Future of start-up funding: Why product and consumer sustainability is key to long-term success

By Omoruyi Edoigiawerie, Esq

Start-ups perform an increasingly important role in global and local economies by driving technological developments and shaping the modern world.

A comparison between start-ups and fully grown companies, reveals that start-ups are not only seen to be more agile, but they also continue to remain frontrunners in breakthrough innovation, willing to take on more risks, venture to unknown territories, and create new businesses or markets paths.

There is no gainsaying the fact that the start-up landscape has been dominated by venture capitalists (VCs) who invest heavily in promising start-ups with the hope of reaping huge returns.

The above analogy may be the reason many startups believe that their sustenance lies in external funding – which is the money needed to launch their up-and-coming business.

Although this funding can come from a variety of sources and can be used for any purpose that helps the start-up launch from idea to actual business, the spotlight, even for Startups, is more on venture capitalists and angel investors.

This has influenced many startups to build their business models around the convenience of these investors. The downside of this type of business model is that many techprenuers and start-up founders are distracted from focusing on the product, its market penetration, and business sustainability because they are either justifying the investment in their firms or redefining their processes to suit investor expectations or attract investment; and when this happens, the product suffers.

The above is not to say that investments in Startups are unnecessary or unimportant, but rather to expose the need for a balance and a mind-set reconfiguration where the product and the market are the focus, and the ability of the product to “keep the lights on” through market penetration is above average.

Recent happenstance in the ecosystem has shown how start-ups with very lively potential for growth and viable products have failed because they relied impulsively on investment funding.

In my opinion, it is better to encourage start-ups to focus on building sustainable business models and a strong product, rather than solely seeking out VC investment. For ease of analysis, this view is predicated on the following grounds:

1.           Venture Capital (VC) funding does not guarantee business success: While VC funding may provide a start-up with a significant boost in terms of resources and exposure, it does not necessarily guarantee success. Many startups that receive significant VC funding still fail. Therefore, it will be an error to rely solely on VC funding as a measure of success, the focus should be on building a strong product and sustainable business model that can generate revenue and attract customers, only using investment funding where it is entirely necessary as an early-stage buffer.

2.           Sustainability is pivotal: an industrywide analysis will show that startups that prioritize sustainability and a strong product in their growth trajectory are more likely to have long-term success. The reason is not far-fetched, building a business that can generate consistent revenue and growth, rather than relying on one-time injections of capital from VC funding rounds, is the only way to build a sustainable and authentic business. One thing that sustainability does, is that it helps startups build a strong foundation for growth and provides a blanket for navigating the challenges that come at the early and mid-stages of growth.

3.           There are always strings attached: as the saying goes, “There’s no free lunch even in Freetown” It would be unwise not to understand that VC funding often comes with expectations from investors and experience, one of the most dangerous forms of this, is the pressure to show or focus on rapid growth at the expense of profitability or reliable market presence, or in more dire situations, an exit strategy that prioritizes a quick sale rather than long-term success. These expectations can be very dangerous and oftentimes clash with the start-up’s vision and long-term projection. At the end of the day, product sustainability and a strong business model are jeopardised, startups end up finding it difficult to maintain greater control over their destiny and make decisions that align with their values and vision, they are compelled by circumstances to pander to the people whose hands are on the nuzzle.

4.           Pressure to raise more money never ends: investments are not gifts or low-hanging fruits, from the moment of investment, the demand for raising more money begins. Oftentimes, the incentives for the players are different; for the VCs, raising capital yields substantial management fees which is even more lucrative than the returns from investment, and thus the most important thing for the VCs may just be the ability to generate more fees by raising more capital, while the startups are pushed to seek additional investments to scale operations. In all this, the pressure diverts the attention from the product and market to funding the operations of the start-up and keeping it hooked on investor financing.

*Here’s what I think

Start-ups must begin prioritising building sustainable business models by paying more attention to product and market presence, the product should keep the business in shape or show a firm potential for the sustainability of the start-up. There should be less reliance on investment funding, and these investments should be seen as a buffer for early-stage growth and not a means of business sustenance. It should not be the sole focus of a start-up’s strategy.

At the end of the day, a product-driven start-up focus has a better chance at long-term growth because it places value on the product and puts in the effort to regularly improve the products to keep it attuned with market expectations. This is the focus that every start-up that values sustainability must-have, a drive to ensure that the product sells itself and by so doing becomes the lifeline of the start-up.

It is also important for start-ups to enable a system that relies strongly on a sales-driven approach – one that pushes them to focus on how the innovative product can meet the needs of more customers in a manner where it makes their daily living easier, this sort of system enables user reliance which in turn creates the necessary customer base that keeps the business afloat.

*Conclusion

It is time to go back to the basics- a realization that products and customers are the only sustainable lifeline a start-up can have. Hence products and sales are very important and should not be ignored. Investment should only be a temporary buffer and not a means of sustenance. At the end of the day, irrespective of the objective for the establishment of the start-up, sales, and customer satisfaction is the lifeblood of any company, not investment, and in them lies the key to long-term success and impactful growth.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on startups, established businesses, and upscale private clients in Nigeria.  The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com

*This article was first published by Techpoint in May 2023.