|#99 MWAVC| - You grow, or you die😵

Long-ish post

Yesterday, I had a conversation with a client around a company we’re looking to invest in and we looked at the business from two differing perspectives. Mind you, this is a very early stage company and though they’re revenue generating, the numbers aren’t that exciting…yet. So, when I’m looking at an early stage company, I’m checking three things. Seed funded? Product-market fit? Core team? This company checked all three so we’re good to go. Plus he’s failed 3 times before and is using those learnings in this new venture (yum yum). Now the next challenge is growth and what I like to see is companies with quantifiable growth or growth economics. Managing these growth economics becomes your secret weapon because they are the inputs to your growth chart over time. Even though revenues are not too exciting right now, I’m happy to invest based on the fact that the company satisfies these three simple equations below that show the quality of growth and strength of the business. Of course, we all still want to reach profitability (no WeWork business here🌚🌚) but that structured business model can come in a couple of months, while the company deploys a number of other products and leverages the information they’ve accumulated thus far. 

Again: most important thing is products have been launched, there’s some traction and they’ve reached PMF. Here ares some extracts from various articles tackling each of these three measurements of growth. 

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1. Velocity

In math terms, velocity — how fast a company is growing — is the slope of your growth curve. Velocity is one of the most significant drivers of value in venture capital, and founders ignore its demands to their significant disadvantage.

There are three major vectors of value creation in the venture: the myth of new technologies creating entirely new markets is only the most prominent one, but not necessarily more important than others. In fact, much of the value of high-growth/ venture-backed startups are created because they are scaling so rapidly.

As my colleague David Frankel puts it, it matters a lot if you get to $1M ARR in one year or ten. This is, even more, the case with venture-backed startups, because you’re essentially building with someone else’s money.

velocity = growth/ time

2. Unit economics

In math terms, unit economics relate to the height of each slice of your growth curve, between your revenue and your costs.

Unit economics are a much more atomic glance into profitability, i.e. at a customer or product level. As you’ll see with capital efficiency, the downstream impact of a low-margin business is that you have less in your war chest for customer acquisition — which is a downer, especially when you hit post A raise, i.e. right when you’re most sensitive to competition and do-or-die growth milestones. Also, you are much less likely to be able to fund your own growth, which means that you’ll have to go back out to the market each time.

We believe exceptional teams can build unicorn-scale companies despite poor unit economics. But this requires that every single other aspect of their business has to be steered as finely as a multimillion-dollar racing yacht.

There can be extenuating factors — say, if you have positive network effects, or it takes Olympian execution — but we’ve been lucky enough to work with some of these founders, and maybe you’re one of them! For everyone else, poor unit economics are more friction you’ll need to combat, as you head up Olympus.

unit economics = profitability/ unit OR revenue - (CAC + COGS)/ unit

3. Capital Efficiency

Capital efficiency is, in math terms, the area between the profit and revenue curves, and so at its most basic level, how profitable a company is. Often as founders, and definitely as investors, we are optimizing for maximum profitability, i.e. how fat is that slice?

It seems like a fundamental truism that the revenue you can generate — relative to paid acquisition spend or fixed costs — is a measure of your business’s health. However, the demands of growth have created an unhealthy market distortion where funding unprofitable growth sometimes seems like good business.*** We have assembled a data set showing that the startups that raise the most money do not return the most capital — either to founders or to investors. In fact, frugality forces founders to make tougher, more strategic investments, which ultimately results in stronger businesses.

While there are many different ways to calculate capital efficiency, the most important variables seem to be:

• Revenue: This can be total revenue when evaluating a company at a very big picture level (which almost no one ever does); or incremental revenue, which is more practical for a team to update every month.

• Acquisition spend: Whether this is in fixed costs (number of bodies on your sales and marketing team) or variable costs (i.e. performance marketing or SEO optimization spend), founders need controls to determine whether acquiring customers, aka growth, is profitable or not, and if not, how bad is the bleeding? You can be sure that investors and board members are asking, even if — very rarely founders are not.

• Payback on acquisition spends: This often overlooked variable is so essential to managing cash flow. Does it take 3 months or 12 months to pay back your CAC? The latter suggests a business that will need to raise large growth rounds in order to scale. The more VC dependent a company is, the more the market will be able to set the terms for further financing, sometimes to the detriment of founders and earlier stage investors.

Capital efficiency= total revenue/ total money raised OR GMV or revenue/ $ spend 

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Should probably do a longer post on each of these another time. Soon come.

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Article List— What I’m reading (10 articles a day x 7 days x 4 weeks x 12 months = 3360 articles a year).

Cargill announces investments in Ghanaian cocoa industry, farmer communities: Love to see it. We can all do more, and by “we”, I mean Mars and Barry Callebaut et al.

Ethiopia, Alibaba Group Sign Mou To Establish Ewtp: Meanwhile in Ghana and Nigeria, I’m sure they were just asking him which country’s jollof tastes better.

Nigerian Stock Exchange delists Dangote Flour Mills after takeover: Round 2? Lol. Who remembers what happened with Tiger Brands? Gather around kids. Basically, Uncle Aliko sold DFM to Tiger Brands ($200 million for 70% of the company) in 2013. Tiger Brands racked up billions in losses. In 2015, Dangote and other directors resigned. Three days later, Tiger Brands announced a $120m write-off on the company. Uncle Dangz bought the company back fro $1, brought his directors back in and within 6 months, share price rose by 400%. 😳🙃 Nigeria consumer goods market is no joke. 

Nigeria’s Innoson: making cars or selling a feeling?: Surprisingly, doesn’t make me feel different about Kantanka. I’d put my money on Innocent before Apostle K.

Telling the full story of African art just got harder: Goal for next year is to acquire art as an investment. Looking forward to what I can find. Alternative asset management firm coming right up.

Harlem Capital Closes $40M Fund To Back Diverse Founders: Congrats to the team. I think they’re doing something amazing. For an idea of what the stories could look like, refer back to HIBT episode with Tristan Walker.

5 Big-Business Growth Strategies Small Business Can Use: Looking to build the next 10m$ company? Follow the best.

The building blocks of a Tech Ecosystem: And this is why we can’t just wake up and talk about building a “Silicon Accra” without having the right infrastructure in place. Read Artificial Intelligence Superpowers and understand how China built what it has today.

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Podcast— What I’m listening to (1 podcast episode a day= 365 podcast episodes a year) — Broadening my experiences through others’ stories. 

New podcast I found yesterday: This American Life. ANYTHING you want to know about America, has and will be discussed here. No cap. 

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Book— 1 Chapter a day  x 7 days x 4 weeks x 12 months = 336 chapters. Most books have 10-12 chapters, so 1 year = 28 to 33 books. And my book list is nearing 1000 books. Send help 🌚

Venture Deals by Brad Feld and Jason Mendelson. I’m actually learning so much from this book. Highly highly highly recommend to anyone looking to get into venture investing. Might take a while to grasp all the concepts. I’ll have to read it at least 3 times to fully get it. 

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📱📱Quote of the day

“A happy person isn’t someone who’s happy all the time. It’s someone who effortlessly interprets events in such  way that they don’t lose their innate peace.”- Naval. 

Remember: “Until the lion learns to write, every story will glorify the hunter.”