Africa’s startup ecosystem is structured in a way that allows you to get funding as long as you have a good idea. There will be people willing to invest and get you to a point where you can build and get your first 100 customers, probably 1000 customers, or make your first $100,000 or $1000000 in revenue.
There is the build phase – At this stage, you’re building a product, getting your MVP, and product-market fit with a more defined target market, and you are beginning to make money.
For example; you’re no longer working from home but from an office space, you probably have a good number of people working for you and you’re now introducing some structure to the mix like an HR team which is great. It shows that you’ve got action and you’ve got revenue coming in. But one of the key differences between a startup and an SME is that: for an SME, that person could be happy and satisfied with that. That is, if you make $1 million the year before, you just aim to make another 1.5 or 2 million the following year, and maybe in 10 years, you make 10 million. This is not bad at all because, at least you have enough money that takes care of yourself and your family, the founding team, and enough money to take care of the business. This is sometimes referred to as the dividend play; where people just take dividends at the end of the year and they look forward to the next year, grow a little more and share dividends. But, if you are a startup, the chances are that you’ve got investors who have put in money and are looking at 10 times that investment in the space of five to seven years so you need to scale. Certain assumptions will be made in this article like you’ve got a product market fit and you’re already making money so, you’re not building an MVP. If you’re in the MVP stage of your startup, this article is probably not for you. But you need to be able to have a certain amount of money to be considered a scale-up.
Let’s get to the 7 things to help founders scale:
#1: Addressable market size
One of the reasons why you need to know your total addressable market, or at least your service addressable market, is that when it’s time to scale, you need to start reaching out to those people. The obtainable market for a startup at a startup level may not be big enough for you to scale. It is at this stage that you begin to look at what the service addressable market is. Under the addressable market size, there are two key areas; the first one is several potential customers – when you compare your product/service and you look at your service addressable market, do you have enough customers to give you that? I’d say in terms of physical numbers, do you have the numbers to give you that? When we talk about addressable markets; it’s always more important to talk about not just physical numbers, but dollar signs as well. This depends largely on your business as there is no hard or fast number that everybody needs to do.
I know a Fintech who looked at their market and what they want to do with $50 million in revenue. For them to scale, they need to have the numbers to do that. 50 million divided by the average one customer gives you a year, will give you the number of customers that you need to reach, to get that. And then once they’ve got that number, for example, say 5 million customers. At least, They need to hit 5 million and the question to ask at this point is; I’ve got 50 million, 50 million equals 5 million customers. Do we have 5 million customers in our current market? Do we have up to 5 million people in Nigeria that will pay for this product/service? If that number is 5 million, you know, for a fact, there is no way you can have 100% of the market. So, if after doing calculations, the number ends up being 5 million, then you should be thinking twice and considering other options like going to a different market or maybe moving to Ghana to get that 5 million. For you to scale, you need 5 million people, so you need to look for 5 million people if you’ve done the calculation, and it just happens that there are not up to 5 million people in the places that you can reach. If you can’t get 5 million, then you need to come to the point, probably very reluctantly, that you cannot scale your product or your solution and you might start looking for another product or another solution.
If you have done the work properly when you were just starting, you would know your service addressable market. This is why it’s important to find these things out in the early beginnings so that we don’t get to a point where you’re ready to scale, and then find out that you don’t have the market for it. So hopefully, you would have done this work beforehand so it’d be an easy tick. This is one of the things that investors need to be asking founders right at the very beginning to have clarity on whether you have that.
The second subpoint is that customers all need to have the same or very similar needs. If your customers all have similar jobs to be done, then it’s easier to scale.
For example, the customers of a loan service company all need the loan, what differs is the use of the loan. In that case, everybody in that market has a similar job to be done. It will be different if you sold a car for example; not everybody likes Mercedes or not everybody likes BMW. So, whilst everybody wants a car to drive, people might want different types/brands. And there’s a lot of differentiation out there and we will come to that in a bit. But if the needs are very similar; what you sell to person A, you can easily replicate that and sell to person B, and there are quite a several, up to 5 million A’s in your market that you can easily sell to. In the example, What that means is that you don’t have to change your product or solution too much to reach more people, so you can use the same product and just replicate that product, which makes it easier to scale. These are the two key areas of the addressable market size. If the metrics that you’re getting in those two areas are very positive then, you’re in a strong position to scale but, if you’ve got some weaknesses in any of those two things, then you may need to make some changes if you feel you need to. Then the other one is very similar to what we’ve just spoken about;
#2: Solution distinctness.
