Category: Perspectives

  • The Almanack of DFS Lab: Making Sense of VC Investing in Africa

    The Almanack of DFS Lab: Making Sense of VC Investing in Africa

    Contributed by Yannick Deza, publisher of Data Bites.

    I have long been a fan of DFS Lab, the “research-driven venture capital in Africa”.

    It’s the only VC firm on the continent that consistently shares – publicly and transparently – nuanced, long-form reflections around its investment thesis.

    By doing that, they gifted the ecosystem not just with high-quality articles, but new terms/concepts to describe & make sense of tech in Africa.

    Kudos to them! 💥

    In a world defined by information overload and sensationalism, mental clarity is one of the most underrated qualities we should consciously strive to cultivate.

    How do you know what you know? What is the deep meaning of it? If you cut through the noise, what do you see?

    Trying to answer these questions – peeling all the layers of opaqueness – most people would find themselves naked.

    This is why, drawing inspiration from the Almanack of Naval Ravikant, I am happy to propose – for the first time – the Almanack of DFS Lab: 6 theoretical primitives to make sense of VC investing in Africa.

    These are six concepts coined by the firm that I find extremely insightful/useful in my activities as a researcher/investor:

    1. The Frontier Blindspot
    2. Fortune at the middle of the pyramid
    3. The B-side of African Tech
    4. Cyborgs vs Androids
    5. Invested infrastructure
    6. African S-curves

    The original articles are all available on the DFS Lab website and Medium page.

    My contribution mainly consists of summarizing my understanding of them & complementing them with my own ideas.

    Lessgò.

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    1) The Frontier Blindspot 👀

    Premise: The world has developed “intuitions about how technology markets are structured and what successful technology companies look like”. Cool.

    However: this learning process took place strictly in the context of Western economies.

    Ergo: the same frameworks do not always apply to frontier markets (like Africa).

    Thesis: the disconnect between how we think tech is supposed to work versus how it really works – in Africa & other frontier markets – is the Frontier Blindspot! 💥

    It is a blindspot because we are partially clueless – how tech markets work or don’t work in Africa has yet to be demonstrated. As we cannot copy-paste, learning happens by trial and error, thorough research, and on-the-ground experience.

    What type of bias did we borrow from the Global North when making our assumptions about tech in Africa?

    • we overestimated the pace of digitalization;
    • we underestimated the strength of informal markets;
    • we overlooked the state of infrastructure and consumer purchasing power

    When you factor in low-paced digitalization, strong informal markets, and quirky infra, you’ll see that a lot of common startup wisdom about business models, distribution strategies, and growth projections, won’t apply to the continent.

    However, local entrepreneurs are still finding unique ways to apply the “modern startup stack” to the specifics of the African environment.

    This is where the real opportunities are, and the areas of excitement include:

    • Physical logistics
    • SME solution stack
    • Financial building blocks
    • Agent networks

    Although these things may seem obvious today, I think they are still not obvious to many, and they certainly were not obvious in 2020 (when the article came out).

    What I find particularly useful about this piece is stressing the differences in infrastructure and purchasing power. When looking at pitch decks, I try stress the following questions:

    • what needs to be there for your product to be made, consumed, or delivered? (read: infrastructure)
    • How many people can buy your product, regularly? How do you know it?

    We are about to have a taste of it with the next concept ✨

    2) Fortune at the middle of the pyramid 🔺

    Who is the African consumer & what is the real size of the African market for digital products?

    Hashtag: debunking the (once) popular tag “Nigeria is a market of 200M people” with some rigorous thinking.

    Why?

    Because population size does not equal market size, we cannot boast “the youngest population in the world” without looking at income brackets too.

    Let’s proceed in order.

    1. “Most B2C tech startups are seeking to make money from people’s discretionary spending”
    2. Discretionary spending is the spending power that remains once covered for necessities like food, clothing, and shelter.

    The question asked is: among the 200M fellow Nigerians, how many have the discretionary spending for my type of product?

    In the image below, we can look at income levels and their percentage of discretionary income (in Africa).

    Source: Fortune at the middle of the pyramid

    If you are a B2C startup, what is the juiciest segment?

    As a fairly coherent group, the people earning between $5-$10 – while comprising only ~10% of the population – have one of the highest discretionary spending power combined.

