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 and fundraising gone wrong.
In this week’s edition, I contacted Andrea Böhmert, Co-Managing Partner at Cape Town-Based VC firm, Knife Capital. She’s been in the venture funding business for over a decade and in that time, there have been plenty of gems and some gall too.
Enjoy the read!
After a few conversations with a startup over a period of six weeks, Andrea Böhmert and the rest of the team at Cape Town-based venture capital (VC) firm, Knife Capital, couldn’t shake off their doubts.
The venture funding/fundraising process is a bit like buying and selling in an open market, but with less haggling. Basically, there’s something of value and two parties on either side deciding whether what they are getting is a good deal.
If both parties think they are getting a good deal, handshakes follow, and money exchanges hands. But if at least one party finds it unsatisfactory, they would have to decline and take a walk.
That’s how funding talks usually work. Well, unless one suddenly discovers they are dealing with a situation where saying “no” is some kind of offense.
And in this week’s edition of the FHFH series, Böhmert, Co-Managing Partner at Knife Capital, tells me that one such bizarre incident sits in her memory as her most unpleasant venture funding encounter.
Apparently, saying “no” can cause problems
The South African VC firm, through its partners, does dabble into startup initiatives by supporting several pro-startup interventions. But it’s no secret that Knife Capital has a preference for scale-ups; companies that have traction and have proved their worth, while not necessarily being profitable, as Böhmert once explained.
So, for a number of reasons including the fact that the startup in question was a bit too early-stage, coupled with a valuation disconnect and doubts about scaling prospects, Knife Capital opted to respectfully decline to invest in the said startup despite holding a few talks.
What was to come later was quite the shocker. The founder, who until getting a no from the VC firm was amiable, suddenly switched up on them like they were sworn enemies and decided to take “legal steps.”
The founder claimed to have missed out on several other non-descript funding opportunities while in talks with Knife Capital and was due some compensation. It’s like watching a cloth seller get mad at a potential buyer for choosing not to buy a blouse that doesn’t fit and asking to be paid for time spent on haggling.
“When we declined the investment the founder turned toxic, accusing us of having cost him numerous opportunities of having raised money from other funders (but refused to give any names) and threatening to take us to court. We were actually served a legal letter requesting compensation,” she recalls.
The matter was eventually quelled when Knife Capital got its lawyers involved. But Böhmert says she’s quite appalled by the way the founder “turned from charming and pleasant to insulting and threatening.”
“It was extremely unpleasant, especially as some of the additional threats started to become personal,” she tells me.
And the plot does thicken
Böhmert has earned her stripes in the South African VC space where she has put in work since the 2000s.
It all began some 25 years ago when the South African/German citizen arrived in South Africa from Germany on a three-month internship. She was to return to Germany after that but providence had something else in store.
After stints at Siemens in Johannesburg and Dimension Data in Cape Town, Böhmert caught the entrepreneurship bug and started off by launching Cape Venture Partners.
Startup funding was hard to come by at the time, and with a view to tackling that problem, she managed to raise a USD 28 Mn fund in 2007 from Hasso Plattner, co-founder of the software giant, SAP. This fund enabled investments into various businesses.
Böhmert eventually joined Eben van Heerden and Keet van Zyl at Knife Capital in 2011 and the VC firm has built quite the portfolio and scored a number of successful exits. But things aren’t always so pretty as backing the right startups can be an extreme sport.
For every diamond unearthed, there’s a tonne of dirt to excavate. And sometimes, dirt is dealing with founders who care a lot more about their take-home pay than the business itself.
Böhmert recounts one episode with some co-founders whose attitude towards the entire establishment can be summarised as walking in with the expectation that the VC bears all the risk while the entrepreneurs demand corporate salaries and perks.
“In this example, 80 percent of the funds raised would have been utilised for the VERY HIGH salaries of the founders, leaving the business short of the growth capital it actually required,” she tells me.
“The real red flag was the reaction of the individuals when this was pointed out to them. They vehemently refused to accept any reduction to their salaries to the benefit of the business. This clearly demonstrated a lifestyle approach and these are not the kind of founders we would want to support,” Böhmert adds.
Gut feelings and consequences
Even when everything looks right, it can go horribly wrong. And the South African investor has seen this play out first-hand on a number of occasions.
Böhmert says there have been one or two times when everything else was perfect and the only reservation was a gut feeling. And in hindsight, perhaps it would have helped to embrace those second-thoughts instead of casting them aside.
“Sometimes investments just look too good on paper; growing market, product-market fit, great traction, capable team. But there is this niggly feeling about company culture and the integrity of the individuals,” she says.
“Looking back at some investments, the niggly feeling was there but overruled by the picture-perfect plan. Which in the end didn’t turn out to be so picture-perfect, exactly for the reasons that were already identified subconsciously. Lesson learned: listen to these niggly feelings,” Böhmert notes.
When I ask about incidents of fallouts or disagreements with founders that have led to a discontinuation of funding negotiations, Böhmert says she’s experienced quite a few in her practice.
“It normally is a result of a disagreement on the terms of the investment such as milestones that need to be achieved before the next tranche of funding is released.”
She adds, “It is one thing to promise certain performance in a pitch but clearly something else if you have to deliver on such promises to get the next tranche. When entrepreneurs push back too hard, it is a sign that they don’t really believe that they can achieve the traction that often underpins the valuation.”
The other stuff
In relating the worst pitch she has ever sat through, Böhmert reveals that she once heard an entrepreneur finish off his pitch by stating that he isn’t sure if he should continue with the business as he doesn’t really believe in its success. “That was the end of the conversation,” she tells me.
Böhmert says she’s more inclined to invest in companies run by a “well-prepared team with proven traction that can excite me from the first interaction onwards.”
In her own words, she’s drawn to teams that are “fun to talk to but professional, no push-overs but open to feedback, convinced of their abilities and able to acknowledge their weaknesses, ambitious but realistic, passionate and committed to the journey, a clear path to scale and ways to generate meaningful returns within a given period of time.”
On the other hand, she’s put off by arrogance, misrepresentation of facts, lifestyle approach to business, and lack of consideration for the long haul.
African startup founder or funder who fancies a feature on this “not-boring” series? Please reach me via [email protected]