Two years ago, Nigerian VC firm, Oui Capital, launched its second fund for African founders.

Tosin Eniolorunda, Co-founder and CEO of Moniepoint — one of the firm's earliest investments — was among its limited partners. And Olu Oyinsan, Managing Partner at Oui Capital believes this is a clear indicator of their success and credibility.

"I feel like I got my full circle moment quicker than expected. The life cycle of a fund is usually around ten years and it usually takes closer to that kind of time for things like this to happen. This is why I do venture; this is why I moved back home to create memories like this for myself and for the team. You can't buy it."

Six years ago, Oyinsan left his job as a Vice President, Investments at Ingressive Capital to start a fund with Francesco Andreoli, a former software engineer at IBM whom he met while in business school in the United States. Together, they've raised $40 million across two funds and invested in more than 20 pre-seed and seed stage startups.

With an acceptance rate of 2%, lower than Harvard's 3.4%, Oyinsan explains that investing in Africa is tough and argues that Africa-focused investors are some of the best around thanks to structural challenges that they must overcome before making successful bets.

As venture funding has slowed in the past two years, he points out that investors have evolved alongside, with many now playing the role of co-operator and therapist.

"A lot of what you have to do, especially as an early investor, is to just get people going."

Over 20 African startups have closed during the past 24 months. While the lack of funding contributed to many of these shutdowns, worsening economic conditions didn't help these startups' causes.

Nigeria, Kenya, Egypt, and South Africa are the continents main destinations of venture capital on the continent, but all four countries have seen currency devaluations that have forced multinationals out and reduced their citizen's purchasing power.

Despite what looks like a bleak situation, Oyinsan explains that his experience raising a fund when investing in Africa was not an attractive proposition for many investors has prepared him to offer support to portfolio companies.

Balancing founder potential with market realities  

If you're investing at the Series A stage, you have some years' worth of data to look at when making decisions. Early-stage investors, however, often have to work with really scant data forcing them to take bets on the founder and the market.

Oyinsan agrees but points out that brilliant founders often limit their chances of success by tackling problems they are unlikely to solve.

"Sometimes you see brilliant founders. They have great experience and want to build something for Africa that you probably need disposable income of $1,000 a month to afford. It can be a lovely product. They would execute brilliantly, but as an investor, you have to look outside the founder.

"Sometimes we step back from brilliant founders just because we think the market is not there or the headwinds that are coming are just maybe too strong, or it's just not the right time."

Dishing out rejections is a crucial part of a venture capitalist's role and Oyinsan explains that it is one that must be done with utmost consideration for a founder's emotions. While founders may react negatively to feedback about their business, he insists that those emotions are normal.

"I think that if you're totally rational in life, you might not make it as a founder. You need just a little sprinkle of delusion to make it as a founder."

In line with this, new analysts at Oui Capital are trained to write rejections with the firm's top brass kept looped in until new hires are familiar with the firm's process.

"I always say, 'Do not leave any space for an argument. Make it obvious that this is our own perception.'"

Regardless, he maintains that great founders take feedback well regardless of how it is delivered. He also identifies continuous learning as a key trait of successful entrepreneurs and investors.

With businesses requiring different skills at various stages, he explains that founders must be adequately skilled or risk being left behind. Good founders, he says, must recognise that the skills necessary for starting a business may not be helpful in building or growing a thriving organisation.

Early-stage investing is science and art

There are a few factors that could hint at whether a startup will succeed or fail but Oyinsan says that early-stage investing is equal parts science and art. When hiring analysts, the firm focuses on people who understand markets enough to have convictions about them.

Large markets are important, too, as is a founder or founding team. In evaluating founding teams, Oui Capital focuses on the team dynamics and skills.

Chemistry between team members ensures they'll work well together, but possessing complementary skill sets helps startups achieve their goals faster. Beyond factors that startups can control, it also analyses how government regulations, macroeconomic factors, and competition could influence a startup's trajectory.

Venture capital is not a silver bullet for funding in Africa

With all the challenges that African venture-backed businesses have faced recently, there have been question marks over the suitability of the asset class for funding startups in a notoriously volatile environment. However, Oyinsan argues in favour of venture capital in Africa.

"VC is a very viable funding option in the entrepreneurial or capital universe. The problem is you want to use VC for everything. VC starts to fail when you apply it to businesses it has no business backing."

Venture capitalists have two stakeholder groups — limited partners and portfolio companies — that they must satisfy or risk going out of business. However, both parties don't always have similar goals.

Managing expectations from both requires strong money management skills, Oyinsan says. With LPs unable to dictate what startups a VC backs, he explains that investors are freed to make decisions that they believe yield the best returns. "Portfolio construction is the secret to being able to follow a plan and return money to your LPs," he concludes.