    This is the fortune at the middle of the pyramid: the segment having enough people, with enough discretionary spending power. To the left of the curve, there are a lot of people but with little money; to the right, they have a lot of money but they are too few.

    Now, speaking of unit economics: how much does it cost to acquire these customers? Here things get trickier.

    In Africa, higher incomes are usually digitally-fluent city dwellers. Their geographical concentration, professional status, and greater online life, make them perfect targets for digital acquisition strategies. The same doesn’t necessarily hold for lower-income prospects: acquiring them is harder and costs more (with traditional digital methods).

    To this comes a paradox: if the cost of acquiring a new customer is way more than what you earn from them, you will soon move to serve higher-income consumers. However, if you only serve the +10$ income bracket, at some point, growth will stall and you’ll need to move cross-border (not easy).

    What can we learn from all we just stayed?

    • purely consumer-focused apps that do not focus on necessities (read: targeting discretionary spending) face unique challenges with monetization in Africa. This is because
    • the largest economic opportunity sits within the 5-10$ bracket, but the cost of acquiring them is high due to lower digital presence.

    Moving forward, I think two very important corollaries emerge about “how to be successful”:

    1. build apps focused on necessities, or focused on the business equivalent of “necessities” (restocking, working capital, inventory etc..);
    2. if you target consumers’ discretionary spending, invest in human agent networks, the physical point of entry to most digital experiences for middle-of-the-pyramid Africans.

    Offline agent networks play a vital role in African tech, and there are plenty of examples.

    Personally, whenever I look at the pitch deck of a B2C company:

    • if they target offline acquisition, it means they are serving the middle of the pyramid;
    • if they don’t mention offline acquisition, it means they are serving the top of the pyramid.

    Hence, I’ll start to wonder. Given the risk and the complexities of moving cross-border, can they make money (read: positive operating profit) before moving cross-border?

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    3)The B-Side of African Tech 🍑

    This article draws inspiration from Wang Huiwen, the co-founder of Meituan Dianping, the most successful Chinese food delivery company, turned super-app.

    In an issue of the newsletter “The China Playbook”, Huiwen defines the internet industry as made of two sides:

    A-side: Supply and Fulfill Online

    B-Side: Supply and Fulfill Offline

    Side-A is products and services that are “pure internet”, as they can be delivered and consumed entirely online. SaaS (Salesforce), video-games (Voodoo), streaming (Spotify), etc…

    Side-B is products and services that are delivered offline and consumed offline. Think of retail (Amazon), mobility (Uber), ticketing (Ticketmaster), etc…

    If we have to apply this distinction to African economies, we would see that side-A (online utility) is smaller, compared to side B (offline utility).

    The reason is that “fully digital experiences are either inaccessible, unaffordable or don’t cover the primary consumption needs for those in the bottom 95%.”

    Ok cool. Let’s have a closer look at the B-side then. The B-side can be further divided into two sub-sections:

    B1: SKU-based supplies

    B2: location-based services

    B1 is companies like Wasoko, Omniretail, and other traditional marketplaces. As digital businesses positioning in between the sourcing & delivery of physical products, their core competencies lie in ”understanding SKUs (stock keeping unit), understanding the supply chain, and understanding pricing”.

    B2 is companies like Hubtel and Wahu Mobility. They are location-centric, as the physical location of customers & partners is a key element of their value proposition. For example, a ride-hailing company like Uber will need to recruit drivers in your city and ensure there are enough in your area as you order a ride – otherwise, you won’t be able to access their service. B2 businesses demand a larger offline team to manage operations closer to the customers.

    What learnings do we have here?

    B1 leverages technology to “improve the efficiency of existing value flows and reorganize pricing power”. On the contrary, “B2 is physical ubiquity”.

    Let’s stop here.

    In the article, Stephen Deng (DFS Lab MP) expands on the original concept expressed by Meituan Dianping founder.

    When Wang Huiwen talks about B2 “location-based businesses”, he is primarily referring to ride-hailing, bike-sharing, and food-delivery, products made accessible by smartphone proliferation, which unlocked & democratized location data. These businesses are useful because you can see your location with your phone, and other people can see it too.

