Most startup article series are boring, so we got you one that is not boring, finally. This is “Founders From Hell, Funders From Hades” – a safe space where startup founders and funders bare it all like never before. Watch this space weekly for real accounts of funding gone wrong.
And for the first installment of this exciting new series, I had a fun chat with veteran angel investor, Tomi Davies.
Running a startup is an extreme sport, but so is funding one. And this might even be truer for the bringer of said funds than the seeker.
Well, that’s one thing you never stop learning in the line of work that the seasoned Nigerian-British tech investor, Harry ‘Tomi Davies (fondly called TD), is known for.
Being the co-founder of the Lagos Angel Network and founding President of the African Business Angel Network (ABAN), he’s been funding and mentoring African startups since 2012, officially. As of 2015, he’d poured up to USD 1.2 Mn into several startups including SimplePay, Pass.ng, PushCV, Sproxil, etc. He recently joined GreenTec Capital Partners as Chief Investment Officer.
TD is a well-known angel investor, entrepreneur, author, speaker, philanthropist, and advisor to technology companies. In his line of work, cutting cheques to individuals with great but untested ideas and business models is just another day on the job. In fact, those cheques are most times the first in a business.
And not too long ago, he was pretty close to cutting one cheque that he would have probably gone on to rue.
How so? Let’s just stay it would sting pretty bad if it dawns on you that you managed to cut a USD 70 K cheque to a startup that talked a big game but ultimately sold a lie.
Even for folks like TD who have “been there and done that,” the “occupational hazard” of being sweet-talked into loosening the purse strings is a real and ever-present danger. But as he puts it, “thanks to the female members in our group,” trouble was averted.
In this discussion, TD bared it all on his ”Founders From Hell” encounters. In the earlier-mentioned incident, he was actually recounting the biggest-ever red flag that kept him from backing a startup he had actually fancied.
It involved a Nigerian agritech startup (name withheld) whose business was essentially a lie.
They said all the right things, however bogus. They had all the numbers, however fudged. The founders seemed to know their onions and appeared to be worth their salt, however rehearsed. In the end, they turned out to be poseurs who were mostly bullshitting.
“They pitched, we liked the pitch. Then we got to due diligence. During due diligence, we found that, quite literally, 70 percent of what they had told us was false. They were not expecting that level of due diligence,” TD recalls.
“For example, they had told us about farm operations that did not exist. They had told us about revenues that were non-existent. They served such an amazing pitch. They were so smooth, they had all the statistics, they had all the numbers, they had background and pedigree, their CVs were impeccable. Everything was fantastic,” he says.
TD recalls he was sold on their pitch which portrayed a unique agro-business with an elegant model that revolved around food storage and distribution. As he says, “left to me, I would have written the cheque that day.”
But maybe it really does help to stick to one’s principles and methods. In this case, TD recalls a few female partners insisting on the required due diligence even though they were sure it would be a mere formality.
“They were the ones that said: ‘eh, shey they have a farm, let’s go and see,’” he says, with a slight chuckle and a pinch of processed Nigerian Pidgin. “They did such an amazing pitch. But luckily for us, we had a process that participants insisted on. Else, they would have gotten a cheque on the day of the presentation.”
As it turns out, due diligence revealed gaping holes in the startup’s story — there was no farm, no revenue, no plans; just vibes. And ultimately, a bullet was dodged. But that’s just the beginning of TD’s least favourite yet interesting tales of personal encounters highlighting the common-but-underreported pitfalls of funding startups.
When I ask about encounters with founders that may have resulted in a fallout that tanked funding talks, TD insists that while he’s had no such episodes so far, there’ve been quite a number of cases of disagreements with founders post-investment.
As a matter of fact, one such incident is still being resolved five years after things got ugly.
“It was a massive fallout. This is five years later and we’re trying to mend fences. I still have around 3.5 to 4 percent shares in the company. They are struggling and they need help. To recover my money, I may need to go in but we had a massive fallout with the founder,” he says.
According to TD, the disagreement with said founder wasn’t necessarily hinged on straight-up dishonesty but it was about someone trying to be “smart.”
“I don’t like being outsmarted, but I have to confess, I was outsmarted,” he confesses. “And it didn’t leave me with a very good feeling, especially because I brought co-investors to the party who felt stupid also.”
As the interview progresses, TD shares instances of regret over investing in startups which he had second thoughts about initially but ignored the warning signs, and ultimately rued.
“That company is now the walking dead,” he says. “It’s still alive and paying salaries but that’s about it.”
He goes on to say that one of such experiences has caused him to resolve to never invest in individuals anymore, and as he puts it, he now only does teams: that is, invests in startups with at least two co-founders.
