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Near term pain, long-term gain | November 2022

Dear Partners and Friends of Raba,

The last few months have been productive despite a turbulent environment marked by frenetic markets and a number of unresolved questions — some, hugely consequential.  We expect capital flows to follow based on how this turbulence is resolved. From our conversations, we are seeing a resulting hunker-down-and-wait mentality and in cases, sellers of assets.  This environment presents unique opportunities for the partnership.  As others pull back, we are focused on accelerating our learnings, updating our frameworks and building our brand to earn the right to be early partners to the next generation of the best founders and teams across the continent.

Since our last review, our companies continue to make strong progress in building their teams, acquiring licenses and building product.  Seven Raba companies raised additional capital.

New companies that join the partnership:

Stealth: raised a $10M initial round to incubate a new fintech.  Raba joined a consortium that includes a preeminent global venture capital firm, a global fintech and payments leader, and a strategic publicly traded company.  The opportunity is driven by the strong demand for continued digitization of consumers and businesses across Africa.  This is a first for Raba and different from our founder-led investment thesis in that this is capital backing an idea before it assembles a team to execute on it.  We are encouraged by the progress so far and the strategic combination of groups involved.   We will share more details in the future.

TFK: (The Fashion Kingdom) closed a $2.6M seed round led by CVenture in backing Fadi Antaki and team.  Raba joined Foundation Ventures, The Cairo Angels, and fashion industry veterans Paul Antaki and Nasser Chourbagi as part of the round.  TFK is building an Egyptian e-commerce marketplace for fashion, beauty and home accessories items.  TFK launched their marketplace in September 2020 and today carries over 200 brands and serve over 160,000 customers.  Learn more here.

Near term pain, long-term gain…

It may sound counter-intuitive, but this environment is good for venture and founders …

Let me explain.  Over the past several years, growth was rewarded above all else.  Grow, grow, grow and you can raise more and figure out the business model later.  There are instances where this probably worked out, but those are exceptions.

The burst of venture dollars into the earliest stages of an entrepreneurial ecosystem is a great thing.  It is a stimulant for more risk-taking and more founder experimentation, and it raises the probability of real breakthroughs.  Beyond the headline rounds of mega financings and celebratory TechCrunch articles, startups serve as important training grounds for future founders, managers and venture investors.  Everyone picks up new habits — some good, others not so much.  The next couple of years will unwind some of the poor habits of years past.  As we go through the ebbs and flows of the cycle, a shift of investor and founder mindset will happen.  The inputs will need to be higher quality, and so will the conversations, as they get back to answering fundamental questions, “am I building a product that customers need, will pay for, and at economics that make sense?”

This is a good thing... Deeper analysis of business models and a focus on quality revenue that syncs to an appropriate level of investment (burn) are the right conversations to be having.  Understanding burn multiple and rubrics for measuring the health of your business are company building 101 —  in software you have the rule of 40 and in fintech, the rule of 200 (a newer heuristic described in this whitepaper from our friends at Coatue).  The most important component in our view, is retention.  Strong retention is an obvious priority — your customers stick around and keep paying you.  As a friend and co-investor put it, high retention businesses are like a layer cake — you only get to stack cake layers (new customers) on top of a stable cake base (existing customers).  This supercharges great businesses.  A reasonable question to ask and keep revisiting is whether the business model has “layer cake potential.”

Why? Retention drives long-term value — as described in this excellent piece on durable revenue and long-term value creation from Meritech.  Durability of revenue drives long-term business value as measured by the company's discounted future cash flows.  At an early stage, cash flows are rarely the focus but the business model we fund is our focus.  Our job as investors is to evaluate for “layer cake potential” to determine what kind of cash flows we can anticipate in a future state.  These are the conversations we are having with founders (we suspect others are too).  The downstream impact on organizations should lead to thinking more critically about business models (not all models are meant to be venture backed, as we are learning today).

We are encouraged by these conversations, and expect that stronger habits are being formed and ultimately better businesses will get built.

Studying success...

There are certain criteria we look for in founders — we call it the personal foundations that raise the probability of their success.  We regularly revisit our framework of questions we ask and how we ask them to better understand founders beyond their generally impressive resume and increasingly professional presentations.  Meeting founders is like a job interview, where each interaction counts given limited information and time.  To help us understand what great looks like, we maintain a catalog of founder traits and experiences, supplemented by data on a range of successful people across disciplines.  We’ve studied people from Sara Blakely, Michael Jordan to Mansa Muhsa, members of the Rothschild family to lesser known figures like Sam Zemurray (please send us books, podcasts, interviews, etc).  My goal is simple — to have a framework to ask better questions and to make better decisions.  We will write about our learnings in our upcoming annual partnership letter.