The danger of having insider information about a product, an industry, a culture, or a market is that you can quickly become complacent, thinking that you know it all. That’s the danger I must watch for every day as I go through various pitch decks of startups launching or expanding into Sub-Saharan Africa. The most significant oversight I have seen is lifting Silicon Valley metrics and business lifecycles and applying them to Sub-Saharan Africa. By this time, every venture capitalist and private equity firm should know that what works in Silicon Valley does not necessarily work in Tokyo, let alone Lagos or Nairobi. The metrics are so different that we need a totally different approach to designing KPIs and fundamentals for different markets.
Let’s start with the most common metrics for startups.
Number of users, anyone? So, you have a million users downloading your app or signing up for your platform. You’ve heard that startup X was valued at 20X the number of users or $50 per use. Now, you are going around with a pitch deck that values your startup at more revenue per user than the total monthly income of your average user. If your users plan to spend all their monthly income on your product, then go ahead.
Have you heard about GMV (gross merchandise value) and GTV (gross transaction value)? Nothing could be more misleading than this metric. A simple illustration of this oversight is Amazon and eBay. Amazon’s market cap is currently at 2X its GMV, but eBay is at 0.3X GMV (a 7X discount on eBay compared to Amazon). What about GTV? Mastercard processed $6T in GTV last year compared to PayPal at $1.4T. You would expect Mastercard to have a 4X market cap compared to PayPal, but no, Mastercard is seven times more valuable than Paypal, apples to apples. This should tell you that not all GMV/GTV is created equal. Next time you hear anyone say their startup is the Amazon of Africa, remind them that Amazon makes 16% gross profit margins. Most “Amazons of Africa” I have reviewed (including one today) barely break a 7% gross margin. When you add the high “soft” cost of doing business, you are walking away with no business model at all. All these soft variables need to be worked into every analysis.
We will skip through management and leadership and discuss TAM, SAM, and SOM instead. If you don’t know these terms, you are probably already bored out of this conversation and have dropped off. So, we will skip the explanation. The entire African continent can never be your Total Available Market (TAM). Launching in Cape Town and expanding to Rio de Janeiro might be easier than expanding to Lagos. What about that projected 5% to 10% Serviceable Obtainable Market (SOM)? Unless you have invented the cure for cancer or how to reverse aging, it will take a while to have customers warming up to your product. If you are taking a 10% market share and still coming up with less than a few hundred million dollars in revenue, the market is too small, and you should consider setting up a charity to raise donations.
Let’s end with runway. Runway refers to how long a startup can keep operating before it’s out of money. If you have raised a round and are burning cash to a 12-month runway thin, you are not stretching your runway to land more planes. Everyone knows how hard it is to raise funds in some markets. Some markets need entire airports, not runways, to get them to the next raise. If you are putting money into a startup that you know will run out of runway in less than 18 months, you already know where this is headed.
We need different rules for different markets. Everyone who writes checks for a particular market must invest in learning about that market. How do cultures in that market make decisions? What place does money hold in that market’s mind compared to, say, family? What’s the disposable income of the target market? Does the infrastructure for this GIZMO really exist? What’s the internet speed of the target market? What do the founders and cofounders think about integrity, responsibility, and respect?
If these soft pieces are poorly examined, we will get more startup death announcements than acquisition notices. And honestly, we can’t take any more death announcements. Our startup burial grounds are filling up quickly. Hello, hospitals and wellness centers!
Amon Munyaneza is a Venture Builder, Angel Investor , Digital Economy Evangelist,| Building Sustainable Impact Through Digital Inclusion.
