Originally published on the MEST Africa Blog.
Hosted at the Meltwater Incubator, MEST Talks brings together skilled business and technology personnel, global capital investors, and budding entrepreneurs to share lessons learned, new trends observed, and actionable advice to tackle the rough terrain of the startup scene.
This month’s Talk themed “Preparing for the global stage” was a conversation on what it takes for a startup to be globally competitive and attractive to investors.
The panel featured Andrea Barrica, Venture Partner and Entrepreneur in Residence at 500 Startups, and Toro Orero, Managing Partner at DraperDarkFlow.
Below are notes from the event. Please note that these notes are paraphrased transcriptions from the live discussion.
Featured speaker, Andrea Barrica is a revenue-obsessed entrepreneur who loves to pitch and help others achieve their revenue and fundraising goals. Currently Venture Partner and Entrepreneur in Residence at 500 Startups, she focuses on helping founders pay attention on what has heart and meaning to their customers, team and investors.
Toro Orero is Managing Partner at DraperDarkFlow, a silicon valley based VC fund for awesome African startups that can change the world. DraperDarkFlow focuses on startups that have global vision, and not limited to Africa as the total market. Toro emphasizes on simplicity of the product, person (team), and execution, never the business plan.
1. What makes a globally competitive startup?
2. How can an African startup attract globally scalable investment?
3. What are common startup mistakes that hinder global competitiveness?
In a bid to answer the above questions, Andrea broke the technology business landscape into 3 segments – marketplaces, e-commerce, and SAAS (software as a service) companies. She delved into each of these segments, analysing key performance metrics that matter uniquely to each, and scalable marketing techniques with examples to rake in revenue every month.
Notes From The Event
500 startups is an accelerator that invests in high potential technology companies from anywhere in the world – businesses across all verticals. They focus on technology businesses that can grow through digital marketing and other scalable marketing techniques, but stay away from hardware businesses.
Andrea recommended 2 books with insightful tips to all entrepreneurs in the audience – Lean Analytics by Alistair Croll and Benjamin Yoskovitz, and 4 steps to epiphany by Steve Blank.
Quick definition: On an ecommerce platform, a visitor comes to your site and buys a product from a web based retailer. Examples from Africa are Jumia, Konga.
E-commerce companies are judged by investors on the following metrics:
- Volume of transactions
- Repeat buying
- Conversion rate
- Average cart size
Conversion rate – At the top of the customer acquisition funnel, how many visitors come to your site, what percentage of these visitors buy? These depend on the e-commerce site and its brand of course, but these are the things that every e-commerce entrepreneur should be thinking of.
Repeat buying – Measuring the re-purchase rate of an e-commerce store in preset periods, usually 90 days. Entrepreneurs should keep track of how many times a customer comes back to buy something else after the first order. She implied that the mark of a true pro is not the first order, but the re-order.
[Tweet “The mark of a true pro is not the first order, but the re-order.”]
Companies metrics change. In the beginning as an entrepreneur, you just want customers in general, anybody to come in and buy. You’re not really concerned about re-purchase rate and this shows in your metrics and roadmap. An ecommerce store with under 15% re-purchase rate has low potential, and this shows that the store is still in activation mode – focused on the top of the funnel.
A company with over 40% re-purchase rate has high potential, and shows that its strategy relies on loyalty and repeated customer buying. This helps investors get a sense of what kind of company or entrepreneur you are.
Average cart size – This is the average amount that one customer will buy. A shoe company will probably run about $100 average cart size,while a luxury company will run about $2000 per customer. This is very important because as an ecommerce entrepreneur, you want to make sure that the ratio of the CAC (cost of acquiring 1 customer) to LTV (lifetime value of a customer) makes sense.
[Tweet “You want to make sure that the ratio of CAC to LTV makes sense.”]
Search– How are you coming up in searches, what is your keyword strategy, are people searching for the products, how are you most often found?
These KPIs are the most common metrics investors use to evaluate the health of a e-commerce platform.
One important thing to note is that, in the beginning you will not have all of the KPIs checked. Start-ups are lopsided, so choosing what to focus on takes insight and analysis. It’s very important to know the one metric that matters to you, your business and investors.
[Tweet “Picking the right metric to focus on is key. You always have to trade off one for the other.”]
Also, it’s not always the obvious metric that matters. Any 2 sided marketplace entrepreneur will be quick to think it’s obviously about getting more users, but that’s not an exciting to an investor. It could be something else like the number of transactions that are on the platform at any particular time. Having a lot of users is good, but if your average cart size is high, or re-purchase rate higher than 30%, then you have something good worth investing in.
For e-commerce startups, global investors are looking for stickiness. What is it about your brand that makes customers come back over and over again to buy?
Quick definition: Marketplaces are a play on e-commerce. The major differentiation is that a marketplace makes money when demand (buyers) and supply (sellers) come together on your platform. Examples from Africa are OLX, Dealdey, Tonaton.
