This will likely be one of my most controversial posts. But I think these things need to be said. Like I have always maintained, tech businesses do not have a monopoly on the word “Startup”, though they have fully hijacked the name, so that my mother trying to set up her poultry farm in our village cannot call that business a startup.

I sincerely think that there is a deliberate attempt to set different rules of engagement for technology entrepreneurship when compared to its non-tech counterpart, that is why a company that is neither profitable nor cashflow positive nor even EBITDA positive will be valued as a unicorn (meaning has achieved a valuation greater than or equal to $1bn). Some of these unicorns don’t have paths to becoming EBITDA positive, yet they enjoy the unicorn status.

I was then taken aback when seemingly sophisticated investors (especially Asset Managers) provided exit liquidity for some of these over-bloated startups in the public market.

Please don’t prosecute me just yet, I was trained to value a business based on its FUNDAMENTALS. I mean the underlying business. The question to ask – How does this company make money? Will this company continue to make money for the foreseeable future? How much can I pay today to justify the equity risk I am taking as well as provide me a positive total return (Dividend Earned and Capital Appreciation) higher than my cost of funds?

If I cannot be affirmative on these questions, then, I will never make such Investments.

Who started valuing e-commerce businesses based on their GMV?

This is one of the biggest drivers of indiscipline in the technology space. Haba, how can you tell me that the value of an e-commerce business or an online marketplace is to be determined by its Gross Merchandise Volume. I believe that the person who started this multiple was looking to justify a ridiculous valuation (Most times, if I am forced to use a GMV valuation for a business, I typically apply a multiple less than 1x).

Let me explain this in clearer terms. Imagine that you bought a laptop from an online marketplace, say, for N100k. That price (N100k) is Mallonline’s GMV. So, Mallonline’s valuation will be determined by applying a multiple (say 1.5x) on that GMV.

This valuation ignores Mallonline’s own revenue, its operating costs and other operating metrics. It solely focuses on the topline. From the conservative background that I have, this is totally unacceptable.

If I were the CEO of Mallonline, since I know that I am going to be measured by my GMV, I will put all my resources to driving up that GMV irrespective of the cost. By this, I mean, I can afford to slash the prices of goods on my platform by 30% just so that my customers are incentivised to buy from my platform, thereby driving up my GMV at a 30% cost to me.

Let me explain this with numbers. Imagine a third-party merchant selling on my platform. Typical arrangement is that the platform takes a percentage of the merchant’s order value (say 20%). Using the laptop scenario, The merchant lists his product as N100k on my platform, once that product is sold, I (the platform) get N20k which is 20% of the order value, while the merchant gets the balance N80k.

As a GMV-hungry CEO, once the merchant lists his product as N100k, I will further slash that N100k, say by 40%. This means that I will sell the product for N60k. Once the customer pays N60k, I am committed to the merchant that I will remit his N80k (don’t forget that if I had sold it for N100k, I would have taken 20% of the value anyway, thus remitting only N80k to the merchant) irrespective of the price in which I sold the product. This means that I must make the merchant whole by dipping my hands into investors’ money to pay the merchant an additional N20k to the N60k I sold the product for.

Analysing this transaction, I recorded a N60k GMV, so my valuation is based on that N60k. But in fact, I lost N40k in the process. Maybe better put, I didn’t earn an actual revenue from that transaction, instead, I paid the merchant for selling on my platform. My N20k net revenue was forgone, I then depleted my savings further to pay the merchant his full value.

Imagine that I was able to do this for hundreds of thousands of people, my GMV would have run into billions while the hole I would be digging in my balance sheet would have run into that same billions. My net revenues will be negative, or zero at best, if I never sold an item at the same price the merchant recommended. EBITDA is definitely negative and once all that is negative, then you have to forget about profit before tax. Once the loss on the income statement is crystallized, then your shareholders funds is being depleted by the same amount of loss on the income statement. Soon, if I am unable to raise additional money, the business will die a natural death.

I blame VCs

VCs should take the blame for these vices. But wait, the VC wants to write up its own valuation at all costs, so it will devise a means to getting that done – Eureka, GMV!

These same VCs will then punish startups that have a disciplined approach to growth. So, businesses that are not losing their net revenues for GMV are punished for not having huge GMV. VCs will say those businesses are not “scaling” fast enough. I have written a piece on how not to scale a technology business. I believe the summary of that piece is – Don’t scale with your inefficiencies.

Delicate Balance

So how do I grow quickly while maintaining operational discipline? You must understand your local market, gain control of all (at least most) of your business dependencies. Understand and address your business problems first before thinking of expansion.

In fact, I advise that businesses should start with a single product line to learn about the market, then layer on additional complimentary products before thinking of geographic expansion.

Learn to take your punches on a small scale. Trust me, the market will punch you! But it will be a disaster to get punched at the same time in 3 different countries.

Trust me, Nigeria is large, but very diverse. Your strategy in Lagos probably won’t work in Kaduna, and you would have to tweak your approach in Abuja.

Ask entrepreneurs, Lagos is fast paced: the traffic is killing. But Abuja is a lot slower and complacent (at least from the Lagosian’s perspective). If your value proposition is convenience for instance, the way an Abuja resident thinks of convenience is totally different from the Lagosian’s view, hence you must find a way to tweak your product offering or delivery method to suit both markets, let alone including Kenyans and Ghanaians in the mix.

So, tread with caution. The slow steps of a Tiger should never be interpreted as cowardice! Once you have a full hang of your business and you strike, no one will be able to stop you!

Worthy of note

This is not all about online market places, I will write about WeWork, Snap and Theranos in another post. This indiscipline is a global phenomenon. It needs to be dealt with like that.

Happy entrepreneuring

Fisayo Durojaye



  1. I just saw this post, really controversial indeed, don’t let them catch you o Fisayo….lol….especially our dear unicorn e-commerce enroute a foreign IPO…..Anyway, I totally share your thoughts………Sheer irresponsibility on the part of the VCs. They invested in these businesses at their early stages when we all thought the businesses would turn out to be goldmines. Right now, they need to exit their investments so they will tell any valuation story to get their ROI……rolling eyes


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.