From Here Ventures Investor Update - September 2023
It's with great enthusiasm that we share our mid year-ish performance update. Reflecting on our journey since the start of the year, I recall words from our last Annual Investors Letter - "Africa is the final frontier for global development and for those whose spirits yearn for adventure and impact".
The energy, opportunities and transformation taking place on this continent are palpable.
Fund Details
Portfolio - 8
Markups - 5
Markdowns - 0
Average check size - 153K
Stage - Pre seed(5), Seed (3), Series A(1)
Executive Summary
In January 2023, we set out on a mission to localize our approach to venture investing in Africa. Our goal was clear: align our strategies with the ground truth to unlock the potential for a 3-5x return.
With this in mind we are targeting a portfolio construction strategy where 65% goes towards companies with an ability to liquidate our position from balance sheet within 48 months with 35% going towards classic venture capital with long term equity instruments like SAFEs and priced rounds.
With the venture debt approach the sweet spot lies in businesses that already have meaningful traction, are already profitable or with a line of sight towards profitability within 12-18 months with strong margins.
Since embarking on this strategy we have made two separate investments (Twiva and Eden Care) and interestingly enough in both cases ended up utilizing both venture debt and equity instruments in parallel.
We fully appreciate and embrace the classic venture model where certain types of companies require longer time horizons to create and realize value.
The one caveat on our portfolio construction strategy is we recognize the need for a slight adjustment in the ratios between venture debt and equity from an initial 65/35 to a 50/50 split in this fund.
With 56% of committed capital deployed so far the current ratio between venture debt and equity across the portfolio stands at 15% to 85%. We have some catching up to do in order to get to our projected ratios.
The upshot of this pragmatic, fundamentals focussed strategy is it has clarified our thinking and conversations with founders revolving around the fundamental questions; are you chasing valuations or profitability/strong fundamentals?
It is unequivocally clear to us that it is almost impossible to chase both at the same time successfully.
Africa is not a country
Conventional wisdom regarding scaling in Africa has meant entering new country markets as soon as one receives funding regardless of the stage of their business. A point of view and expectation championed by foreign investors who lack an appreciation for Africa’s inter-country differences, complexities of building on this continent and even when said investors operate locally they still lack first hand operating experience building for the African realities.
This blindspot has been the bane of destruction of many startups who after having received funding found themselves forced to chase growth in new country markets well before they were ready because valuations mattered way more than sustainability and healthy fundamentals.
We are seeing many companies that were the darling of the fundraising gallery shuttering. Here is an example.
When capital was abundant, everybody bought into the subsidized growth narrative in pursuit of valuations which at the time I believed was flawed.
I remember sitting down with one of our portfolio CEOs in April of 2022 after he had struggled to raise at a higher valuation just when the market correction was beginning to bite. Like everyone else he had embraced the thousand miles-wide-inch-deep strategy expected by investors as a proxy for value and catalyst for fundraising. My message to him was by failing to raise at what in hindsight would have been an astronomical valuation, he had dodged a bullet and should reconsider his strategy and double down on his home market, which he eventually did and have since posted profits in and as result of this go-deep in one market focussed approach are embarking on a robust strategy that would not have been possible if they were stretched thin chasing valuations via geographic expansion.
YC bump or curse?
The YC bump is also proving problematic as some companies that received the hallowed valuation bump by raising from YC are finding it difficult to raise as investors are not willing to get in at such high prices which are so clearly disconnected from ground truth in Africa. We have looked at at least one company who fit this profile and interestingly enough have decided to work towards investing in a direct pre-YC competitor who would provide us meaningful ownership and who would be very much aligned with our post money value adds. The founder sees the value we bring and is super keen on working with us. I expect this deal to close by mid October at the latest.
Pipeline looking promising
Last quarter we missed our capital deployment cadence of two deals per quarter and not from lack of trying. We are learning that investing is not as straightforward as one might assume. Finding opportunities one believes in and aligned founders is probably as difficult as dating.
While concerned, I balanced my anxiety with the notion that patience pays and it is better to move slowly than rush into situations one might later regret. Not deploying preserves optionality because there are always more opportunities down the road.
Today we have a very promising pipeline which fits beautifully into our sweet spot with opportunities we believe in and aligned founders. I expect we shall be adding two new companies to the portfolio with pre-seed ownership levels north of 12%.
Platform coming together
As you know we have the privilege of riding on the venture building capabilities provided by Impact Africa Network, our “parent” org. These include; talent sourcing, GTM know-how, networks, Launchpad and now Lokal Capital.
Lokal Capital is a homegrown project we are incubating at Impact Africa Network whose mission is to democratize startup investing via a community based venture model. Think Republic for Africa.
Since 2016 over $16B has been invested into African startups with approximately only 1% coming from local sources, which is both a huge missed opportunity and unsustainable for the ecosystem.
Lokal Capital is key to our venture building strategy as it bridges a critical gap in the local private markets. It brings accelerative capital into the equation because the money comes with a community of investors motivated to help turbocharge growth providing startups with that critical initial boost needed to get the growth flywheel going.
We are dogfooding this model with three of our homegrown spin outs including; ElevateHR, Shukran and Kinetic Education and expect to have news on this by January 2024. Stay tuned.
Concerns
Talent: the age old talent issue is still present but thankfully has cooled off given the tech slow down. We now have access to tech pipeline talent even though we are not out of the woods yet as the best talent is swooped up by foreign companies offering packets we can’t compete with. But the worst seems to be behind us in this regard.
Taxes: the newly elected administration has embarked on a tax expansion binge which I fear could have adverse effects on the business environment. Not sure how this will play out and affect us but we are duly concerned.
Forex: the Kenya shilling has lost significant ground on the dollar since just before the pandemic. In February of 2020 the Shilling was trading at 100 to the dollar and today it is trading at 145. While this has been great for extending runways when converting to local currency it places a strain on our ability to realize USD based gains down the road. Essentially, to realize gains we are going to have to extract significant value from a depressed currency.
Fundraising
We are on a path to close Fund I targeting a $5m close by Dec 31, 2023. Should we not hit the target we will duly call the fund closed and proceed to work towards the task of realizing returns for our investors.
Conclusion
In this September 2023 update, we find ourselves energized by the incredible progress made since embarking on our mission to localize venture investing in Africa in January 2023.
We've reaffirmed our conviction that Africa's unique challenges hold boundless opportunities, particularly in tech entrepreneurship where our focus on companies with rapid paths to profitability is proving successful.
While we acknowledge the evolving dynamics in the African tech landscape and the impact of global market corrections, our commitment to nurturing local startups remains unwavering.
Our portfolio companies: Lipa Later, Rology, Eden Care, Ubuntu, ElevateHR, Kinetic, Shukran and most recently Twiva continue to thrive, demonstrating the potential of African innovation.
As we move forward, we stay dedicated to supporting startups in mastering the basics, cultivating sustainable growth, and fostering a brighter future for our continent