Thread by @ido_sum

#AfricaTech #Reflections and the importance (plus issues) with how some think about #TAM (Total Addressable Market) in our ecosystem. Here we go 👇🧵:

1/ We(#VCs) care a lot about TAM. If it’s not big enough, it makes our ability to imagine a large enough exit problematic. What is large enough exit? One where our share at exit (say 5-12% post dilution in future rounds) is a fund returner. On $150m fund – you can do the math.

2/ Africa has many ‘large problem’ or ‘large verticals’. #Agri, #Health, #Education, #Logistics, #Agri and many more. There are also horizontal ones such as access to payments, and B2B ones. While data is thin, many get the part of how big is the overall market somewhat right.

3/ Yet, too many founders I meet fail in the (as important, if not more) important second step >> What are the implications of your business model to participate and capture a meaningful part, and which part it maybe (and how do you size it).

4/ What do I mean? Take the health market. Huge consumer spend, but super fragmented. Insurance penetration 1-3% - so big issue with who pays, and how you secure ‘re-occurrence’ and predictability of revenuies over time.

5/ Most medications given at clinics and pharmacies, without prescription, and usually with no real diagnosis (treating the symptoms, not the cause).

6/ There is margin on the medications. There is margin in the financing of it to pharmacies. There is margin in the data aggregation. And so on and so on.
As making money on pharma wholesale is the simplest, many start from there.

7/ But this gives you access to a fairly small part of the total spend on health, and also if it doesn’t end in better service to patients, there can only be very few winners (not a defensible positioning), winning on execution and mostly on scale.

8/ Want to win the patient relationship for data and controlling more of the value chain? that's more complex. Who owns these relationships? Can you bring clear value prop to the patient that he/she feels in their pocket and in their health?

9/ If you focus on serving HMOs – again your TAM is very small. If you take over the HMO, more complex, and if you target the real TAM – you must focus on the 97% uninsured. Where’s the margin and defendable model there?

10/ Somewhat similar with logistics. Market is very large. Cost of logistics in absolute and relative terms is among the highest globally, due to many inefficiencies. So – any tech platform should remove those and win – right?

11/ Yet, the problem is much more complex. Some inefficiencies are a result of infrastructure (roads / ports / trucks) – which tech will not fix (initially). Others are financing. Some are the layers of intermediation and ownership of logistics assets.

12/ Some are inability to match supply and demand. So its not just the TAM of logistics – its understanding the money flow, which participant takes what margin, and where your tech platform / solution / aggregation can win by being much better and capture the value.

13/ So – how can one go about it? If data isn’t out there (which is usually the case), take a top to bottom approach to get the TAM indication, but than move into a bottom up approach. Analyse the cash flows and cycles in the value chain between the layers of participants.

14/ Talk to a few in each layer defining their problems and estimate what margins they take + what can be replaced / solved by tech vs. what can’t. if you can find a (very large) niche in which less are playing, or solve for the real pain point and not just top line, much better.

15/ Help us understand your thinking by sharing the assumptions. Good investors will be able to challenge, help you test them, and hopefully ask questions to help you focus on what’s really important. Weaker investors will just want to see the initial large TAM…

16 / #TAM is key, but its not sufficient to quote a large one. Having the depth of what's bneneath and what you can capture (and how) is many times the secret sauce to diffrentiate and build a defensable strategy.

End / #Africa lacks data and clarity on value chains structrue and size of each layer - so this one (finding what really needs to and can be solved) is on us. Giagatic upside to those who will get it right.

#AfricaTech #AfricaVC