How to generate business outcomes in Africa
21st Oct 2021
Several years ago, I read a piece called five ways to build a $100 million SaaS business. Like with most viral VC posts about startups like this one, it takes a complex and multi variate concept and breaks it down into a simplistic yet useful model, that's helpful in conceptualizing one very important part of building a venture: Pricing. In fact, the post is not really about pricing, it is about which type of customers a SaaS business should pursue to get to scale. It is simply an assumption that at different sizes, there is an implied ARPA (average revenue per account) that scales alongside that size. This is the first assumption I'll challenge in a minute.
By a power law distribution it is fairly obvious that there are a small number of extremely large companies that can afford to pay big money to vendors and suppliers, and a much larger number of small companies that can afford to pay less for products and services of value to them. When building a startup, both in determining market size and potential, projecting revenue growth, and most importantly, when pricing, it is necessary to understand who your initial target customer is, what they can afford, and how that scales. This analysis is pretty critical to knowing whether a business can make any money.
As the blog post states, you can think of each customer demographic and their associated ARPA range as an animal of a particular size. From flies or ants (consumers), to mice, rabbits (SMBs), deer, elephants and finally whales (enterprise). The analysis in the posts covers what is necessary to get to $100M in annual revenue when you are chasing different sized animals. If you're chasing flies or mice, with low ARPA, you need tremendous growth to reach scale, and either incredible performance marketing (and a budget to go with it), or inherent virality. If you're chasing whales, with high ARPA, you need a sales organization and the capital (and stomach) for long sales cycles, painful procurement processes, and highly political decision making.
I prefer to think about all this in terms of pricing, because it is often possible (and when it is, highly desirable) to generate more value, and command a higher price, from a smaller customer.
For example, several years ago I worked closely with the founders of Ophelia, helping them build their business from scratch. They are a direct to consumer health company delivering suboxone (anti-opioid medication) discretely to help people overcome addiction. An interesting thing that about the business is that suboxone is recommended to be used over typically 18 months. There is no detox and cold turkey recovery, it is a long process of taking your medication. The reimbursement rates for suboxone can run $600 for a monthly supply. But the customers are individuals. This means that a patient population of 200 would generate $120k in MRR! Needless to say, 200 customers is nothing to an online software based DTC business. If each customer generated $60 instead of $600 of monthly revenue, it would take 2,000 customers to reach the same MRR. At 2,000 customers, that it still not tremendous scale, but it demonstrates that you need increasingly scalable and profitable customer acquisition strategies as you move towards smaller customer demographics (and ARPAs).
The beauty of generating more value per customer, is that it's easier to just find enough customers organically or manually, without requiring complex and resource intensive acquisition strategies. Thus, venture scale businesses that go after consumers require enormous performance marketing and other budgets, in addition to the inherent virality necessary to achieve venture scale. Without such expenses, businesses can get to profitability very quickly, which opens up tremendous optionality in scaling, product development, and generating outcomes. Selling a profitable and growing company with no venture investment and a clean cap table, or recycling profits into continued growth and experimentation, are precisely the types of desirable outcomes for Africa that optionality enables.
Lately, this issue around pricing has been coming up frequently across our portfolio, and I feel like it's always an opportunity to engineer ways to create flexibility and optionality, and get to revenue targets earlier, without massive growth, which is much more sustainable.
In summary, what I appreciate about strategies that focus on smaller numbers of customers that each generate more substantive revenue, is that it provides tremendously flexibility. And flexibility is key to generating business outcomes in Africa.