Incubators and SME Accelerators,
Bootstrapping involves growing a startup without external funding or enterprise support. In this case, startups rely on funding from its founders and trickles of revenue from sales and its operations. This is the classic Nigerian SME story of self sabotage. It’s why we rarely scale.
Bootstrapping is great in building a minimum value proposition and in understanding the actual problem to be solved in detail. But know when to stop. Bootstrapping is a long road to freedom. And travelling that long road is the type that can burn you down before you produce the required lights. Let’s face it, startups do better through support, incubations and acceleration. The Nigerian tech space is showing this, with Interswitch, Flutterwave and Paystack hitting that Unicorn (1 Billion dollars in capitalization) status. Flutterwave was even more amazing with theirs. They did it in just five years, with more valuation than almost all Nigerian banks (most of which have been in business in about 30 years). But they wouldn’t have gotten there through organic growth without external funding and acceleration. But what really is incubation and acceleration?
An incubator helps entrepreneurs flesh out business ideas while accelerators come after. They expedite growth of existing companies with a fully formed minimum viable product (MVP). Incubators operate on a flexible time frame ending when a business has an idea or product to pitch to investors or consumers that can be through accelerators or any other investment vehicle.
Incubators and accelerators nurture and prepare startups to scale. Incubators focus on startups at conception stage while accelerators target startups at a slightly later stage that have shown some level of traction. The traction later exposes them to more investors. The entire process (mostly involving technical enhancement, injection of corporate governance, high level exposure through networking and mentorship) prepares them and shows that are viable and ready to scale. Startups who successfully pass through incubators/accelerators receive seed investment during and at the end of their program. The seed investment is introduced to startups in exchange for equity. Yes, it’s better to give away a part of your ownership to do more. But you must have essence, structure and great advisory first. Once this is achieved, go for it for it’s better to own 10 percent of something that makes sense than 100percent of nonsense. That’s the game of incubators and accelerators.
One of the most popular incubators is the Y Combinator. Y Combinator (YC) is an American seed money startup accelerator launched in March 2005. It has been used to launch over 2,000 companies, including Stripe, our own Nigerian firm by the name of Paystack, Airbnb, Cruise Automation, DoorDash, Coinbase, Instacart, Dropbox, Twitch, and Reddit. The combined valuation of the top YC companies was over US$155 billion as of October 2019. Y Combinator created a new model for funding early stage startups. Twice a year they invest a small amount of money ($125k) in a large number of start-ups. They work intensively with the companies for three months, to get them into the best possible shape and refine their pitch to investors. Each cycle culminates in Demo Day, when the startups present their companies to a carefully selected, invite-only audience.
Incubators and accelerators generally are programs. What they need to see is that you are in a high growth market and that your idea is scalable. For the former, we are highly favored in Nigeria (thanks to our exploding population of young people, high internet penetration rate and use of smartphone. But the latter we have to build in our business. Incubators, accelerators, angels and investors beyond market growth potentials also need to see that the founders are deeply passionate with a disruptive narrative backed by data, and that they are organized and quite business ready. At this point, Incubators can help refine the plan, build the team, provide resources and invest in the company. Making profit already doesn’t have to be a criteria, but a reasonable cash flow should be.
It’s best for incubators or those interested in being one to have a physical facility and an on-site management for their subjects to explore. This should replace the current craze for virtual offices around us. As simple as this is, it most times changes the entire destiny of a firm, especially as it exposes it to structure, advisory, support and even walk in angel investors through pitches.
Angel or seed investors are early stage investors. They are built to invest and flip (sell). They typically fund startups at the beginning of their lifecycle. Venture capital firms on the other hand provides funds at a later stage most times to the same startups. But at that point they are glaringly more viable with a recognized customer base and established revenue stream.
We need more of this for Africa if we must fight our current reality. And that reality is that in most Sub-Saharan countries, poverty rates still exceed 70%. Recent estimates place Sub-Saharan Africa as the region with the second highest rate of unemployment, at 10.6%. To grow, Africa needs no more hand downs and palliatives. All that Africa needs with its young population is more fuel to the currently burning fire of tech and enterprise exposure to foreign direct investments. We just need enabling environments and SME seed funding through governments, foreign accelerators, angels, VCs and even our local upper class. Our highly liquid upper class (some with stolen wealth from government deals) needs to democratize that wealth through incubation and acceleration. It’s a better alternative to capital flight and bank interest rates. And the core focus should be around SMEs with disruptive business models; the types that create efficient alternatives to how we live. This can be done through more incubators accelerators and FDIs.
Strategy. Business StartUps and Corporate Restructuring Consulting
Uwaoma Eizu is the lead strategist at Hexavia! He is a graduate of Mathematics with two MBAs and over a decade of experience working with startups and big businesses. His core is in building startups and in corporate restructuring. He is also a certified member of the Nigerian Institute of Management, Institute of Strategic Management of Nigeria and the Project Management Institute, USA. By the side, he writes weekly for the BusinessDay newspaper.