow-up questions after reading the form.
With multi-choice it’s easier and faster for founders to fill the application and we also get a better sense of who the founders are, what they are working on and where they are at currently on our end.
We are constantly iterating our processes and we believe we’ll be able to achieve our goal of being a hassle-free funding option for pre-traction startups.
There are loads of startups but if I could single out one it would be Paystack — I first told Shola about Microtraction in November 2016, at this point it was just an idea and we didn’t have a name yet - and he gave me a lot of good advice. I knew we were on the right path when he said he would have applied to Microtraction when Paystack was just getting off the ground.
Shola & Ezra are good examples of founders that we want to fund. They are both technical, known each other professionally and socially for years and have worked on projects/startups in the past so learnt from their previous experiences.
Paystack solves a top 3 problem (getting paid) for their target customers (businesses) in a big and fast growing addressable market (Online Payments). At Microtraction we love single use-case lovable products with great design and we think Paystack excels at this.
Another thing I like about Paystack that I hope to emulate is their openness about sharing metrics & teaching the community with their blog. I believe it’s important as an ecosystem to foster the ideology of paying it forward and enabling the ecosystem as a whole.
A MASSIVE mention will also be Hotels.ng due to what they are doing with their internship program, they have had almost 1,600+ people join who are hungry to learn technical skills and it’s definitely something I think about a lot — how do we scalable teach people across Africa to code/design/market despite the infrastructural challenges we face as the folks at Andela say “talent is evenly distributed but opportunity is not”.
Ecommerce is definitely not as popular as it was a couple years ago — I also thought FinTech would be really popular but our most popular categories are consumer & marketplace companies.
Consumer startups are really hard and they are all about retention & growth. The mistake a lot of founders make when building consumer startups is they build way too much “product” in the beginning, you should build the simplest but complete and lovable version of your product and launch fast so you can get real world feedback on what you are building, focusing on engagement & retention in the early stages. Engagement meaning “are users doing the behavior you designed for at the intended frequency e.g. two photos uploaded per week” and retention being “are your users active after 7 days / 30 days after they signed up”
For marketplaces, the key thing is how do you overcome your chicken and egg problem. My general advice is to focus on one niche within the market e.g. If you are building an artisan service marketplace focus on Plumbers or Electricians and ideally in one location e.g. Yaba or V.I and expand from there. You should always onboard the side of the marketplace that is easiest usually it’s supply side but during your “idea validation” phase, think through how you are going to get your customers doesn’t matter if it’s not scalable initially.
Thanks for the kind words and super happy to be here.
We are Market first i.e. we are looking for large fast growing markets ($1B+) that we think can be exploited & scaled with technology
Founding teams without a technical founder are a deal breaker for us. It’s very hard to get your product right in it’s first iteration and our initial investment is to give founders enough runway (6+ months) to 100% focus on their business - outsourcing development will be a big drain on the limited capital resources that an early stage team has at this point.
We want founders that have known each other for a while and worked together professionally for a least 6 months — Would I also be excited to join this company if I was looking to join this startup in Dec 2015. Another thing I look out for is if I am learning something new during the conversation and I actually do due diligence on the idea, market by asking the founders questions about their assumptions. We are also looking for “edge” i.e. Why is this team better suited to solve this problem than anybody else in the market
For Problems, we are looking for painkillers not vitamins i.e. is this a problem top 3 problem for customers in their target market and can you capture the value you create by solving this problem — this typically means that you have a clear revenue model because customers are going to pay you for the solution.
We also like to think about distribution, how do the founders currently acquire users and plan to acquire users. Most founders make distribution an afterthought but we know that a good enough product with killer distribution will beat an amazing product with no/poor distribution. There are loads of great products on the internet that we’ve never heard of because the founders weren’t able to figure out distribution.
Since we are looking at Pre-traction startups, here’s how we qualitatively access startups
- Are we impressed with the amount of work they have done since starting?
- Have they built an MVP and if so how long did it take?
- Are they moving faster than their competitors?
- If they don’t get into Microtraction - will they continue working on this company?
- Are they dependent on investment to move forward
We are trying to be as efficient as possible to make the process hassle-free for founders. We didn’t choose our deal terms by guessing and I’ll try to explain how we decided on what to offer.
$15k @ N365 is N5,475,000 - if the founders living costs come to N150k per founder per month that’s a total of N450,000 if it’s a team of 3 (average team size is about 2.7). Assuming they spend another 200k on other expenses per month that comes to about 8+ months of runway. We believe a capital efficient team can make this amount last a lot longer than say $120k if you were a silicon valley based startup.