    Deng however, twists its meaning for the African context, attaching to it the familiar notion of physical ubiquity: B2 businesses are interesting because of their physical proximity to the customers, mobilizing people and resources last-mile. Other than delivery, one can think of mobile money agents and social commerce as a form of B2 businesses. Their utility comes from their ability to integrate kiosks and people from your neighborhood in their business model. They are relatable, they are next door.

    In short, they are more similar to Cyborgs, instead of Androids. What?

    You read correctly. The concept of “B-Side of African Tech” is strictly intertwined with that of “Androids vs Cyborgs”, that we explore in the next section (before wrapping up with my two cents on this stuff).

    4) Andorids vs Cyborgs 🤖

    Androids: solutions that replace informal markets with digital, formalized parts and processes

    Cyborgs: solutions that enhance informal markets by arming them with digital, formalized parts and processes

    Androids use tech to replace a set of existing actors.

    Cyborgs use tech to improve the work of a set of existing actors.

    Stephen Deng claims that we cannot brute force androids into existence if we are incapable of replacing informal players with significantly better solutions. And if we can’t replace them, we’d better empower them by building cyborgs.

    It might seem like a B2C (Android) vs B2B (Cyborgs) play, but it’s more nuanced than that. Examples?

    The ultimate Android example is Jumia and all Amazon-inspired B2C marketplaces: “replacing the local market with an online option that is meant to be more convenient, have more options, and is fully digitized”.

    However, I think the same holds for many agri-tech platforms (like Complete Farmer or Winich Farms) that aggregate farmers’ produce and facilitate access to market & agro-inputs. In almost every pitch deck you will read about them “cutting out the middlemen”, the set of informal buyers and sellers who move crops to markets, whose commissions eat out farmers’ margins and drive inefficiencies (btw these platforms raised a lot of funds, but it’s not clear to me how much money they are making).

    Cyborgs, on the contrary, look like tools that empower small businesses, applying a mix of online and offline. Instead of replacing existing relationships, they “supercharge them with digital optionality when the need arises”.

    Both B2-side businesses and Cyborgs, tell the same story: existing structures can be valuable when they are empowered, instead of substituted.

    Ok, but empowered how?

    In my opinion, an online-offline Cyborg approach, can only be one of two things:

    1. cost-effective offline distribution and/or marketing – agents knocking on doors or setting up shops;
    2. tech-enabled intermediaries/retailers – empowered by a digital backend or specialized hardware.

    That’s it!

    Moniepoint is Africa’s fastest-growing fintech. Its distribution model? An army of human agents armed with PoS devices, knocking on merchants’ doors. The company revolutionized the capacity for Nigerian businesses to collect digital payments.

    → a Cyborg approach to digital payments.

    Retailers’ bookkeeping apps like Oze and supply-chain management tools like Jetstream, both started as digital super-charger of African businesses: I give you tools to better manage invoices and logistics. Fast forward a couple of years, and they both ended up embedding credit and solving the pain of access to capital.

    → a Cyborg approach to digital lending.

    I think Cyborg either means giving more “legs and arms” for asset-light digital businesses, or making “legs and arms” (SMBs) more competitive with digital tools.

    Digital solution → leave a digital trace → data + learning models → better decision making

    Digital solution → relational database & data integration → operational efficiencies

    Digital solution → composable software stack → APIs & integrations → new products/services delivered on top of the main product

    🪄🪄🪄

    More in general, I think that both the “B-Side” and “Android vs Cyborg” arguments tend to over-emphasize the promises of the physical ubiquitous approach, without addressing the elephant in the room: we need more hardware.

    A lot of things can be done with your phone, but not everything can be done with your phone, and sometimes, a phone is too much.

    Limited storage/memory, weak bandwidth, and high data costs still represent hard limits to app utility for the average African business operator. A phone can do a lot, but not everything.

    Safiri is a Tanzanian company equipping bus companies with thermal printers, and customers with digital ticket purchase options. They record transactions “digitally”, and print tickets “physically”. A good blend of digital and physical coming together. No need for Industry 4.0 here, just basic hardware tools.

    And yet, I am not seeing enough investors stressing how specialized hardware – as well as consumer hardware – can play its role in the tech landscape.

    We need more hardware. We can’t expect to revolutionize the continent simply with apps running on cheap smartphones.

