The African tech startup ecosystem has witnessed remarkable growth in recent years, attracting significant attention from venture capital investors, angels, and private equity funds.
Understanding the key metrics that matter most becomes crucial as these startups move from the initial seed stage to scaling their operations. This article delves into the essential metrics that tech startups in Africa should focus on during their growth journey to attract and retain venture capital funding.
Every metric and benchmark holds valuable insights about a startup's potential for growth and success. In this fast-evolving landscape, these metrics serve as crucial data points that provide a comprehensive understanding of a startup's performance and trajectory. From Customer Acquisition Cost (CAC) to Monthly Recurring Revenue (MRR) and Churn Rate, each metric paints a vivid picture of a startup's ability to navigate the unique challenges and opportunities in Africa's burgeoning tech scene.
As the African tech ecosystem continues to thrive, it becomes increasingly essential for funds to scrutinize these metrics meticulously. By doing so, they can identify startups that demonstrate strong growth potential and possess the adaptability and resilience needed to thrive in this dynamic market.
According to Stephen Deng, founder, and partner of DFS Lab, who believes the ecosystem still has a long way to go and untapped opportunities, "We are slowly building a more durable capital base for African tech. Having 1,000 active investors is not enough," He told TechCrunch. "We need thousands of active investors that support the different startup stages, especially on the growth side, offering both equity and debt."
In 2022, 1,100 unique investors threw their weight behind African startups, which amounted to $6.5 billion in funding raised, according to a report by Partech; this speaks to the amount of interest in the ecosystem. Thus, founders must know what metrics to track in other to secure investor interest.
The following metrics empower investors to make informed decisions that support and fuel the growth of promising startups.
Customer Acquisition Cost (CAC)
For startups looking to scale, understanding the cost of acquiring new customers is fundamental. CAC measures the resources expended to acquire each new customer, encompassing marketing, sales, and other related expenses.
As investors seek sustainable growth, startups with a low and efficient CAC are more likely to garner interest. Reducing CAC over time while maintaining customer acquisition volume is a promising sign of scalability. According to an analysis by Mckinsey, African fintechs will have to give attention to this metric, if they are going to remain attractive because of the challenge of lower disposable income and lower customer loyalty in the continent.
"Growth at a sustainable cost is a priority for investors. your CLV and CAC have to be in a ratio of 3:1 or 4:1 respectively, or that would be a red flag," Kate Edema, who provides growth support to startups who get into the Founders Factory Africa program.
Customer Lifetime Value (CLV)
While acquiring new customers is crucial, retaining them is equally vital. CLV assesses the net profit a startup can expect to earn from a customer during their entire relationship. Startups with a high CLV demonstrate strong customer loyalty and long-term revenue potential.
Investors often look for startups that can maximize CLV by offering exceptional products or services, fostering customer engagement, and encouraging repeat business. To achieve high CLV, startups should pay attention to data & analytics, and invest in customer relationship strategies.
Monthly Recurring Revenue (MRR)
MRR represents the predictable and stable revenue generated by a startup from its business model. This metric is particularly relevant for SaaS (Software as a Service) startups and is highly valued by investors seeking consistent revenue streams. A growing MRR indicates a growing customer base and the potential for long-term success.
According to Gerald Black, whose startup Parkit got acquired in 2021 and Head of Go to Market at Anchor, a BAAS startup; a healthy MRR Growth Rate suggests that the startup is attracting new customers and retaining existing ones effectively. "It reflects the company's ability to deliver value to its customers, driving increased revenue month over month or quarter over quarter. Steady growth in MRR also indicates a favorable product-market fit, which is essential for sustainable long-term success," Black said.
He further explained that on the other hand, a stagnant or declining MRR Growth Rate may raise concerns for investors. It could signal challenges in customer acquisition, low customer retention, or difficulties in scaling the business. Investors also consider the factors contributing to the MRR Growth Rate, such as marketing efforts, customer satisfaction, expansion revenue from existing customers, and the overall market conditions. By understanding the drivers of MRR growth, investors gain insights into the startup's sales and marketing strategies, customer loyalty, and potential for future growth.
The churn rate measures the rate at which customers discontinue their subscriptions or leave the platform. A high churn rate can be detrimental to a startup's growth prospects, as it indicates difficulties in retaining customers. Investors often look for startups with strategies to keep churn rates low, such as regular customer feedback and tailored customer support.
According to Kate Edema, the churn rate metric is very important as it exposes if there's a retention problem. When a startup has a high churn rate, it's either a situation of users not loving the product enough to stick or the problem being solved is not important enough. "There are however other factors that could contribute to a high churn rate but these are the most frequent and obvious," Edema said.
Startups must closely monitor their gross margin, which reveals the profitability of their core product or service. A healthy gross margin demonstrates that a startup's revenue comfortably exceeds the cost of the solution. Investors seek startups with the potential to achieve sustainable profitability, making gross margin an essential metric to track.
Gerald Black explains that from his experience, "investors want to see a healthy gross margin, which means your product or service is generating enough revenue to cover its production costs and still leave room for profitability. A higher gross margin indicates that your business is pricing its offerings appropriately and efficiently managing its resources."
Consistency in gross margin over time is crucial as it demonstrates stability and the ability to withstand market fluctuations. It shows that your business model is sustainable and can maintain profitability in the long run.
Runway measures the length of time a startup's cash reserves will last based on its current rate of spending. A longer runway provides more time for a startup to prove its business model and achieve significant milestones before requiring additional funding. Investors consider startups with a solid runway, as it mitigates the urgency to seek funding immediately.
Startups aiming to scale and secure venture capital funding must have a comprehensive grasp of key metrics. Investors closely scrutinize Customer Acquisition Cost, Customer Lifetime Value, Monthly Recurring Revenue, Churn Rate, Gross Margin, and Runway in a bid to gauge a startup's growth prospects.
By prioritizing these metrics and showcasing consistent progress, African tech startups can position themselves for successful fundraising and long-term sustainability in the highly competitive global market. Understanding and leveraging these essential metrics will be instrumental in propelling the continent's tech ecosystem to greater heights.