Tag: Investing in Startups

When evaluating these metrics, it’s important to consider the unique challenges and opportunities present in the continent’s diverse markets.

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As the African startup ecosystem continues to flourish, investors are increasingly turning their attention to the continent’s innovative entrepreneurs.

However, making informed investment decisions requires a deep understanding of key metrics that can indicate a startup’s potential for success.

In this blog, we explore some important metrics to consider before investing in African startups in 2024.

1. Total Addressable Market (TAM)

Definition: The TAM represents the overall revenue opportunity for a startup’s product or service. In the African context, it’s crucial to consider not only the current market size but also the potential for growth as infrastructure and technology adoption improve across the continent.

Example: Let’s say you’re launching a mobile money transfer service in Nigeria. To calculate the TAM:

• Population of Nigeria: ~200 million
• Percentage of adults with mobile phones: ~80% = 160 million
• Percentage likely to use mobile money services: ~40% = 64 million
• Average annual spend on money transfers: $100

TAM = 64 million * $100 = $6.4 billion

This gives you an idea of the potential market size. However, remember that you won’t capture the entire market, so it’s also useful to calculate Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM).

2. Monthly Recurring Revenue (MRR)

Definition: The predictable and stable income generated each month for subscription-based startups. For subscription-based startups, MRR is a critical metric that shows the predictable and stable income generated each month. A growing MRR indicates that the startup is successfully acquiring and retaining customers.

Example: Imagine you have a SaaS product for small businesses in Kenya:

• 100 customers on the basic plan ($20/month)
• 50 customers on the premium plan ($50/month)
• 10 customers on the enterprise plan ($200/month)

MRR = (100 * $20) + (50 * $50) + (10 * $200) = $2,000 + $2,500 + $2,000 = $6,500

A good MRR growth rate for early-stage startups is often considered to be 15-20% month-over-month, though this can vary based on the industry and stage of the company.

3. Customer Acquisition Cost (CAC)

Definition: CAC measures the total cost of acquiring a new customer, including marketing and sales expenses. In African markets, where consumer behavior and marketing channels may differ from other regions, understanding the efficiency of customer acquisition is crucial.

Example: Let’s say you’re running a food delivery app in Cairo:

• Total marketing spend last month: $10,000
• Sales team salaries: $5,000
• Number of new customers acquired: 500

CAC = ($10,000 + $5,000) / 500 = $30 per customer

A “good” CAC depends on your business model and LTV. Generally, you want to recover your CAC within 12-18 months.

4. Lifetime Value (LTV)

Definition: LTV estimates the total revenue a business can expect from a single customer account throughout their relationship. A high LTV to CAC ratio (ideally 3:1 or higher) suggests a sustainable business model.

Example: Continuing with the food delivery app:

• Average order value: $15
• Average orders per month: 4
• Average customer lifespan: 24 months
• Profit margin: 20%

LTV = $15 * 4 * 24 * 0.20 = $288

The LTV:CAC ratio in this case would be 288:30 or 9.6:1, which is excellent. As mentioned, a ratio of 3:1 or higher is generally considered good.

5. Churn Rate

Definition: This metric tracks the percentage of customers who stop using a product or service over a given period. In African markets, where customer loyalty can be influenced by unique cultural and economic factors, a low churn rate is particularly important.

Example: For a mobile banking app in Ghana:

• Customers at the start of the month: 10,000
• Customers who left during the month: 200

Monthly churn rate = 200 / 10,000 = 2%

What’s a good churn rate? It varies by industry and business model, but for SaaS companies:

• < 5% annual churn is considered excellent
• 5-7% is good
• 7-10% is average
• 10% needs improvement

For consumer apps, these rates might be higher. The key is to benchmark against your industry and continuously work to improve retention.

To know if your churn rate is good:

1. Compare to industry benchmarks
2. Look at your trend over time – is it improving?
3. Compare to your growth rate – your growth should outpace churn
4. Consider your business stage – early-stage startups often have higher churn as they refine their product-market fit

6. Gross Margin

Definition: Gross margin, calculated as (Revenue – Cost of Goods Sold) / Revenue, indicates the profitability of a startup’s core business model. For African startups, it’s important to consider how local factors such as supply chain challenges or currency fluctuations might impact this metric.