“During the pitch, I was thinking this guy could be a bit autocratic and I wondered if it was a good fit. Also, subsequent to the investment, the so-called co-founder evaporated, he disappeared. This is nearly seven years later, the company still exists but it’s not a startup, it’s not growing,” TD says.
“The [warning] sign I ignored was the individual. It’s happened to me now twice. That was actually the second one. The first one, I didn’t feel the same way I felt about the second guy but this one was also an eloquent, smooth-talking individual. In fact, the company got up to where they raised a million dollars.”
But the said company (with interests in real estate) couldn’t grow any further. TD recounts that they had to do a firesale eventually and he got “six cents on the dollar on a USD 60 K investment.”
It appears angel investing is really not for the faint-hearted, more so because there are so many ways a startup investment can go bust. And on that part, TD has stories for days.
First, there was the case of investing in a startup with two solid co-founders who seemed like a dynamic duo until they had an ugly bust-up and one of them left for East Africa. The co-founder that remained was obfuscating more than he was delivering, and was essentially running the company into the ground.
“We had to step in, exit the founder, and bring in a new co-founder and also recalled the guy that had left. I’m happy to say that the new guy has rebuilt the company and the second co-founder also exited after a couple of years.”
Next, there’s the tragic case of a promising portfolio startup that TD says was doing 30-40 percent month-on-month. This startup had four co-founders but the 26-year-old who was the lead founder suddenly passed on.
“His death threw the company into disarray and the company is just limping along at the bottom at present,” he says.
But the third and final incident in TD’s book is probably the most outrageous: Imagine investing in a startup alongside Co-creation Hub (CcHUB) only to have both co-founders simply vanish.
“I did an investment and I was a bit concerned about the capacity and capability of the co-founders to actually build the business. So, we managed to get them into CcHUB on incubation. CcHUB also put in a little bit of money,” he states.
“I live in the U.K. and I just came back on one of my trips. I asked for these guys and they just totally disappeared off the surface of the earth. I haven’t seen or heard from them. I put in around three-and-half million naira and CcHUB put in five million naira.”
TD calls this last instance the worst of the lot, and it’s all the more befuddling because he did meet with the parents of the co-founders while doing due diligence. It’s yet another indication that the business of funding startups can actually be trickier than it gets credit for. But those burns come with lessons too.
As he tells me, he now has a preference for seed-stage, post-revenue startups. “I co-invest, If I can’t co-invest, I’m not going in. My ticket size is typically between five and twenty thousand dollars. And for me to do twenty, it would probably be a follow-on round.”
He adds, “For first-timers, I typically won’t go over ten. I focus on Lagos but I’m reviewing it. My key areas are food and agric, health and education, and marketing platforms in mobility, logistics, supply-chain, that kind of thing. I no longer do housing. These are my criteria.”
In TD’s line of work, sitting through pitches is a fairly regular activity. Those pitches bring value and a great deal of enjoyment sometimes, and exasperation at other times. Turns out that the day I spoke to TD is the same day he endured the worst pitch he has ever encountered.
“That was just earlier today, I told you we just had five pitches,” he says. “The guy had slides but didn’t use it. He totally talked off-point and spent half his presentation talking about a potential competitor he had helped, rather than his own company.”
But TD maintains that the subject of the said pitch wasn’t exactly terrible, just the delivery. “He was pitching converting plastics to diesel oil. The idea is solid, the pitch itself was bad. It was the worst presentation of the idea that I have ever seen.”
When it comes to terrible ideas, TD seems to have no love lost for buzz hints like: “we are going to be Africa’s Facebook, we are going to be the next Google, we are going to be Amazon for Africa, we are going to be Amazon for healthcare, or we are going to be Facebook for cheese.”
“I find it very, very irritating,” he says. “Just tell me what you do.”
What makes a startup investment a no-brainer for TD? He emphasises a strong founding team with relevant backgrounds, a serial entrepreneur that has done it before, a fast-growing aggressive market, a highly-scalable business model, a significant social impact, and a healthy track record.
For the seasoned angel investor, it’s a non-starter if: a startup is exploring a crowded market with strong competitors, pedigree or credibility is lacking on the part of the founders, it’s a solo-founder startup, or the business model is not scalable.
Just for fun, TD tells me his biggest startup gamble that ultimately paid off was a USD 5 K investment in a startup in 2003 which fetched him USD 250 K when he partially exited in 2008.
“It gets better,” he shares. “Last year, I sold the balance of my shares in that company for another quarter of a million. I basically made half-a-million dollars from five thousand dollars.”
TD adds, “That’s why I’m in this business, these are the kind of deals I look for. But then, you have to be able to deal with those who run away with your money and those that won’t come good also.”
But of course, funding startups, like most endeavours, is indeed a ceaseless juggling of risk and reward.
African startup founder or funder who fancies a feature on this “not-boring” series? Please reach me via [email protected]
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