“Nobody here can check him. He is the founder; and to him, that means that he is God.” That’s Pearl, the co-founder of an Africa-focused fintech firm speaking to me about the startup’s founder. Pearl asked to be identified by a pseudonym to avoid clashes with this founder. “He is always at loggerheads with investors,” she adds. “But we have to keep up with it. We are in a fragile ecosystem and cannot avoid the bad PR. That will be bad for everyone.”
Days later, I listened to a recorded meeting between this founder and an employee. With a barrage of cuss words, he asked that the staff keep quiet or get fired instantly. “Employees and investors are at the receiving end of terrible founders—bad actors who are taking advantage of the high-trust ecosystem to live selfishly. So, when I heard that investors were collating a list of bad actors, I was excited; and I’m happy to support such a move because it has become necessary,” an anonymous general partner at an African-focused VC firm said to me.
According to three corroborating sources in the local venture ecosystem, VC firms have begun conversations about sharing information. The thinking is that sharing information will help stop rogue founders from replaying their scripts for several investors. The common thread from these sources, all of whom asked to remain anonymous, is that VCs have borne the brunt of unethical founders who see venture money as a private chest and a ticket to a better life. ”Why would I raise capital for a founder to build personal houses abroad in the name of offices?” the aforementioned GP asked.
When asked how VC firms are unable to spot such questionable founders during their due diligence processes, the GP said, “Most VCs only do their due diligence before they invest. Then they throw in money and hope the founder multiplies it for them. What we fail to realise is that it’s a huge temptation for founders to have sole access to the kind of money they have never managed before. That’s when strange thoughts and ideas come, and it takes a high degree of integrity to stay in line. Sometimes, it’s not even their fault. There should be checks and balances to help these founders.”
A general manager at a top African VC firm who spoke to TechCabal on the condition of anonymity shared how VC firms are learning and adapting to the behaviours of founders. “VCs are becoming more involved in the day-to-day operations of startups. We are learning every day and approaching due diligence with more sophistication and collaboration. In extreme cases, such as one I am privy to, a board sued the founder for squandering funds.”
Wavering ecosystem trust
Prior to 2015, several foreign investors looking to invest in emerging markets sidestepped Africa for several reasons, ranging from competence to integrity issues. However, the tide changed soon enough. Some African founders globally demonstrated integrity to match their competence. It took a few success stories to get the job done, but the ecosystem eventually opened. Investors rushed in, and a high-trust ecosystem flourished on the back of the “Africa rising” narrative.
“Trust is fragile and takes a while to build. The high-trust ecosystem we have today was built over time. It’s critical that the founders that are coming on board understand this and act carefully not to break it. Also, as an ecosystem, we have to be careful of bad actors and weed them out fast, because if the trust is gone, it affects everyone.” Oo Nwoye, TechCircle’s founder and long-time African tech pundit, said to Techcabal.
VCs may have their hands tied
From the outside, one can imagine VCs at the top of the ecosystem pyramid, controlling the flow of funds and immune from the antics of founders. But that picture is hardly correct. VC firms rely on the accountability of founders to thrive and make critical decisions. Where accountability and integrity become questionable, VCs are backed into really tight positions—and bleed a lot of dollars.
According to the general manager quoted above, VCs’ contracts with founders—term sheets—only protect the investments made by the VC firms, but do not hedge against scams and other unethical practices. “This puts VCs in a difficult situation, and the checklist is a response to these concerns,” he said.
For the local VCs involved, collaboration has become key as they strive to attain the common goal of evading bad actors. Their move mirrors a recent coalition by 13 African fintechs—including Flutterwave—who are teaming up to stop fraud and share data of “individuals and groups that have attempted or made fraudulent transactions.”
Read also: Nigerian fintech startups want to collaborate to fight fraud
While this move may add an extra layer of due diligence for investors, there are brewing concerns about how easily such a coalition could drift into gatekeeping. Some founders that spoke to TechCabal argued that VC firms on this coalition train must realise that they too owe the ecosystem the transparency they seek from founders.
The truth is: VCs, especially when they work together, can unlock opportunities for founders and overcome challenges with bad actors. However, the African tech ecosystem is nascent and bad actors are in the minority; so the necessity of a checklist at this stage largely remains debatable.