Each week during Season Two of The Flip, we’re going to publish an essay that corresponds with that week’s podcast episode. This Thursday we published Season Two, Episode One: Co-Building The Future - High-Touch Venture Investing, featuring Adedana Ashebir with Village Capital, Maelis Carraro and Aaron Fu with Catalyst Fund, Lwazi Wali and Sam Sturm with Founders Factory Africa, Erick Yong with GreenTec Capital Partners, and Selam Kebede with Antler.
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In May 2019, I was invited to the launch event for Founders Factory Africa here in Johannesburg, where I had the opportunity to meet the team, as well as some of the founders of their first African cohort. What struck me about that evening and still resonates with me today, in particular, was the zeal with which FFA evangelized their investment model: the venture building model.
FFA is not a typical accelerator, they said. Instead, they’re co-builders - FFA co-builds products with their portfolio companies as an extension of the team. This model has merit in Africa in particular, they argued, where human capital, particularly of a certain caliber or skillset, can be more impactful to an early-stage startup than financial capital itself.
This view was corroborated by Maxime Bayen of GreenTec Capital Partners, another Africa-focused venture builder, during a podcast interview I had with him a few months later. GreenTec is unique in that they employ a “results for equity” model, which they believe enables startups to achieve certain objectives without equity dilution.
What do early-stage startups need funding for?, he questioned.
Startups that are attempting to scale need funding but also need talent, time, people, access to networks, access to investors, access to devs, and so on... Rather than raising funding from investors to solve these problems, they can work with GreenTec to find the solutions.
There are two types of capital that early-stage investors provide to their portfolio companies: human capital and financial capital.
While the level of post-investment, hands-on support from angel investors and venture capitalists differs depending on the individuals and the firms, their primary value to their investees is in the financial capital they provide. Meanwhile, the core value proposition of accelerators and venture builders is that they provide varying amounts of non-financial resources to their companies. The difference between accelerators and venture builders, then, becomes how bespoke those resources are, with the latter offering more hands-on services than the former.
To understand the merits of the high-touch, human capital intensive approach requires us first to begin with definitions and categorization of the types of investors and entrepreneurship support programs on the continent. This section borrows and adapts the definitions laid out by Thibaud Elziere, a Founding Partner of the European startup studio eFounders, in this Medium post.
First, accelerators -
provide a more substantial amount of money (between $20k and $100k) in exchange for equity (usually around 5–10%). In this model, a large number of hand-picked startups — usually tens of startups per batch and between 1–5% acceptance rate — benefit from mentorship and education during a few months. Most of the accelerators offer a strong network of alumni and investor contacts. Startups also benefit the recognition of being part of the accelerator’s selection.
On the continent, the above numbers may look a little different. For example, Startupbootcamp Africa offers €15,000 for an 8% equity stake for participation in their three-month program. That compared to global accelerators like Y Combinator, which offers $125,000 for 7%, Techstars, which offers $120,000 for 6%, and 500 Startups, which offers $150,000 for 6%.
These accelerators also offer content, access to mentorship, connection to investors and other in-kind resources, such as credits to products like AWS, to help mitigate initial costs for an early-stage tech startup.
On the continent, the services offered by many (but certainly not all) accelerators are generally pretty surface level. According to the Global Accelerator Learning Initiative (GALI) data on the accelerator landscape in emerging markets (with the caveat that Sub-Saharan African respondents account for 8.5% of total respondents and roughly 16% of emerging market respondents), the largest services provided by accelerators are networking connections, mentoring, funding advice and workshops.
