Categories
Series V

Banking on eyeballs.

Let’s say you’ve started a company and your product is one customers do not need to pay for but the gears of the business must be oiled and so you think of a way to generate revenue. Ads.

Here’s the thing, choosing Ads as a primary source of revenue in this part of the globe is a dicey model for a couple reasons: the stage of the market — businesses are still struggling to survive. There’s also the long road to building a sticky product before you become attractive to advertisers (which entrepreneurs forget when they cite Facebook as an example).

For Google and Facebook the chief revenue source is from ads but then in 2015, Apple added a feature to their phones and tablets that allowed users to block ads. Devices running on iOS were responsible for an estimated 75% of Google’s revenue from mobile search ads dealing a blow to online advertising. In 2016, the number of people blocking ads on a mobile device grew 102% from 2015. For ads to work, you need to get a good audience, high quality with high intent but whilst you grapple with that media consumption is moving from advertising to subscription-based models and it seems to be working. Netflix and Amazon continue to experience growth with their ad-free experience.

“advertising is a tax on the poor” — Scott Galloway

The leading reason for the embrace of subscriptions is the “tax” on our attention that we pay through advertising. Pausing to watch an ad is a speed bump and frankly, once you’ve tasted the smooth ad-free ride on Netflix or Spotify the ads on YouTube become even more irritating.

Also, consumer habits are slow to change but after they do it cuts across categories. For instance, people who subscribe to one media channel often start a subscription habit in others. As time goes on we choose to get our video on Netflix and music with Spotify. This ad-free shift is not just happening with content. The mobile games industry are with the movement as well. For instance, candy crush grew revenue by 35% by deleting ads.

All of the above is not to say that an ad-based revenue model is entirely useless and subscription is the way but to show that companies are moving on from this model and that before you decide to make it your first and/or primary source of revenue ask how you can make user experience and advertising compatible. Get context from the experience of ad-based startups especially those that have pivoted (like Iroko TV).

For the more people get used to an ad-free experience, the more painful those interruptions feel.


Inside VP

jThe Vice President, Prof. Yemi Osinbajo visited the Ventures Park on Monday and spent time getting familiar with a few Portfolio companies.

Portfolio Propaganda

Gerocare and Mobile Forms were selected as a part of the Top 50 Africa Innovation Summit innovations to be showcased at the AIS Innovation Exhibition in Kigali, Rwanda. They’ll be at the Summit from the 6th — 8th of June.


Links from the Internets

  • Know your enemies and know thyself. Eugene Wei on forecasting the bump in your growth curve and addressing it. [Link]
  • It’s more likely that what you think will happen in the next five years will actually happen in the next three. [Link]
  • If you want to understand the future of Tesla, and Elon Musk’s role in it, start here. [Link]
  • Internet trends report 2018 [Link]
  • Great startups come from everywhere and Founders embassy wants to give them their best shot at making an impact. [Link]
  • Recommended: 15+ years learnings for businessing. [Link]
Categories
Series V

Spoiler: there is no template.

Pay attention to the successes in any category, and what you’ll see is one. But what you don’t see is that they are one in x million.

After any process that leaves behind survivors (say…entrepreneurship), the non-survivors are removed from view and conclusions are drawn from data that is available or worse, convenient. When failures become invisible, naturally, people pay more attention to the successes. Consequently, they not only fail to recognize what’s missing, but they also fail to realize that there is missing information at all.

“When failure becomes invisible, the difference between failure and success may also become invisible”

No one writes about people and companies that have failed (somebody should totally fix this). What is abundantly available, though, is stories of successful companies (see: iceberg), and the actions they took on their way to being successful. It’s not clear from the outside, how much of that writing is signal and how much is noise, and so it’s dangerous to parrot success stories in the hope that they will make one successful.

Survivorship bias happens when too many people focus on a successful person/company believing they have some exceptional quality that explains their success and provides a template for others to follow. In reality, there’s timing, luck, and other external influences involved.

