Africa is different - here's what you need to know
What are your first thoughts when you hear about Africa? Culture-rich, Potential, Struggle, Colonialism, Game-Drives or perhaps Hot Weather? How easily would your mind connect terms like Entrepreneurship, Business Growth, Investment Funds or Unicorns with our continent? Your mind is probably moving westward right now, to tech centres like Silicon Valley.
Africa, regardless of any connotation, is blossoming with entrepreneurial potential. Startups on the continent raised over a billion dollars in 2019. This amount is almost double what was raised in 2018 and more than 6 times what was raised in 2017. The recent acquisition by developed market counterparts of Paystack (Nigeria) and Luno (South Africa) are validation of the continent’s potential.
It is however important to realise that our ecosystems are young. Cape Innovation & Technology Initiative (CiTi), the oldest incubator in Africa, was founded in 1999, the IHub in Nairobi launched in 2010 and the CC-Hub in Lagos in 2011 while silicon transistors have been manufactured in Silicon Valley since the 1950’s. Over and above this, developed markets are as the name suggests, developed and have more resources to pull on. For more context on the continent’s incubator landscape read Tomi Davies’, President of ABAN, article titled ‘Will African Hubs be Eagles or Lions?’. Often, however, the literature we reference in building out businesses comes from developed markets. In this blog we explore concepts that we read and hear about that are not necessarily relevant to our local ecosystems.
LinkedIn founder Reid Hoffman often talks about blitzscaling and has done work on breaking down the various stages of blitzscaling. Essentially what this means is extremely fast growth and capturing market before the existing players have time to respond. This is what is being referred to when they say “the solution went viral”. Bird, an electric scooter startup, was founded in September 2017 and by June the following year had raised its Series C round led by Sequoia Capital, valuing the business at over a billion dollars (known as unicorn status).
While it's questionable if growth at that pace is healthy and creates a sustainable business, it should be noted that scaling on the African continent has an entirely different meaning. In many respects it's a function of market size and potential. Africa is a continent of 54 distinct countries with more than 40 official currencies as well as different languages and levels of infrastructure development. Jumia, known as Africa’s Amazon, was founded in February 2013 and went on to list on the New York Stock Exchange in April 2019 giving the company unicorn status - a six year journey. The average successful South African startup is an 8 to 12 year journey, from founding to exit. Over time this should come down as the environment matures but remains a journey of years and not months.
The city of Seattle in the US state of Washington has developed what they call the Seattle Tech Universe. It's a graphic representation of the tech businesses started by employees of large tech companies like Amazon and Microsoft. Working for companies like this is a roadmap for any new startup, with the dead-ends, shortcuts and highways clearly illustrated.
“A big difference between startups on the African continent vs startups in the western world is access to talent and being able to build and grow a team as a company develops,” says Co-founder and Director General of the African Business Angel Network (ABAN), David van Dijk. "There are simply not that many people on the continent that have hands-on experience launching and managing fast growing (digital) companies. Besides developers also mid-level management, CFO's, controllers, etc. To a large extent this is learning by doing".
In addition to the limited resources available to startups in Africa, the privilege to focus on a single startup is usually not possible. Founder & Director of Viktoria Angels, Stephen Gugu highlights this point, “A key thing is this idea that one needs to focus on only one thing to build a successful startup. Due to lack of capital and requirements to support a family, most founders have to hustle. This means they end up doing many things at the same time for a considerable amount of time before they can focus.”
Depth of investor pool
Earlier on we mentioned that African startups raised $1.34 billion in 2019. It is worth noting that a lot of this capital is managed by fund managers that don’t have a presence on the continent and in comparison, the US raised $30.8 billion in the first quarter of 2019 alone. Another example of the stark differences comes when we compare two companies in the same industry:
Uber, the disruptor of the taxi industry, has had 26 rounds of funding since 2011, raising a total to $24,7 billion. Over the past decade, Uber has developed 6 sub-organisations which may not have been possible without these funding rounds.
Zebra Cabs founded before Uber in South Africa has had 1 funding round to the value of $21.5 million.
Every company is unique and it may be argued that the business models are different but the comparison is a data point which illustrates the differences in landscape. Most South African startups need to raise funds internationally when looking for Series C and occasionally Series B funding - the investor pool is shallow due to the market size.
Co-founder of Cameroon Angels Network, Rebecca Enonchong clarifies the point further, “The greatest difference is access to capital. In the US, you hear '100 investors turned me down before one invested'. The reality in most African countries is that you have just a handful of early-stage investors so even if only a couple turns you down, you've run out of options”.
President of ABAN, Tomi Davies weighs in on the topic, "African startups do not have access to the wealth of human and financial capital their US counterparts are awash with from the east coast universities to Silicon Valley. So one critical difference between African and US startups is their inherent resilience when it comes to overcoming basic challenges as they strive to succeed".
There are a number of different techniques to valuing a startup, the most popular being the venture capital method, scorecard method, discounted cash flow and cost to duplicate. Another popular category of methods is comparables. Essentially, using valuations from similar companies as a starting point and then adjusting for certain variables like market opportunity and team expertise. A prerequisite for comparables is the availability of data. Not only are investment volumes in our market thin but investors don’t often make valuations publicly available. As a result, some of the valuation methods like those that use comparables are not possible and where they are possible, assumptions need to be adjusted for our market.
B2C vs B2B
When speaking to a startup you’ll often hear different types of business models, the most popular of these being B2B (business to business) and B2C (business to consumer). B2C solutions tend to be the most recognisable brands because of their mainstream marketing but are generally hamstrung in smaller markets.
Market size is determined by two variables: population size and spending power per capita. If you look at the South African market in isolation, we come short on both these variables in comparison to other developed markets. The profit potential of B2C solutions needs to be adjusted as a result - it should be noted that the path to profitability of any B2C solution is long, with potential being unlocked through scale.
The local business environment is however more comparable to international markets and a number of angels in our network tend to favour B2B solutions over B2C solutions as a result. The challenge with B2B solutions is the lengthy sales cycles. These have been prolonged in the current economic climate.
Pick up a book on starting a business and one of the main points is to test the market before mass producing anything. Thankfully, it's never been easier to test whether a product demand. Spinning out a landing page can be done in an afternoon with tools of the 'no and low code movement'. Research however shows that African consumers tend to be more brand loyal than those in the US. While this is great for the established service provider, it's not so great for startups trying to get market feedback.
To add to the challenge, lower levels of online engagement, acceptance and availability of online payments and access to the internet can skew feedback. "Local startups mostly have to provide essential infrastructure such as the internet, electricity and running water for their work environment, something their US counterparts take for granted as provided by their governments. African startups also have to run blindly without access to the depth and quality of market data and information available to their US counterparts,” says Tomi Davies.
Africa’s narrative is being re-written. The founders of Paystack and the thousands of others pioneering ground breaking initiatives are showing us the roadmap from potential to realisation. Key to this growth is the investment in businesses and mentoring the teams that lead these initiatives. Tomi Davies concludes, “The work being done by angel groups are just a start. We have to inspire those with disposable income to become local investors. As governments, development partners and regional bodies continue to focus on entrepreneurship, the need for local investment, mentoring and connections will only increase.”