At the stage we invest, we expect a high percentage of startups to die and we also expect more dilution than investors in the US. Think Sam Altman of YC said that they don’t get diluted by more than 50% even at post $1Bn valuation. If the dilution factor for a startup in the US was 100 base points in Africa it will be 250 base points at least until Series A.
However we are open to being flexible e.g. $7.5k for 3.75% — we are stubborn about our vision but flexible on our strategy to fund the best founders.
Just raised seed capital ...how much should be executive team salary
We’ve seen a lot interesting companies ranging from Hardware to Blockchain, AI, Fintech, Infrastructure and Agriculture.
Can’t publicly disclose our most interesting pitches though
We currently take 7.5%
We are looking to fund teams with 2-4 founders with at least one technical founder who is responsible for building the tech i.e. not outsourced
However a non-technical founding team that has hired a developer full time also counts.
what basic assumptions are you making about the African market that significantly influence your investment theses. And what are the variables (micro / macro) that will likely change those assumptions?
I go into detail in my blog post when we launched Microtraction.
But my belief is that more venture backable startups at seed stage will lead to more growth venture funds being formed and that’s our principle role at Microtraction.
Not a fan of the term “unicorns” and it’s obsession but I 100% believe we’ll get multiple unicorns with time.
The focus right now is to seed sustainable high-growth potential startups in very large fast growing markets
There are lots of people with “ideas” than there are “technical founders”, we decided to go with this initial focus because it’s a fundamental belief of ours that’s it’s really hard & costly to build a tech company without a tech founder – also my personal experience as a non-technical single founder vs when I was technical with a technical CTO/founder was mind blowingly different, we were able to ship an app from idea to app store in under a week compared me spending 16 months to recruit/outsource development
We have Andela & Andela DLC, Switch, ForLoop, DevCenter, Ocean Digits, “Forward thinking” Universities and many more creating this pool of talent – we don’t think we are there yet but there’s definitely positive momentum. Special TUALE to the Developer Evangelists across the continent
We are definitely thinking about it, our guiding philosophy is to “Stand on the shoulders of giants but build from first principles” – We want to teach people how to code from their mobile phones at their own convenience, for free whilst having access to mentors/community". Would be great if a startup set out to solve this problem as we’ll definitely be interested in funding a company like this.
Bonus Answer – we want to fund Africa focused or based founders so the answer is yes !
I don’t have a lot of assumptions but we have key beliefs
- Founders can validate that their startup is venture backable on $15-50k
- Founding teams with technical founders will be more capital efficient than non-technical teams
- $100m annual revenue companies will be built by African founders within 10 years
The first bullet point is what MUST be validated in the short term and our success metric is our portfolio companies raising $500k within 18 months of our investments. It’s ambitious but if we aim for the sun and land on the moon it’s not a bad effort.
A few questions:
What’s one thing you wish more people work on but not seeing from your application pool?
If you were to build a company today, not Microtraction of course, what problem will you be solving? Put differently, top idea on your mind.
(I guess that’s variant of question 1)
How tall are you?
1. What’s one thing you wish more people work on but not seeing from your application pool?
Would like to see more Agricultural companies, Agriculture is a significant % of our GDP and it’s a really big market with problems that are not being solved. SaaS & BPO companies are another favourite of mine, I believe we can build global SaaS & BPO companies from Africa that will have significant revenue potential. In a future post I will be sharing insights into opportunities that founders should look into exploring.
2. If you were to build a company today, not Microtraction of course, what problem will you be solving? Put differently, top idea on your mind.
I’ll would work on a crypto-hedge fund (or what I call a spec fund) – super risky & speculative stuff but it’s on the edge of technology so it’s interesting & combines my original interest in investments with the benefits of having a higher IRR potential than venture investment. I’m also interested in battery packs like Tesla’s powerwall as an alternative to electric grid, having seen the rapid increase in innovation within the space in the last 5 years. Non-tech I would focus on Agriculture or Manufacturing sectors.
3. How tall are you?
Haha! You are right I’m 6 ft 6
Bonus: I play football rather than basketball and captained my university’s football team
Okay that’s it for me.
Thanks for coming and asking really great questions. If you are starting a company, I’ll love to hear from you.
Apply here to get funded by Microtraction.
Have a blessed day.
Great stuff Yele.
The session gave useful insights into your approach and ideology. Lot of takeaways, key for me though is looking forward to the first $100 million revenue startup.
Big ups to the Cabal team for the amazing AMA sessions.