Founders should therefore not base their strategy on what has worked well for other companies without understanding all the reasons they achieved their success. Writing six-page memos is not the [only] reason Amazon is worth $767 billion. Psychologist, Daniel Kahneman puts it nicely:

“A stupid decision that works out well becomes a brilliant decision in hindsight”

Kahneman advises that before emulating a famous company, you should imagine going back in time when that company was getting started and ask yourself if the outcome of its decisions were in any way predictable. If not, you are seeing patterns in hindsight.

Bottomline is, embrace balance. Read the success stories and take lessons, but make sure to separate the wheat from the chaff.


Links from the Internets

  • Best VC bets of all time. [Link]
  • Why WINRAR 40-day trial never ends. [Link]
  • N’est-ce pas? [Link]
  • The Moat map and Network effects [Link]
  • Digital’s tipping point. [Link]

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Categories
Series V

Vanity upon Vanity.

Last week we started talking about tracking and what founders need to succeed in markets that are superficially wide but not deep. This week, we’ll look at tracking what matters.

The only thing worse than not tracking any metrics is tracking or obsessing over the wrong metrics.

“Our app has 5 million downloads…”

“Our Facebook page has 10 million likes”

Humans have an affinity for vanity metrics precisely because of the psychology behind them. Everyone wants to believe that the work they are doing is making a difference. So it’s easy to read positive causes into noisy data, whether it’s really happening or not.

Daniel Simons and Christopher Chabris call this the illusion of cause — the human tendency to make causal connections between related facts.

“Ah, our app has a gazillion downloads, so we must have the best and most loved/used product around”.

Vanity metrics are like a candy high that give short bursts of excitement but ultimately distract from fundamental issues and contribute very little to the long-term success of the business. They are false signals. They do not tell you if people are using your product, if they are using it how you expect, or if they are using it at the frequency you expect.

With news publications, the numbers that are out there aren’t usually indicative of anything useful. They may show who’s winning but not how or why. When you look at the competition through those lenses, you can’t draw any lessons because whatever startup X did because their decisions are based on hidden factors (operational metrics) which are often excluded in the news. Operational metrics like retention, how long it took for a user to get your service, etc are the unseen gears that drive growth.

One metric that matters

Replace throwing metrics on the wall and hoping one sticks with figuring out the ONE metric that matters to your company per time. Most businesses will need to track multiple metrics but there is always that one that matters and it is dependent on: the stakeholders they are communicating with, the market they operate in, the company stage, and the business model they operate.

Your OMTM could be occupancy, profitability, units moved, or transactions processed. Whatever it is, it must move the needle for your business in practical ways.

Focusing on OMTM forces you to squeeze out as much of it as you can (the obvious caveat being Goodhart’s law: “When a measure becomes a target, it ceases to be a good measure”). As a result, an inflection point occurs and reveals the next metric you need to focus on. E.g, moving from increased website traffic or maximizing conversion.

Vanity metrics aren’t entirely meaningless. They show that there is interest in your company and that could initiate partnerships or investment. They could also be a morale boost for your employees. On the flip side, your employees and even worse — you may start to believe your hype.


Links from the Internets

  • Choices. Choices. Choices. [Link]
  • This mathematical model could lead to a new approach to the study of what is possible, and how it follows from what already exists. [Link]
  • How in touch is your CTO? [Link]
  • AI x the nature of the universe. [Link]
  • Our productivity has increased due to technological innovations. Shocker. [Link]

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Categories
Series V

Check yourself before you wreck yourself

“We will lose a little money on every customer, but we will make it up in volume.”

Eh…no.

It is becoming increasingly clear that user growth without a corresponding increase in (unit-profitable) revenue growth is not a luxury founders in developing markets have.

There are many reasons why this is true, but the most important for today’s nugget is this: the nature of the companies built here — their DNA — means that they often don’t have a scalable advantage in customer acquisition costs. That is: the bigger they grow, the more likely they are to encounter customers who care less, spend less and churn more. Don’t believe the flywheel illustrations.

Too often, this isn’t well considered and companies find themselves coasting on the coattails of “user growth” or “Facebook likes” or “press mentions” until isht hits the fan and the music stops and the smoke clears. Party over. The entrepreneur’s job is to quickly understand the levers that impact their revenue growth and unit economics and work out ways to shift them in their favor.