What makes your solution different? What makes it distinct? Different is part of it but, what makes it distinct? And there are three things that we’ll cover under this.
- Repeatability: if your customers are similar, you can repeat that product to similar groups of customers. So, having similar customers is one thing but being able to repeat that product, will sell that product very easily to those customers. I know of a loan company and one of the challenges is that when people are taking loans, they want different interest rates. So they have three or five different interest rates for different customers. But, what that does is that it adds a certain level of adaptation or complexity to their product. This is not to say that you can’t do that but, if you start doing that just to meet your customers’ needs, it might prove more difficult to scale. In my opinion, the simple thing is to say; ‘We have a big enough market, we have enough to meet 5 million people or we have much more than 5 million, so we can meet the 5 million target. But if we begin to see that to meet that 5 million, we need to maybe change our rates, it’s something we have to think about it. It’s much easier if you have something that is very repeatable. Henry Ford once publicly revealed that when he started his business, all his cars were black because it made it so much easier to make more cars and so he didn’t give the customers options. If you wanted the yellow car, you’d go to a different supplier but at the time cars were a new invention, people didn’t have much of a choice and they didn’t want much of a choice either because they just knew it’s a car and buying the right color was not a huge factor for them. Henry Ford found it very easy to sell because it was just one color of the car, a simple process and so he just churned out as many black cars as possible – same model, same car, same color.
- Differentiation: Any product will always have alternatives and these alternatives may not necessarily be a direct alternative. For example; one of the biggest competitors to iTunes now is Spotify, some people argue that one of the biggest competitors to Apple, as a company, is Spotify. You can use Spotify on Apple but just imagine Spotify says that you cannot install our app on iPhones, you can only install it on Android devices. You find that there could be a dip, maybe a less significant one, but there could be a dip in the sale of iPhones. So ultimately, you need to understand what exactly your product is, and what makes your product different. Again, this is linked to the distinctiveness of your product. What’s your unique selling point? It could be that you have very great customer service. I usually joke that in Nigeria, I can enter into any business and be very successful. All I need to do is have a good customer service team because customer service in Nigeria is abysmal. Another USP could be your speed – you are the quickest in delivering pizza, your pizza may not be the best but people can be rest assured that, if you order a pizza now, in 10 minutes, it’s at your door. That could make you unique! People might think; I’m just hungry. I don’t care how it tastes and I’ll go with Gerard pizza over Pizza Express because I know Gerard will be with me in 10 minutes guaranteed. Another very good example was EasyJet, in the airline industry. Easy Jet will get you to your destination on time. If your flight is at 10 o’clock, your flight must leave at 10 o’clock and it’s meant to arrive at a destination at 12 0’clock, it will arrive at the destination as well at the right time and people knew them for that. So, even if I knew they were cheap, even though they didn’t have the comforts and the luxuries that the other airlines will give you, you certainly know that if you are flying EasyJet, you’re going to get to your destination on time. So people that have time issues will always go with EasyJet and yes! That’s another way of differentiating yourself. Another differentiation could be the cost. You could differentiate yourself at costs by bringing your price low although, that’s not a very good differentiator. This is because somebody else would just come in tomorrow and be cheaper than you.
- Dependability: You need to be able to defend your space. In doing that, it has to be a product that other people can’t easily copy. Using the example of the loan company, this is one of their biggest challenges because there are now so many lending companies in Nigeria. When they started, their unique selling point was that you could get a loan irrespective of your location in Nigeria. People were impressed that they could get a loan without actually going into a bank but, you have so many people doing that now and so, it’s no longer a new thing. The important point here is that dependability may change over time and you need to be looking at that. Whilst that was a great point for the loan company over the banks at the time because you don’t need to open a bank account to get a loan, things have changed now. They have to look for another way to defend their space because anybody and anyone can set up a loan digital lending company and the barrier to entry is so low. And if your product is not difficult for people to imitate, then people will just imitate it and begin to make money and this might tamper with your ability to scale. If all the other things are not increased for you, then that’s then taking potential customers away from you. So, these are the three things on; Solution distinctness.