    I feel we’ll see major shifts when large-scale hardware manufacturing that truly responds to local business needs comes to fruition.

    And yes, somehow, I am still convinced this can be a VC play.

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    5) Invested Infrastructure 🏗️

    The concept is simple, yet powerful: the infrastructure built in the past has a lasting, indelible influence on our present & future.

    Economists call it “path dependency”: society builds on top of what has been built, and this process makes us drift toward a trajectory of development and away from others.

    In the United States, payment infrastructure has been built “for a time when phones were not as ubiquitous and hard-wired ethernet was increasingly common.”

    The proliferation of PoS devices & phone cables (& later fiber cables), gradually made up the physical network on top of which credit cards’ adoption became widespread.

    The alternative to cash travels on rails that took a long time to build, but once in place, it is hard to replace. It’s the hidden cost of path dependency: the more we build on top of invested infrastructure, the higher the switching costs to a different system.

    “They have since gained ubiquity, and because mobile phone-based services can only offer marginal improvements, the system stays resilient — it is challenging to overcome the inertia of this invested infrastructure”

    What is the invested infrastructure in Africa and how will it impact its future?

    It is an important question to ask because – as we have seen – companies that leverage invested infrastructure can have a competitive edge, reducing costs and frictions to adoption; those that try to replace it might sink under the weight of high switching costs & behavioral change (although in some cases – boom jackpot 🎰).

    If we think of financial infrastructure, in Africa the equivalent of the US card network is a combination of:

    • a human agent network
    • phones & SIM cards
    • tower cells

    It hasn’t always been the case. The capillary presence established by telco companies in the continent from the 90s onward, brought along the way important infrastructural development that served as the launchpad to mobile money: financial infrastructure borrowed from the already existing communication infrastructure.

    A human agent network could now be used to on-ramp/off-ramp physical cash.

    Phones and SIM cards became wallets.

    Tower cells relayed information – and now value – across long distances.

    Innovation on top of invested infrastructure.

    But it’s not over.

    As the new payments infrastructure emerged, further developments “up the ladder” could see the light of day: “The combination of USSD-based mobile accounts that worked on every phone and cash-in/cash-out agents in nearly every neighborhood and village proved to be powerful infrastructure on which to build new product offerings”.

    The first wave of successful tech businesses on the continent – real “market-creating” innovations – are the product of it.

    Examples:

    • First generation: pay-as-you-go solar (like M-Kopa)
    • Second generation: digital lending

    Access to energy & access to credit. Both are built on top of mobile money infrastructure, built on top of telco’s invested infrastructure.

    What lessons can we take home from this chapter?

    1. invested infrastructure matters
    2. it looks different in Africa than in other places
    3. opportunities exist for those who build on top of it + those who make it more efficient

    Personally, I find myself asking the question” What’s the invested infrastructure here?”. And not just for payments, but for commerce, logistics, agriculture etc.. In short, it translates to: how things are done now, how much does it cost to switch and who has interest in doing it?

    6) African S-Curves ⚡️

    S-curves describe the performance of a new technology – or a technological toolset – over time.

    In the beginning, during the R&D and prototyping phase, adoption is minimal and the potential of tech still needs to be validated. The curve is flat and growing slowly. Think of electric cars 15 years ago. It is the territory of university budgets, public finance, and research grants.

    When the tech starts showing signs of improvement, it is followed by a steep acceleration in performance and increased adoption. Think of Generative AI one year ago. It is the land of VCs, profiting “by investing in emerging tech before it’s mainstream and exiting when growth plateaus”.

    Finally, when a technology is mature, adoption widespread and there is little room for marginal improvements: the tail of the curve flattens. It is the PE and stock market game.

    And then, onto the next technology, that will replace the incumbent with the next S-curve. Venture capital funding follows the S-curves cycle, the peak funding being when the curve is at its highest steep.

    Now: in the wake of funding drought, startup bankruptcies, and crowding away of international investors, what can we say about the shape of the African S-curve?

    One: African S curves have much longer tails.

    This means that it takes more time for tech in Africa to see widespread adoption. Rather than a limit to technology performance, the problem lies in the lack of market readiness.

