Paystack’s cashout distribution, over the weekend, gives some insights into the dynamics of how startups work.
The word “Startup” here is as defined primarily by the American technology and investment community -usually tech businesses that grow very quickly.
Here are some of its attributes using Paystack as a case study:
- How startups make money: Most startups make money by capital gain and not profits – at least not initially. So it is really not about how much money the business is making from operations. To put this in perspective, Jeff Bezos is rich because of the share price of Amazon -not its profits. So when YCombinator invested $125k in Paystack for 7% equity, it made money by selling those shares for about $14m.
- The number of shareholders: Paystack has many shareholders. Personally, there are at least nineteen (19) I know of. Typical private businesses are not willing to give up equity so easily. But most startups usually dilute equity to multiple shareholders because they need to raise money. Assignment: Go look at the number of equity investors Paga has for instance. You will find out that there are a lot of them.
- The time to cash out: It took Paystack investors about 5 years to recover their investments with significant gains (2016 to 2021). Studies have revealed that a 5-year stretch is the typical time frame investors want their money back from startups.
- Return on Investment (ROI): Paystack gave its investors a whooping 1,440% ROI after 5 years. That is the type of return startup investors (VCs and angel investors) want. It’s hard to get that within such a short time frame in other industries asides “software technology based startups.” This is largely because of how rapidly these startups can scale. For instance, it’s easy for apps like TikTok to go global compared to manufacturers which require physical structures.
This post is for educative and information purposes. And, this is not recommending that everyone launch a startup. There are nuances in our Nigerian environment that need to be taken into consideration. Hopefully, I can share them before the end of the week.