Those accelerators deemed more valuable, certainly, are those that can provide meaningful connections to investors. Many VCs use accelerators not only as deal flow but as a heuristic in assessing prospective investments. Here’s Aaron Fu, the Head of Growth at Catalyst Fun and formerly the MD of MEST,
I think it’s also important to recognize that a lot of programs are very much there to be a badge of consistency. To me, one of their primary value propositions is their selection process. The fact that you got through their regular selection process and made it to the cohort on day one. I think a lot of investors want to see that you’ve been through someone else’s rigorous election process and made it through that. I think also a lot of programs are designed with maybe two or three very specific outcomes. And very often one of those two or three is to be able to find follow on investment for their cohort, right? And to me, super similar to grad school as well, whereby a KPI is certainly how many of the grads actually get placed.
However, not all accelerators offer this level of uniformity - some offer more specialty. Take Village Capital, for example, which has developed sector-specific accelerator programs. Their vertical, narrow programs are crucial for the efficacy of their peer-selected investment model, in which the entrepreneurs of each cohort make the investment decisions for Village Capital. The benefit of sector-specific programs may also ensure a better, more impactful experience for program participants, especially when compared to the experience of other accelerators whose cohorts span across a wide set of sectors.
Venture builders and high-touch programs
That experience - of being in a program with a diversity of other startups and that is not especially valuable for its participants - was part of the inspiration for Maelis Carraro, the Director of Catalyst Fund, in the design and implementation of Catalyst Fund’s program.
When I launched my own startup back in 2013, I went through a couple of incubation programs. They all have a bit of a one size fits all generalized approach to acceleration and they didn’t end up being that helpful for us as a company. And all of the startups in the room, frankly, were at different starting points. And this is why when we started Catalyst, I wanted me to be extremely focused on individual entrepreneurs’ challenges and tailored support in a way that makes sense in the specific context to the company and can take them closer to product-market fit. So the methodology that works best we found is a venture building methodology.
Venture building is a more hands-on approach, in which an investment company offers more bespoke, co-building resources (often, in addition to financial and in-kind resources) to the startups in their cohort.
Here’s how Thibaud Elziere explains these programs (which he refers to as startup studios) in his aforementioned Medium article,
usually take a much bigger slice of the cake but provide a fully dedicated team and a lot of financial and human resources to a small number of companies (not more than a few each year), along with a strong platform (tools, a network, and knowledge). Some studios own the ideation process while some work with very early-stage companies. Studios’ support might last long, generally a few years, and in some cases during the entire startup’s life.
Though perhaps in its purest form, venture building is pre-idea, where a startup studio takes, along with its Entrepreneurs in Residence or in-house founders, test and validate ideas to take a startup from zero to one.
Take Akili Ventures - in Akili’s startup studio, their employees collaboratively test and validate startup ideas until such a time as they reach a certain level of traction and should be spun out into an independent venture, usually to raise follow on funding. Typically, an Akili Entrepreneur in Residence will then spin out with the startup to become its founder.
Founders Factory Africa employs two venture building models, one of which is similar in structure to the Akili model.
As FFA has a team of 40+ venture builders, they use these resources to test and validate ideas of their own, pairing those ideas with an Entrepreneur in Residence. These companies are incubated in house, until such time as the startup is ready to be spun out. FFA makes an initial £50,000 towards these businesses, and then another £100,000 as the business has proven a path to scale.
However, FFA also takes external startups in as cohorts, leveraging their internal resources to co-build with the startups themselves. In addition to their co-building services, FFA makes an initial cash investment of £30,000, plus additional in-kind resources that they value at £220,000. Their equity stake varies by startup.
Meanwhile, Rocket Internet is also similar in structure to Akili and the former of FFA’s activities in that they also incubate startups in house before spinning them out into their own entity. However, Rocket is known for building companies modeled after successful US startups in other geographies - Jumia employing the Amazon model in Africa is perhaps the most well-known example.
While the above-mentioned venture builders take businesses from zero to one, other venture builders - as in the case with FFA’s latter activities - apply hands-on services to existing startups.
GreenTec Capital Partners employs a “results for equity” model in their program. They do not make a cash investment nor do they receive any equity in the startups they work with until, through their company builder program, they achieve mutually agreeable KPIs.