    Read: “Customers don’t need new tech, or don’t trust new tech, or can’t afford new tech, or don’t have access to infrastructure for new tech, or don’t believe new tech provides enough value vs. old tech”

    Two: African S curves have much steeper slopes

    On the contrary, once adoption kicks in, the potential for improvements in technology can last for a very long time, going beyond what was once imagined.

    The acceleration phase lasts a long time along with its benefits.

    How do we change from one S-curve to the other? When will the new tech replace the old one?

    There are 4 different scenarios.

    If the old tech is not improving, and the market is ready for a novel solutions, then we’ll have a quick transition. This means heading towards Point A, and what people cheer as Africa’s technology leapfrog.

    On the opposite side, if incumbents are delivering increasingly better utility to consumers, who are not ready to change for newcomers, then we’ll have a very gradual and slow transition. Ergo, heading towards Point D.

    Many people either bought the point A narrative (technology leapfrog), or buys into point C one. They think old tech is crap, inefficient, and not making any progress. However, the market is not ready for new digital solutions yet. It’s a matter of time.

    Stephen Deng, on the contrary, thinks we are heading towards point B. A situation where yes, the market is not ready, but the old tech – and the ecosystem around it – is still improving.

    Think of mobile money. It is a fairly old technology ( and USSD codes), but it can still deliver innovation to its users. Telcos are blending digital offerings into their core model; traditional financial services are integrating with the mobile money ecosystem for seamless interactions; new products are developed on top of it every month.

    If MoMo is the old tech, the new tech would be close to neo-banks like Djamo. How many customers does one have vs the other?

    The shelf life of telecommunications technology has been pretty long. No surprise than that the true champions of tech in the continent are telcos. Companies like MTN, Airtel, Safaricom. This is in stark contrast with the Google, the Meta and the Microsoft of North America.

    The main argument is the following: from now on, until we reach point B, a lot of incremental innovations will be built around the existing tech. We need to surf it 🏄🏽‍♂️

    It is what Deng calls the “cybernetic commerce” area, yet another version of the Cyborg thesis.

    The most interesting element of this article, to me, is the mental framework that comes with it: how many incremental innovations can still be built on top of the existing rails?

    When you look at African markets overall, you’ll see that a lot of problems can be solved with existing technologies. There is no need for a breakthrough.

    How to deliver the benefits of tech without losing money: this is the number one skill a founder must have.

    This is the end, my friends. I hope you enjoyed the read. Writing this piece I’ve noticed that – as telcos in Africa – my essays have room for improvement. In particular, from now on I will try to deliver:

    • more real-life examples (what companies, what products etc…) → it helps with mental clarity when you have more than 1/2 examples
    • more exit simulations (revenues, potential returns) → VC exists where outsized returns exist, and we need to be more rigorous on that.

    Onto the next one! 🚀 🚀 🚀

  • Is Africa’s Growth-Driven Fintech Boom Built to Last?

    Is Africa’s Growth-Driven Fintech Boom Built to Last?

    Contributed by Ajibola Awojobi, founder and CEO of BorderPal.

    As the sun rises over Lagos, Adebayo, a young Nigerian fintech entrepreneur, stares at his computer screen. His brow furrowed in concentration and his startup, a mobile money platform to bring financial services to the unbanked, has just secured significant funding from a Silicon Valley venture capital firm. It should be a moment of triumph, but Adebayo feels a gnawing sense of unease. The numbers on his screen tell a troubling story: his company is spending $20 to acquire each new customer, yet the average revenue per user is a mere $7.

    Adebayo’s predicament is not unique. Across Africa, fintech startups are grappling with a challenging reality: the cost of customer acquisition often far outweighs the immediate returns. This scenario raises a critical question: Is Africa’s venture capital-backed fintech model sustainable or fundamentally broken?

    VCs and the Promise of African Fintech

    The African continent has long been considered the next frontier for fintech innovation. With a large unbanked population and rapidly increasing mobile phone penetration, the potential for transformative financial services seemed boundless. Venture capitalists, enticed by the prospect of tapping into a market of over a billion people—half without any formal bank account—have poured billions of dollars into African fintech startups over the past decade.

    These investments have fueled remarkable innovations. From mobile money platforms that allow users to send and receive funds with a simple text message, to AI-powered credit scoring systems that enable microloans for small businesses, African fintechs have been at the forefront of financial inclusion efforts.