Example: Let’s consider a solar energy startup in Kenya selling solar panels and installation services:

• Revenue from sales and installations: $100,000
• Cost of solar panels and installation materials: $60,000

Gross Margin = ($100,000 – $60,000) / $100,000 = 40%

What’s a good gross margin? It varies by industry:

• Software/SaaS companies often have gross margins of 70-80%
• E-commerce businesses might see 20-40%
• Manufacturing companies could be in the 20-35% range

For our solar energy example, 40% is quite good, considering the hardware involved. To improve gross margin, the company could look into:

• Negotiating better prices with suppliers
• Optimizing installation processes
• Offering higher-margin services like maintenance contracts

7. Burn Rate

Definition: The burn rate shows how quickly a startup is spending its capital. In the African context, where follow-on funding can be more challenging to secure, a sustainable burn rate is crucial for long-term survival.

Example: A fintech startup in Nigeria has:

• $500,000 in the bank
• Monthly revenue: $50,000
• Monthly expenses: $100,000

Monthly burn rate = $100,000 – $50,000 = $50,000

This means the company is “burning” through $50,000 of its capital each month.

What’s a good burn rate? It depends on your funding situation and growth stage.

Early-stage startups often have higher burn rates as they invest in growth. The key is to ensure your burn rate allows for sufficient runway (see next point) to reach key milestones.

Also Read: 2023 Recap: Major Themes in African Tech

8. Runway

Definition: Closely related to burn rate, runway indicates how long a startup can continue operating before it runs out of cash. A longer runway gives African startups more time to achieve key milestones and secure additional funding.

Continuing with the previous example:

• Cash in bank: $500,000
• Monthly burn rate: $50,000

Runway = $500,000 / $50,000 = 10 months

Is 10 months a good runway? It depends, but generally:

• Less than 6 months is concerning
• 12-18 months is often considered comfortable
• 18+ months gives significant breathing room

Within 10 months, this startup should start planning its next funding round or focus on reducing the burn rate/increasing revenue.

9. User Growth Rate

Definition: This metric measures the speed at which a startup is acquiring new users. In Africa’s rapidly evolving markets, a strong user growth rate can indicate product-market fit and the potential for rapid scaling.

Example: An edtech app in South Africa had:

• 10,000 users at the start of January
• 13,000 users at the end of January

Monthly growth rate = (13,000 – 10,000) / 10,000 = 30%

Is this good? For consumer apps:

• 5-7% weekly growth is considered good
• 10%+ weekly growth is excellent

This translates to roughly 20-30% monthly growth, so our example is doing well. However, growth rates often slow as the user base gets larger.

10. Active User Ratio

Beyond just user acquisition, it’s important to track how many users are actively engaging with the product or service. This metric can provide insights into user satisfaction and the startup’s ability to create lasting value.

Definition: The proportion of total users who are actively engaging with the product or service.

Example: A mobile banking app in Ghana has:

• 100,000 total registered users
• 65,000 users who performed at least one transaction in the last month

Active User Ratio = 65,000 / 100,000 = 65%

Is this good? It depends on the type of app and how “active” is defined, but generally:

• 20-30% is average
• 30-50% is good
• 50%+ is excellent

With 65%, this app is performing very well. To improve further, the company could:

• Analyze what makes the active users engage and try to replicate those factors
• Re-engage inactive users through targeted campaigns
• Improve the onboarding process to activate new users more effectively

11. Mobile Adoption Rate

Definition: The percentage of users who access a startup’s product or service via mobile devices. Given the prevalence of mobile technology in Africa, understanding how well a startup’s product or service performs on mobile devices is crucial. A high mobile adoption rate can indicate strong potential for widespread user acceptance.

Example: An e-commerce platform in Nigeria tracks user access:

• Total monthly active users: 100,000
• Users who accessed via mobile devices: 85,000

Mobile Adoption Rate = 85,000 / 100,000 = 85%

Is this good? For many African markets:

• 70-80% is good
• 80%+ is excellent

With 85%, this platform is performing well. To improve further:

• Optimize the mobile user experience
• Develop mobile-specific features
• Consider a “mobile-first” or even “mobile-only” strategy

12. Payment Success Rate

Definition: The percentage of attempted payments that are successfully completed. For fintech startups or any business involving digital transactions, the payment success rate is a critical metric. In African markets, where payment infrastructure can vary widely, a high success rate demonstrates the startup’s ability to overcome local challenges.

Example: A digital lending app in Kenya tracks payment attempts:

• Total payment attempts last month: 10,000
• Successful payments: 9,200

Payment Success Rate = 9,200 / 10,000 = 92%

Is this good? It depends on the context, but generally:

• Below 90% needs immediate attention
• 90-95% is average
• 95%+ is excellent

At 92%, there’s room for improvement. Strategies could include:

• Partnering with multiple payment providers
• Implementing retry logic for failed payments
• Educating users on common reasons for payment failures

13. Unit Economics

Definition: The revenues and costs associated with a single unit of sale. Understanding the revenues and costs associated with a single unit of sale is crucial for assessing a startup’s potential for profitability at scale. In Africa, where market conditions can vary significantly between countries, strong unit economics are a positive indicator.

