VC plays a “catalytic role” in innovation, but can investors interfere?

Venture capital plays a “catalytic role” in innovation and fills a pivotal gap within the global financial and business landscape, yet VCs have to make sure they get the balance correct when it comes to whether they are helping their portfolio companies or simply interfering once an investment has been made.

That is according to VCs at Quona Capital, a venture firm focused on fintech in emerging markets including Africa, who were speaking to Disrupt Podcast for its four-part mini-series  “The essential guide to African VC”.

Quona, alongside 10X Entrepreneur, Catalyst Fund, and Knife Capital, is a partner for the focused series, which really digs into venture capital, looking at its business model, how startups and VCs can work together to build Africa’s tech ecosystem, and what issues still remain to be resolved. 

Johan Bosini, venture partner at Quona Capital, said he believed VC plays a “catalytic role” in innovation and growth around the world.  

“If you look at many of the technology companies that you and I engage with today, the majority have been venture backed,” he said, citing US-based companies that are “challenging convention” in their category, like Uber, Airbnb, Slack and SpaceX, as key global examples. But why does VC exist in the first place?

“If you look at the rules of capital markets, someone with an idea or a new technology often doesn’t have any institution to turn to other than family and friends, otherwise venture capital,” said Bosini. 

“Generally financial regulation limits the interest you can charge on loans, and the risk inherent in any startup or new founding team usually does not justify those capped interest rates, meaning the price has to be higher to justify taking that risk. So bankers will only finance a new business to the extent that it has hard assets, and very often these early-stage businesses don’t have those hard assets, and that’s where venture steps in.”

Given the size of the risk, venture firms expect high returns, in the “high 20s” according to Bosini, and given the failure rates of startups and the demands of LPs this means it is a quite a pressured business.

“You are looking at a bunch of LPs that are normally expecting a minimum hurdle return and then obviously having some outsized returns on top of that. And the ecosystem has gotten really competitive,” he said, citing statistics that say most VC firms do not actually make any money.

“This combination of high expectations from LPs as well as a very competitive ecosystem means finding the best deals is key, and you need to move fast to secure those deals. So I think a lot of the pressure doesn’t really come from LPs, it is more from the ecosystem,” said Bosini. “A large component of your job is pretty reactive.”

So is backing the best startups an art or a science, and to what extent does luck play a part?

“It is both art and science. It is all about finding great teams who can tell a story that attracts a combination of great staff, great investors, great customers, in a market sector that can offer outsized returns for us and obviously for the founding team as well. Does luck play a part? Absolutely. Some businesses have thrived in COVID, for example, and some have really struggled, and nobody could have seen an event like this coming, so there is an element of luck to some businesses, as well as to some venture deals where you happen to be in the right place at the right time,” said Bosini.

What about after an investment has been made? Monica Brand Engel is co-founder and Managing Partner at Quona. She says companies such as hers can play a key role in helping startups grow into companies that can generate the expected returns.

“First and foremost is being there. Being there when there is a difficult problem, being there when you need capital, being there with an introduction,” Engel said.

As opposed to helpful, can VCs sometimes be too interfering, however? Engel uses a “mum” analogy.

“Sometimes the way parents can be helicopter parents and interfere, any venture capitalist who said they hadn’t crossed a line would be lying. And they cross the line because they care. They want to help,” she said. “But any true mentor or parent knows the potential for learning by making your own mistakes, learning by taking risks.” 

However, it is worth remembering that VCs have institutional memory that founders do not, and that sometimes can be valuable.

“You like to make new mistakes, and not the same mistakes, so we do sometimes lobby harder when we see someone maybe about to hit a wall, and thinking there might be something we can do to avoid that pain,” said Engel.

Even when a founder chooses to go their own way, and makes mistakes, VCs need to respond in the right way, she said.

“There’s no “I told you so”, there’s no “shoulds”, we’re all learning together.”

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DP #22: The essential guide to African VC, episode 2 – April 17, 2022 – Disrupt Africa has partnered Quona Capital, 10X Entrepreneur, Catalyst Fund, and Knife Capital to put together a four-part podcast series on the African venture capital space – how it works, what its dynamics are, and what is happening in the sector.

“The essential guide to African VC” educates listeners in the “A-Z of African VC”, digging into venture capital, looking at its business model, how startups and VCs can work together to build Africa’s tech ecosystem, and what issues still remain to be resolved.

Episode two takes listeners through the anatomy of a VC deal – discussing how investments are made, where VCs source their startups from, and what due diligence looks like. We also look at potential exit routes for VCs, and how they go about ensuring they are prepared for them.