Learning from African Mega-Deals
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* This article is sourced from Nicole Dunn - Venture Scale Lead at FFA. [ Edits by Ighlaas Carlie ].
What do African mega-deals have in common?
Africa's startup ecosystem is accelerating. In the first six months of 2021, four companies have raised mega-rounds (financing above $100m) – creating an increasingly compelling precedent for founders in the region. Many see this as a signal of ecosystem maturity – anticipating an inflection point in African venture capital and unicorns to come.
There is no doubt that these businesses (and the six others that have raised mega-rounds, see list at the end of this article) have benefited from timing – a harmonious combination of increased mobile penetration, declining data costs, enabling regulation, and growing investor interest in emerging markets. But what can we learn from their outsized success?
The playbook for building Silicon Valley unicorns is well-defined. Building billion dollar businesses in Africa is a nascent experiment. Aside from connected (often internationally educated) founders, and strong startup fundamentals, what can these companies teach us about building successful African ventures?
1. They help people make money
Africa's population is significant; individual spending power is not. Recent estimates suggest that only the top 10% of Sub-Saharan Africans consume more than $5 a day, and the top 1% consume more than $20 a day – below national poverty lines in Europe. Subtract spend on necessities, and you're left with approximately $3 for businesses to contend with – in markets where customer acquisition costs are notoriously high.
To compete for wallet share in this context, startups must make life significantly better for their customers. Companies that have raised mega-rounds (let's call them 'mega-dealers') have succeeded through selling more than a product – they sell services that help people make money. And, as importantly, they sell them to customers who could not otherwise access these opportunities.
Five of the ten mega-dealers can be categorised as companies creating the infrastructure to help small businesses grow – through reaching more customers (locally and globally), expanding payment options (online and offline), and removing traditional barriers to scale (logistics, technology stack, and back-office operations).
Chipper Cash, which began as a cross-border payments platform, quickly expanded into merchant payments, and is increasingly positioning its platform as a gateway to wealth creation – offering fractional shares and crypto investments. Andela positions itself as a democratiser of opportunity – connecting African talent to global employers that provide a pathway to prosperity.
Only Branch and Tala have an exclusive 'B2C' offering – but in the African context, customers that are taking out micro-loans are often micro-entrepreneurs. Through offering accessible credit, these micro-lenders have empowered individuals to create more sustainable self-employment and increase the financial prospects of their families.
This emphasis on (financial) access has been successful for two reasons. The first is that the customer segments targeted are by definition neglected by incumbents – but are significant in market size. This has enabled first-mover advantage for emerging startups in a large captive market, without having to contend with consumer switching costs or corporate competitors with economies of scale. Secondly, 'access' is emotive. It has been historically elusive for many African citizens, and the payoff is worth the price. If you're going to spend your $3 of daily discretionary income on anything, it may as well be a chance at a significantly better life.
2. They partner strategically to overcome 'institutional voids'
In emerging markets, the institutional infrastructure to support effective transactions is often absent or inadequate. These 'institutional voids' come in many forms – including missing or unreliable market information, uncertain regulatory regimes, and unenforceable contracts.
In this context, buyers and sellers:
- Are often unable to find one another - Distribution breaks down.
- Lack the information they need to transact effectively - credibility breaks down.
- Are unable to validate the sanctity of the transaction - trust breaks down.
For early-stage startups, these voids significantly increase the cost of customer acquisition and make each component of the value chain more challenging and resource intensive to build for.
To succeed in this context, mega-dealers have established strategic partnerships that unlock distribution, credibility, and trust. Tyme Bank's partnership with national retailers enables customers to sign up and make deposits at kiosks fitted in stores. These kiosks – where 85% of accounts have been opened to date – resulted in scalable distribution, whilst establishing credibility through familiar, trusted brands.
Similarly, Flutterwave has built an ecosystem of partnerships to efficiently acquire customers, create a more holistic (and therefore 'sticky') value proposition, and build consumer confidence. These include the startup's landmark partnership with Uber to launch Uber Cash in seven African markets; WorldPay to connect global enterprises to African consumers; and Paypal to connect African businesses to global consumers.
Chipper Cash, Interswitch, Tala, Branch, and Fawry have all benefited from partnering with Visa (among others) – gaining access to a global network and endorsement from one of the world's best known brands. Jumia built a network of distribution and payment partners, including fuel station outlets for collections. Andela partnered with Big Tech companies to attract high quality talent and promote their training.
The trend is clear – in a fragmented, low trust environment, strategic partnerships can fast-track distribution at scale.
3. They prove replicability early on
Given the heterogeneity of African markets, many startups achieve traction in one country, but are unable to scale successfully into new markets. This, of course, limits growth potential, and subsequently capital returns. The question of replicability is therefore salient for investors focused on startups in Africa, where it is yet to be proven that a single market can accommodate a Unicorn - a startup valued over $1 billion.
Following the growth stories of the ten mega-dealers reveals that they tend to prove replicability early – demonstrating outsized growth potential. Often leveraging their strategic partners, the startups pursued geographic expansion within the first few years of operating. On average, mega-dealers are present in 11 markets, and expanded beyond their original market within 4 years - estimated to be 2.3 when excluding outliers.
The exceptions to this rule are OPay and Fawry. OPay raised its first mega-round while focused singularly on Nigeria (note that the startup has since expanded into North Africa – contributing to its newly acquired unicorn status). Egypt-based Fawry, founded in 2007, only started pursuing geographic expansion in 2020 – six years after raising its mega-round of $150m.
This might suggest one of two things. The first explanation is that Nigeria and Egypt (both significant markets by population size and among the African venture capital 'Big Four') are big enough to accommodate a unicorn. The second is that 'super-apps' – with proven segment and product replicability – can raise a mega-round without geographic expansion. With a growing number of 'super-apps' across the region, this may be important for founders and investors to consider.
Of course, these three factors are not a fool-proof recipe for success. Jumia's so-called 'fall from grace' provides a poignant reminder that founders must balance long term vision and short-term traction. The fast pace of market change and shifts in global dynamics also mean that these factors may not hold in the long - or even short - term.
However, these parameters may be a useful way to think about enablers in the African ecosystem that can unlock sustainable scale and investability.
Startups in Africa cannot rely on the infrastructure, spending power, and local scale available in established markets. However, those that assemble the right ecosystem can reap benefits across the full value chain. As we progress to the next stage of this continental experiment, founders and investors should remember these three lessons – solve for access, not consumption; see institutional voids through the lens of opportunity; and balance localisation with replicability. In doing so, we can turn adversity into advantage.