Total addressable markets versus paying customers
WHEN I started my first business as a student I remember having lofty dreams of making millions of rand and retiring at age 30. This burning desire led me to start an organisation which, because of the gift and curse of being young, I completely underestimated at the time.
The vision of being my boss, working my own hours and calling the shots all stacked up in my head and seemed pretty logical – build a business, sell stuff, people will come and voilà – millionaire by age 30. Little did I know.
Creating a solution It almost came naturally to me to start creating a solution that I believed would help solve a market problem – at the time, the solution was niche research in the youth market for corporate entities that bought insights wholesale.
It was obvious to me that the success of my business would depend on finding someone (anyone) willing to pay me to bring this kind of niche research to life.
And so I did, I launched my first business and went on to turn over R6.5 million in revenue in my mid-twenties. My humble story is no different to many others and every now and then you read about home-grown success stories that almost describe their success as a fluke based on an intangible unquantifiable hunch. And sometimes just being in the right place at the right time with the correct skill set and understanding.
As is the case of African millionaire Sudhir Ruparelia – who is the largest property owner in Uganda. He speaks very frankly about how much of his success came from simply following his intuition about an opportunity and nothing else.
Many entrepreneurs like myself and Sudhir were faced by a decision early in their business about where to allocate their energy for optimal results.
Prevailing logic will tell you that you need to spend time analysing data, creating models, identifying and quantifying a Total Addressable Market (TAM) in order for you to get started.
There are a few critical problems with this approach in an emerging market. While this data obsession seems logical, I think it is completely counter productive for entrepreneurs in emerging markets.
Over-reliance on data The problem with an over-reliance on data at this stage of a business is that access to accurate, credible data is difficult. Those who do have access will pay a pretty penny for it.
The second thing is that for all the data in the world, data doesn’t know what data doesn’t know. And so in our highly complex environments, data will often miss the nuance or the texture that provides the much desired insight.
For businesses in emerging markets, both these points are very real challenges.
I also take note that this is not always the case and during my tenure at Facebook – I remember everything was ultra-measureable and quantifiable almost to the extent that there was no room for intuition or gut feel.
In this context, it made sense because the extent and nature of information we could gather and was readily available about our business was mind-boggling.
For any business to actually be a business, I believe two things have to be in place – some sort of value proposition and an Immediate Paying Customer (IPC).
I see it every day how people underplay the crucial nature of an IPC and they spend hours of their valuable time crunching numbers to build perfect models or segmentation charts. This, in my mind is just a “nice to have”. Running my first business taught me that an overemphasis on a TAM will lead to paralysis for any start-up or entrepreneur.
This goes against the principles of moving fast and conducting small controlled experiments in the early stage of a business.
The second thing it taught me, is because of the unique, chaotic and unstructured nature of the emerging market environment, even when you do get an inkling of formal market data, the information is often not encouraging.
The question then becomes, do you stop, wait or move? If I believe in the idea, I will always chose to move.
A tale of two views Investors looking to come into Africa are faced with the very real challenge of making decisions about businesses in foreign contexts and in the process guarantee a good probability of success. For such investors, it makes it difficult or impossible to rely as heavily on intuition compared to someone native to the environment.
I suggest considering two views. The first, as an outsider looking in – data is crucial. The decision to deploy capital, invest in a business or support enterprise has to be validated by data and the data will colour in where your intuitive blind spots are. However, for an insider looking out, I believe that your intuition can trump data or at least serve as a proxy for the lack of data.
In the age of information, one would be a fool not to access the information that may be out there, provided it is available.
Therefore I say focus on finding immediate paying customers.
For such investors, it makes it difficult or impossible to rely as heavily on intuition compared to someone native to the environment.