Catalyst Fund is a grant-funded program, in which their startups are offered up to $100,000 in grant capital, plus their in-kind venture building services. Catalyst Fund's total investment in each company is valued at approximately $350k in total including grants, venture building, and other value-add services (including a talent placement program, corporate partnership facilitation, and more).
As a grant program, startups do not give up any equity to participate. However, Catalyst Fund maintains a rigorous selection process - they do not have open applications and instead only take in startups referred to by other venture investors, who have an intention to fund the startup after, together with Catalyst Fund, they achieve certain objectives.
Switching gears, MEST and Antler aren’t venture builders, per se, because they do not necessarily employ a team to co-build with the startups in their cohort - their content and services fall more under the accelerator umbrella, as well. However, I will nonetheless include them in this category because of the initial, upfront resources they provide in helping individual entrepreneurs go from zero to one.
Antler employs a talent investing model - their program is called a startup generator. Individuals come into an Antler cohort with the purpose of identifying a co-founder and are guided through a rigorous and intentional set of processes to find a co-founder and ultimately build an MVP. Upon completion of the program, these newly founded startups are given the opportunity to pitch Antler for seed investment. All program participants are given a $1,500 per month for the first two months, and those who are funded by Antler receive $100,000 for a 20% equity stake.
MEST’s Entrepreneurship-in-Training program is funded by Meltwater’s foundation, and see’s high potential entrepreneurs go through a fully-funded program to ideate and test a concept. Often, MEST’s EIT’s will pair up to co-found a company, and at the end of the program are given an opportunity to pitch for seed funding. MEST offers $100,000 for a 20% equity stake.
The business models of venture builders
As venture builders are venture investors, the real money for the firm comes during liquidity events. But until such a time, venture builders are running a business with much higher operating expenses than a traditional VC. So, how does that work, from a business model perspective?
Some accelerators and programs act as implementation partners for a specific development organization or agency looking to fund a specific initiative. Others may also receive grants for the ecosystem development work they do. A smaller portion also generates revenue through corporate innovation consulting services.
On the other hand, some accelerators are part of or directly supported by a corporate, such as Google for Startups or RMB’s AlphaCode in Johannesburg. According to GALI data, most accelerators are funded by corporates, followed by philanthropy and government.
On the venture building side, Akili’s venture studios are funded in two ways: first, through a fund, and second, through investment from corporates to test and validate ideas with a strategic mandate. In the Akili model, the fund covers the initial operating expenses, and when a startup is spun out, Akili (and its investors, through their investment) retains an agreed-upon percentage equity depending on at what stage the company is spun out, while the remaining equity is made available to the founders and follow on investors.
Founders Factory Africa raised a fund from two South African corporates - Standard Bank and Netcare. Their relationship with corporates is strategic, with mutual benefit flowing in both directions between startup and corporate. Similar to Akili, while FFA makes minority investments in their portfolio companies, their corporate backers take a stake in Founders Factory Africa rather than the startups themselves.
GreenTec Capital’s results for equity model was born out of their own entrepreneurial experience. They were a startup too, and started working with other startups at risk, in exchange for equity upon achievement of mutually agreeable goals. In demonstrating their value to startups, they have since been able to garner consulting work with development agencies, reinvesting that revenue into building the team to work with more early-stage startups.
Some programs generate revenue through clawbacks. Antler, for example, charges the companies that receive investment from then a fee of $15,000 to cover the cost of the program. Startups that do not receive an investment from Antler does not have to pay the fee.
Finally, Catalyst Fund which is managed by BFA Global, the research, innovation, and strategy consulting firm, relies on philanthropic capital to fund its initiatives. They are supported by the UK Department for International Development (DFID) and JPMorgan Chase & Co., and fiscally sponsored by Rockefeller Philanthropy Advisors. And while Catalyst Fund is considering monetization strategies to bolster their long term sustainability beyond the commitment from their backers, they do think that philanthropic capital should and will continue to play a role, given the type of early innovation they are funding.