Fundraising Fluidity

Entrepreneurial Ecosystems depend upon Conviction-driven capital to start, but Follower-driven capital to sustain themselves.

I just got off the phone with a founder in Africa, and they were complaining that upstream fundraising just takes too long (he’s been trying to raise a series B for over a year). Logically it makes no sense, because this company has a monopoly, has made a lot of progress with very little capital, and has a clear path to profitability and beyond that has unobstructed path to dominant market share.

The problem is that in a world of options, Investors would rather take their time to see if someone else will do the round, before committing. But the problem is there aren’t enough of them in Africa, to even create a competitive dynamic. By contrast Silicon Valley and India companies are raising six and seven figure rounds in weeks on Whatsapp and Zoom. Even if someone doesn’t have conviction, the fear of missing out drives one of them to act, activating a hyper intense sequence of bidding up, based on the imaginary fear of missing out.

These aren’t conviction investors at the late stage, they are momentum chasers. But the existence of 100 momentum chasers moves the market from inaction to action within weeks. That is the reason why the Silicon Valley and India ecosystem (where liquidity is next to nothing) are able to sustain themselves. Conviction driven investors may be rare but without an army of momentum chasers you just don’t have enough fundraising fluidity for markets to be fluid.

At the right level of fundraising fluidity, conviction driven investors can make money, and with the wrong level of fundraising liquidity conviction driven investors are left holding the bag.

This is the paradox of fundraising fluidity.