Example: A solar home system provider in Tanzania:

• Price of one system: $200
• Cost of hardware: $120
• Installation cost: $30
• Customer acquisition cost: $20
• Servicing cost over 2 years: $10

Unit Economics:

• Revenue per unit: $200
• Total cost per unit: $120 + $30 + $20 + $10 = $180
• Profit per unit: $200 – $180 = $20

Is this good? It depends on scale and growth rate, but generally:

• Positive unit economics is a good sign
• Higher margin allows more room for scaling and market fluctuations

With a 10% profit margin, this company should focus on reducing costs or increasing value (and price) to improve unit economics.

14. Regulatory Compliance Score

Definition: A measure of how well a startup adheres to relevant regulations. Given the complex and often changing regulatory landscape across African countries, a startup’s ability to navigate these challenges is crucial. A high compliance score indicates lower regulatory risk and better positioning for long-term success.

Example: A fintech startup in Ghana creates a compliance scorecard:

• AML/KYC procedures: 95/100
• Data protection: 90/100
• Financial reporting: 85/100
• Consumer protection: 80/100

Overall Compliance Score = (95 + 90 + 85 + 80) / 4 = 87.5/100

Is this good?

• Below 80: High risk, needs immediate attention
• 80-90: Good, but room for improvement
• 90+: Excellent, low regulatory risk

At 87.5, this startup is doing well but should focus on improving consumer protection measures to reduce regulatory risk further.

15. Social Impact Metrics

Definition: Measures of a startup’s positive impact on society or the environment. While not always directly tied to financial performance, social impact metrics are increasingly important for startups operating in African markets. These could include measures of job creation, financial inclusion, or environmental sustainability, depending on the startup’s focus.

Example: A microfinance platform in Uganda tracks:

1. Financial Inclusion:
   • New bank accounts opened: 50,000
   • Percentage of female borrowers: 60%
2. Job Creation:
   • Direct jobs created: 500
   • Estimated indirect jobs created through loans: 2,000
3. Environmental Impact:
   • CO2 emissions reduced through funded projects: 1,000 tons

Is this good? It’s hard to benchmark as it depends on the startup’s size, focus, and goals. However, investors and stakeholders increasingly look for clear, measurable social impact. To improve:

• Set clear, quantifiable social impact goals
• Regularly measure and report on these metrics
• Align business strategy with social impact objectives

For all these metrics, it’s crucial to:

1. Benchmark against industry standards and competitors
2. Track trends over time
3. Set clear targets for improvement
4. Use the data to inform strategic decisions

How to Assess Startup Metrics

Remember, while these metrics are important, they should be considered as part of a holistic view of the business.

For example, you might tolerate a higher CAC if you have a high LTV and low churn rate. The key is to look at them holistically and in the context of your specific business and market.

A high user growth rate might justify a higher burn rate, as long as you have the runway to capitalize on that growth. Similarly, a high active user ratio might allow for a higher customer acquisition cost, as users are clearly finding value in your product.

In addition, a startup might excel in one area but need improvement in others. The key is to use these metrics to identify strengths and weaknesses and to guide strategic decision-making for sustainable growth.

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When evaluating these metrics for African startups, it’s important to consider the unique challenges and opportunities present in the continent’s diverse markets. Factors such as infrastructure development, regulatory environments, and cultural nuances can all impact a startup’s performance and potential for success.

It’s also worth noting that while these metrics provide valuable insights, they should be considered alongside qualitative factors such as the strength of the founding team, the innovativeness of the product or service, and the startup’s ability to adapt to the rapidly changing African business landscape.

As the African startup ecosystem continues to mature, we can expect to see more sophisticated data collection and analysis tools emerge, providing even deeper insights into startup performance.

Investors who can effectively leverage these metrics, while also understanding the unique context of African markets, will be well-positioned to identify and support the continent’s most promising entrepreneurial ventures.

By carefully considering these key metrics, investors can gain a comprehensive understanding of an African startup’s performance, potential, and risk profile. This data-driven approach, combined with a nuanced understanding of local market conditions, can help guide investment decisions and contribute to the continued growth and success of Africa’s vibrant startup ecosystem.

To explore investment opportunities and leverage detailed metrics and analysis, visit Daba’s platform today and start your journey towards high-quality investments in Africa and emerging markets.