💬 In this issue:
- The Total Addressable Market: Why it's so important for early-stage startups.
- Investing in the Rising Data Economy: How to make sure you're not left behind.
- The Startup Dating Game: 3 red flags to avoid
“The earlier you’re judging startups, the more you’re just judging the founder”- Paul Graham
One of the most interesting things I’ve listened to this month is this episode of “Conversations with Tyler” that had Paul Graham as its guest. Many of Graham’s responses were pithy and his comment on how judging early-stage startups is pretty much about judging the founders made me realise how startup and investing is a lot like dating. And if you’re familiar with pop culture, you can’t talk about dating without discussing “red flags.”
The Urban Dictionary–pop culture’s answer to Merriam Webster–defines a red flag as a “bad trait someone has.” The idea of red flags is so popular enough to have it own emoji 🚩and red flags are often a sign that someone would not make a good romantic partner. Stick with me, this newsletter is not about love.
When I speak with investors, I get the sense that they’re also looking for great founders to partner with. So what better than to share some of the red flags investors are trying to avoid in early stage startups? One of Nigeria’s most prolific angel investors shared three of his biggest red flags with me.
🥲 Founders who are skittish about risk
He describes this as founders who are not willing to take risks. This unwillingness to take risks may be measured by the founder only committing to the startup as a “side hustle” and not a full-time commitment. This red flag feels pretty self-explanatory; if you’re not willing to make the sacrifice of giving all your time to your early stage startup, you’re going to have a hard time convincing other people to fund it.
💡 Of course, this is not to say that some of the best ideas didn’t start as side projects. It only means that when you’re ready to raise funding from investors, you should pretty much have both your feet in the water. It gives them a sense that you’re all in.
🧐 An inability to entertain different views
An early stage startup can often resemble a thing in flux. It might start out as one thing and, 10 iterations later, become a different thing. A crucial step in this journey to becoming is the willingness to entertain different views; while your sense of the problem might seem compelling, you will always need other opinions to finetune the final product. One point Paul Graham makes in his conversation with Tyler is how Y Combinator has been helpful in refining how founders think of their companies. An inability to entertain different views is something investors say is a huge red flag in founders. 🔥
🚨 Maintaining some type of flexibility can keep your business afloat and even move you in the right direction. In April’s newsletter, I talked about pivoting, a situation where a startup changes its business model, product or customer focus. It’s a radical step that often happens when founders learn something significant about the product, customer, or even find that their thesis on use cases are different from the reality. Summarily, keep an open mind!
📈 An unclear idea of your total addressable market
What’s your total addressable market? If your startup is Nigeria focused and you’re tempted to say 200 million, you’re going to have red flags going off in investors heads. While some African countries may boast sizeable populations, it may not always mean that they have large consumer markets. 🌍
Several investors look out for a sense that you understand the real addressable market wherever you are. So it helps to take out time to know the real size of your market! It’s probably worth stating that you should also create your ideal customer profile while you’re figuring out your addressable market.
That’s all folks! Go out into the dating funding circuit without these red flags.
📚 What we've been reading
- How to hire a Chief Product Officer, a critical role in any startup
- Investing in the rising data economy. Data is the new oil. It’s a cliche, but by now, we can see it
- Why the University of Cape Town leads other African universities in producing startup CEOs
🔫 Parting shot
What's on your mind? Drop us a note via firstname.lastname@example.org to let us know. Or, tag us on social using #africanpreseed or #APSVibeCheck.
That's it for now. See you next month! — Olumuyiwa