Marketplace companies are judged by investors on the following metrics:
- Successful matches
- Supply or demand side growth
- Inventory growth
Successful matches – transactions made on the site.
Supply or demand side growth – This is often a chicken and the egg scenario for marketplaces, when one side attracts the other. The merchants are going to come on when you have users, and the users are going to come on when you have merchants.
What investors look for here is rapid growth on either side of the marketplace growing quickly. They do not expect complete transactions from day 1, but look closely at the rate of growth on at least one side of the market (demand or supply). A good percentage to shoot for is 20% growth every month. Usually, you grow the supply side before the demand side.
[Tweet “What investors look for in marketplace startups is rapid growth on either side of the marketplace, not the number of users.”]
Inventory growth – You also want to see that the number of listings in the marketplace are growing because the customers will come when there’s more inventory passing through your site.
Investors want to hear how u deal with fraud and leakages because these are common marketplace issues. They don’t expect you to solve it entirely, but they want to see that you’ve thought about it and have schemes in place to tackle it. The problem doesn’t have to be solved but must be under control.
Building a marketplace is volatile business but investors fund it because successful ones are hard to replicate. Once a marketplace hits critical mass, it’s hard for new entrants to compete with it, because it gains customer loyalty and has a sense of defensibility from regular customers.
One thing entrepreneurs have to think about is “are you building a marketplace or a lead generation platform for one side?” Because this is usually the main cause of the problem of “leakages”. People meet a match on your platform and get off the platform to continue the transaction. You have to make sure your platform has a compelling reason why people don’t leave the platform to transact.
[Tweet “You have to make sure your platform has a compelling reason why people don’t leave the platform to transact.”]
Airbnb, a classic marketplace company faced this problem. They started unscalably by advertising on craigslist, cold calling and cold emailing. They then started to hire professional photographers to take beautiful, distinct pictures of users’ rooms to attract demand. This made the supply side so beautiful and kept them on the platform.
Another thing they did to retain the supply side is they launched a platform-wide insurance policy. This is one very good secret for dealing with leakages in marketplaces – Figure out the problems of one side of your market, and build it into your platform.
[Tweet “Figure out the problems of one side of your market, and build it into your platform.”]
Some marketplaces turn out to be lead generation platforms and that’s fine. If regardless of loyalty schemes, your users keep going off your platform to transact, you should consider charging per lead, and make most of your money on first touch.
A good commission percentage for a marketplace company to take from its users is 20%. If the platform takes as little as 10%, there should be other sources of revenue to supplement it.
Offering quality, quick decision-making, offering payments, discounted prices, increased income, are all ideas you can tweak to add value to your platform.
Quick definition: People come to your website to solve problems for themselves on an on-demand basis. These type of businesses are usually built on a subscription model – monthly recurring revenue here is huge. Investors love this type of companies because it’s easier to forecast the cashflow over a period of time.
[Tweet “Investors love SAAS companies because it’s easy to forecast the cashflow and revenue over a period of time.”]
The KPIs to monitor are pretty simple. There are three levels of customer conversion to look for: sign up/free registration, activation (interaction with your product/service/website) and conversion to paying user.
Investors look out for stickiness in these companies as well. Stickiness signifies engagement. People pay with their money but they also pay with their time. If users stay up to 6 hours on your platform everyday, that’s very interesting to an investor.
[Tweet “People pay with their money and their time. If users stay up to 6 hours on your platform everyday, that’s very interesting to an investor.”]
Calculating CAC and LTV for SAAS companies is very important because a lot of entrepreneurs want to sell directly to customers but their product only costs so low, and when you do the math, you find that they only have a small amount of money to acquire customers one-by-one. SAAS companies have to have good inbound marketing strategies. A company’s CAC to LTV ratio should be atleast 1:5 to directly acquire customers profitably.
Churn rate – is when customers leave your platform. If your churn rate is above single-digit in a saas model, that’s bad thing.
Revenue – is key metric for SAAS companies- 20% growth every month is attractive to investors.
Its worth it to note that stickiness and engagement are not key KPIs for marketplace companies.
Notes from Q & A
Crowdfunding and fintech startups are similar to marketplaces. Their KPIs similar as well.
Installs and downloads are not that important for mobile app startups, rate of growth and engagement is what investors care about. A startup that was launched 3 years ago and has a million downloads is not interesting to an investor. On the other hand, a startup launched 3 months ago and has a million downloads, is very interesting. Rate of growth shows alignment within the team, and a clear vision. It also shows commitment of the founders, which is crucial, because investors do not fund part-time founders.
[Tweet “Don’t get stuck on how many downloads your startup has. Focus on how fast it’s growing instead.”]
Your rate of growth should ideally double every month. A startup that doubles every month, and sustains that growth over a period of time, is a gift to every investor. You can’t say your startup has been doubling month on month if you don’t say how long it has been happening eg 8 months, 14 months. You can’t just grow from 0% to 1% in one month and say you’ve been doubling month after month.