Paul Graham frames this nicely:

“When I talk to a startup that’s been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it’s been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?”

To succeed in markets that are superficially wide (but not very deep), founders must have a manic focus on discipline, capital efficiency, and unit profitability; every dollar spent, returning a dollar in its place and a dollar more.


Links from the Internets

  • First of all, what problem are you solving? [Link]
  • Yikes. Being Bezos isn’t teachable. [Link]
  • You’ve been encouraging groupthink in your meetings. [Link]
  • Employee Retention [Link]
  • How design grows up. [Link]

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Categories
Series V

Musing About Marketplaces 2

The best marketplaces are the ones that improve an existing behavior between the supply and demand side of the market or make it more efficient. They ride on an existing behavior without trying too hard to create a new one.

Since the internet became ubiquitous, marketplace platforms have been a quintessential part of the business model deployed by online entrepreneurs. It’s one of the best examples of the use of technology to aggregate supply, enable visibility of product and create transparency of services and transaction. The key challenge, however, is that marketplaces are quite foreign to the way Africans normally transact. An open market system is quite dominant, where transaction and communication are done directly between both sides of the market.

And so, to build a successful marketplace in Africa, there needs to be demonstrable value beyond just connecting both sides of the market via an online platform.

Therefore, when you ideate in Africa mimicking a foreign culture you start having problems with educating the market on the need for that marketplace and educating the supply side about the need for them to give you value out of what they are selling. The assumption is that the internet will change people’s behavior but on the contrary, the internet enables an existing behavior. On the flip side of that is creating a marketplace with unique value. Take, for example, Iroko. Before Iroko, movie producers sold directly to retailers and video marketers but Iroko created value through an online channel without having to buy the product physically.

But in a marketplace for artisans, for example, it is harder for the suppliers to see value because they believe they can acquire customers directly and do not see the need for paying transaction fees. So, they turn the marketplace into a discovery platform, and successful marketplaces are not discovery platforms — they draw financial value from all transactions that are going on on their platform. That is how they get lifetime value, data economics, and continuously retain both sides of the market.

When you focus on creating value, or a new value system rather than enabling a transaction, then you start doing something that’s different.

Two things to make marketplaces work: an existing platform that does something similar and a cultural antecedent for that market. These two elements seem to be lacking sometimes in marketplaces in Africa where companies think they can put themselves right in the middle of a transaction just because they have created a platform online.

Right now, VP shies away from marketplaces because it takes a lot of money to validate it at scale — anywhere. Especially in Africa where internet penetration is low and customer acquisition cost is high. And it is difficult to pull in demand and supply and get them to pay in a way that you can draw value from. Except you are creating a value that is very sticky and viral i.e the product itself is inherently viral such that users are incentivized to tell other people about it.

The path to profitability is long for marketplace business requiring a constant injection of capital. The best marketplaces offer end-to-end experiences and they play such a critical role in the commerce experience that buyers often don’t perceive the company as a marketplace.


Inside VP

  • Kayode will be in Nairobi on the 8th for Village Capital’s Fintech Africa cohort demo day.

Kola will be speaking at the Africa Tech Summit London on the 16th. The summit showcases opportunities and connects investors & diaspora in Europe/US with African tech.


Portfolio Propaganda

#Winning
Accounteer emerged the winner at the #MestLagos challenge and will pitch in Cape Town at the Mest Africa Summit.

#GoodDeeds
NESA by Makers has partnered with Tech Advance to provide full scholarships to 10 aspiring developers. [Link] + On May 16th, their CEO will be discussing Africa’s social, political & economic future at the African Business Day in the Netherlands.


Links from the Internets

  • The most famous quote about Facebook isn’t actually about Facebook — it’s about television. [Link]
  • Are high standards intrinsic or teachable? [Link]
  • A dent in the universe is plenty. Curb your ambition. [Link]
  • Entrepreneurs think they are better than their resumes show and realize they can make more money by going it alone. And in most cases, they are right. [Link]
  • Here’s an interesting research by Ventures Platform Foundation for Google [Link]

Have a great day!

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