Thread by @docolumide

7 Efficiency Metrics for Building A Viable and Sustainable Startup for African Founders. These are the metrics I use to measure the quality of the startup I am building—my personal score card—and which I believe other African founders may find useful (Thread).../1

The best benefit of these metrics in my experience building GLOO has been that they have helped me to stay very rational through the news, hype and market cycles of the Nigerian/African startup ecosystems these past years. They ensure I’m not drinking my own Kool Aid.../2

That is: they prevent me from being chasing/distracted by ephemeral vanity metrics, like SM followership, office building size/fanciness, employee size, GMV, Gross Revenue, etc, that don’t exactly tell you if you are on the right path to actually building a REAL business ala.../3

1.) Annual Revenue Run Rate (ARR): Funds Raised Ratio

This shows the efficiency with which you are using investors funds raised to create net revenue. The higher this ratio the better.../4

If a founder has used half the funds I’ve raised to get to same level of net revenue traction, it’s a measure of being better than I am as a founder and/or having a better team than I’ve and/or a better product than my team has managed to build, all other things being equal.../5

The terminal consequence of this metric is easily seen during exit such as when one founder has raised $20m for a startup that exits at $40m and another only raised total of $2m to get to the same outcome../6

Since growth’s a big factor in being a startup, I personally try to factor that into this ratio with this formula (ARR*ARRCAGR)/Funds Raised. A startup with the same net revenue as I, but 2x my revenue growth rate, having raised same amount is far better! Why?.../7

Because, all things being equal, he would have twice the size of my revenue in a year, 4x my revenue in 2years, 8x in 3 years and 16x in 4 years! So the growth factor does count because it eventually compounds.../8

Taking a break. To resume later.../9

2.) Revenue Per Employee

As great as having a big number of employees in one’s startup is, I personally don’t think it’s anything to be proud of devoid/dislocated from the revenue one’s startup is generating averagely per employee.../10

If, for example, you say you have 1,000 employees, the way that number becomes impressive is by comparing your startup’s Revenue per Employee to that of the global benchmarks for your industry.../11

Say you are an ecommerce startup with 1,000 employees, as our local ecommerce biggies had in their hey days a couple years ago, I immediately know you need to to be doing close to $400million revenue to impress me with that number. Why?.../12

Because that’s the revenue Amazon’d have w/ that many number of employees. Even if one were to discount Amazon’s scale/brand into it, I’d do well as a founder, focused on building a REAL business, by pushing at hitting the global benchmarks for my industry. Keeps one honest.../13

The degree to which my Revenue per Employee meets industry benchmarks is the degree to which I would feel proud of the number of employees in my venture. Why?...14

Using local publicly available examples from Nairameteics, GTBank is N80m & UBA’s N31m. Just imagine that! It means GTBank hands down is a better team at the business of banking in Africa. Because they only need to hire ~a 3rd UBA’s staff strength to achieve revenue parity.../14

Imagine a founder not having to deal w/ complexities of managing 3x number of employees as your competition? Better culture, better engagement, better retention, better compensation—probably, thereby attracting/retaining great talents, which also compounds, as in 8 above.../15

3.) CAC Payback Ratio

This is the extent to which you get payback for the upfront cost of acquiring a customer (CAC) on a per month basis. What does a startup use to payback CAC? Gross profits—NOT revenue. Please note this very well. Very important. .../16

1st, CAC. Keep it simple. Divide total cost—direct & indirect—borne per month in winning new customers by number of customers won per month. (I prefer using net customer additions as my denominator to incorporate the element of customer churn into it. It’s tougher.).../17

Next, find Average Gross Profits per User (AGPU) per Month by dividing gross profits generated per month (in the period b4 that used to derive your CAC in 17 above) by the number of existing users (in the period b4 that used to get CAC).../18

CAC Payback Ratio = AGPU/CAC. I optimize for parity, which of course is unattainable. But it’s my idealistic proxy for PMF: a startup that wins customers that, in a subsequent month, payback in full the cost it took to acquire them in a prior month has unmistakable PMF. .../19

If you want to be more exacting, substitute AGPU in 19 above with AMPU (Average Margin Per User). AMPU = (AGPU - (CAC + VCPU)), where VCPU is Variable Cost Per User per month. If you use AMPU for it, you bullet-proof yourself from KoolAid-intoxication; it’ll make you sober.../20

4.) The 40% Rule Multiple

1st, The Rule of 40%, usu applied to SAAS companies, but which I have adapted for myself, says: your annual revenue growth rate + EBITDA margin must ~=40%. e.g if you’re growing revenue 100% YoY, you shouldn’t do EBITDA loss margin > 60%.../21

...100+(-60) = 40%. Or, e.g., if you’ve 10% profit margin, it’s okay if you can’t push revenue beyond 30% CAGR. However, this rule is most fit for at scale startups doing up to $50m revenue. Hence, for startups w/ >$1m annual revenue, what is needed is a multiple of 40%.../21

I optimize for a multiple of 4x and deem anything less than 2x unacceptable for any early stage startup that is executing very well i.e. if I’m only growing revenue at 80% YoY, I should at least attain EBITDA break even. The best startups usu attain 3x in early years.../22

I think those 4 I have treated are fine enough and can be applied to almost any startup. The other 3 are more specific to ecommerce startups and I’ve just realized I don’t want to teach my competitors how to run their startups more efficiently😂😜.

THE END.

ADDENDUM

If you chart these multiples across time, they’re not supposed to have a straight line i.e. remain constant over time. Their trend lines are supposed to oscillate between the upper & lower limits of what is acceptable while you try to aim for a target trend line.../24

E.g, if you’ve just closed a new round of funding, your trend line for Metric 1 will immediately dip. However, if it the dip is too far below lower bound, it may be an indication that you’ve raised much more capital than your startup REALLY requires to hit next milestones.

https://twitter.com/docolumide/status/846264277497511936