#3: Revenue model
This is about how you make money. The three sub-areas that I’ll talk about in this one are. Here is where the value, is very different from where the perception of the value far outweighs the price and the cost of ownership. For example; there’s this guy called a Formato, he has an ice cream van, in front of a school. When the sun is out and the children are out, Formato brings his van and so, all the children know him. However, his ice cream is like 10 times the price of normal ice cream and he has a very fancy ice cream van, almost like a very authentic Italian style, but not the common ones you can easily find in the UK. I presume that he came from Italy and so he gave it an Italian name, Alfonso. So people just feel like, there’s more to this guy and his ice cream and that’s why he can sell it for 10 times the normal price. Personally, and for most of the parents who have children in that school, rather than going to a shop to pay 10 times less, the value we’re getting from that or the perceived value we’re getting from buying Alfonso ice cream that’s almost 10 times more expensive, is to make our children happy. So, it’s no longer about the ice cream instead, it’s about the experience for them. As a parent, if I say no to my kids’ request for ice cream, I’m not just robbing them of ice cream but, I’m robbing them of the whole Alfonso experience. What this Alfonso guy has been able to do very well is, to create some sort of value or perceived value that outweighs the price that we have to pay. So you’ll see people queuing up to buy this ice cream but it’s no longer about the price for us. Also, why do people buy Apple phones? They’re always so expensive. But they have that perceived value, that when you use an iPhone, you’ve joined the Apple family and for you is almost like, separating yourself from a family to use any other phone. So you don’t mind paying the extra to get an Apple phone. Now, if you can build a product that does that, then you’re on your way to scaling easily. Again, all the other factors mentioned earlier have to be true. It has to be uneasy to copy, you need to have enough market size; enough people to serve it to. But if you can add this as well, then you know, you’re on your way, to scaling.
#4: Automated Processes
This involves the key processes that help you deliver your products. These processes need to be automated as quickly as they can because if it relies heavily on human intervention, they’ll be difficult to scale. Whatever requires human intervention is limited. Using a loan company as an example, back in the days, when you want to get a loan, you have to go to the bank where someone has to be there to attend to you, collect your documents and as such, the bank had to create many branches so that they can reach many people which resulted in the need to recruit many people. At the moment, what is happening through technology is that a computer can serve a hundred thousand people and they can be in different locations at different times. All you need is a mobile app or website that they can use so, all of a sudden you don’t need people in five branches anymore, and as such, makes the process automated. The more automated your processes are, the easier it is for you to scale. Founders should be looking for opportunities to add a lot of automation to their products. If it’s not people-intensive then it’s easier to scale.
Like amazon for example, in their warehouses where humans work, amazon created robots that do the sorting so, you still need humans but not so many humans. The robots are quicker and more effective, they do not have off days, sick leave and all, and help you reduce the activities you do with human beings. This is not just automation, the fewer human being you need to deliver your product, the better.
#5: Leverage Resources
If in the process of creating value, that supercomputer can do three or four things at the same time, it will be great. So, you can use one thing to do multiple things at the same time.
#6: Economies of Scale (operating leverage)
As you scale, it should not become more expensive. The bottom line of economies of scale is that your marginal cost should not be increasing, Marginal cost is how much I need to spend to add a product. If I have a hundred and I want to make it a hundred and one, whether you are adding ten or more, it is detrimental if your marginal cost is increasing. Your marginal cost may be reduced, this happens more when you are landing; whereby, as you are adding more people, your marginal cost is reduced. For example; if I buy one computer to serve ten people and the computer costs 100,000 Naira and that’s 10,000 Naira per person that am serving now if I add one person to the person making it the eleventh person, then my marginal cost is reduced and I am earning more as I have more people paying for the computer. You can easily add more people to your business than necessarily add to the unit economics.
#7: Funding
We have two main areas:
- Cash Flows/Positive Flows
This means you making a lot of money from your products or service to fund the scaling, if you are, then you are on the good side. Using Amazon, at a point, people thought they were losing money but they were making lots of money but their investors were investing in other things so, when he stopped, people realized they were making money. When he became the richest man in the world, people began to understand that he was making money all along but spending on other things.
- Access To Funds
If your revenue is not enough for you to scale, do you have other sources to get the funds, and how many sources do you have? Are investors interested in your products? A company that has access to investors is likely to scale. But for those that don’t, you have to search for them
way before you need them, tell them about the business, build the relationship, and be clear that you don’t need the money now. You just want to tell them about the product that you are building and that, you will come back to them when you want to scale.