    However, as Adebayo’s experience illustrates, translating these innovations into sustainable businesses has proven to be a formidable challenge.

    While Adebayo grapples with his early-stage startup’s challenges, a major African fintech player with a customer base of 300,000 users has just raised a mammoth $150 million, which brings its total funding to nearly $600 million. Based on a customer acquisition cost and revenue per customer established earlier, the economics of this deal seem precarious at best. A quick calculation reveals that the company would have spent around $6 million just to acquire its current user base while generating only $2.1 million. The funding, while impressive, thus raises serious questions about the sustainability of this model and the investors’ expectations.

    These scenarios serve as a stark illustration of the broader challenges facing the African fintech sector. It highlights the disconnect between the vast sums of venture capital flowing into the industry and the on-the-ground realities of customer acquisition and revenue generation. For a company to justify such a massive investment, it would need to dramatically increase its user base, significantly reduce its customer acquisition costs, or find ways to generate substantially more revenue per user. Achieving any one of these goals in the complex African market is a tall order; achieving all three simultaneously is unarguably a Herculean task.

    The funding also underscores the potential for overvaluation in the African fintech space. While such large investments can provide companies with the runway needed to scale and innovate, they also create immense pressure to deliver returns that may not be realistic given the current state of the market. This pressure could lead to unsustainable growth strategies, prioritizing user acquisition over building a solid economic foundation. 

    Balancing Profitability & Cost of Growth

    The core of the problem lies in the high cost of customer acquisition. According to a McKinsey analysis, some fintech companies in Africa spend up to $20 to onboard a single customer, only to generate $7 in revenue from that customer. This imbalance is staggering and points to deeper structural issues in the market.

    Several factors contribute to these high acquisition costs. First, there’s the challenge of digital literacy. Many potential customers, particularly those in rural areas, are unfamiliar with digital financial services. This necessitates extensive education and handholding, driving up the cost of onboarding.

    Secondly, Africa’s diverse linguistic and cultural landscape requires tailored marketing approaches for different regions. A strategy that works in urban Lagos may fall flat in rural Tanzania, forcing companies to invest heavily in localized marketing efforts.

    Infrastructure challenges also play a significant role. The lack of robust digital infrastructure in many African countries is partly responsible for the high customer acquisition costs. Poor internet connectivity, limited smartphone penetration, and unreliable power supply in some areas make digital onboarding processes more difficult and expensive. Moreover, many consumers are wary of new financial services, requiring significant investments in building trust and credibility.

    The high customer acquisition costs are reflected in the overall profitability of digital banks globally. A BCG Consulting analysis revealed that only 13 out of 249 digital banks worldwide, or 5%, are profitable, with 10 of those firms being in the Asia Pacific region. This statistic underscores the challenges digital banks face, particularly in emerging markets like Africa.

    This reality presents a conundrum for venture capital firms accustomed to the rapid scaling and quick returns seen in other tech sectors. The traditional VC model, focusing on exponential growth and relatively short investment horizons, may not be well-suited to the realities of building sustainable financial services in Africa.

    Rethinking the Model

    As awareness of these challenges grows, both entrepreneurs and investors need to rethink their approaches to fintech in Africa, taking into consideration the high cost of acquiring customers and the state of the continent’s digital infrastructure.

    One promising avenue is the development of white-label infrastructure. By creating common technological solutions that can be customized and branded by different companies, fintechs can significantly reduce their development costs. This approach could be particularly effective for services like Know Your Customer (KYC) systems or payment processing platforms.

    Taking the white-label concept further, an innovative solution is emerging: white-labeled services provided by community leaders with large networks in rural settings. This approach could help fintechs lower the cost of building their customer base. By leveraging the trust and influence of local leaders, companies can reduce the cost of onboarding and education. Word of mouth spreads faster in close-knit communities, potentially accelerating adoption rates and lowering acquisition costs.

    Partnerships with established institutions are another strategy gaining traction. By collaborating with banks, telecom companies, or large retailers, fintech startups can leverage existing customer bases and distribution networks, potentially lowering acquisition costs.

    Some companies are shifting their focus from B2C to B2B services. Targeting businesses rather than individual consumers could lead to lower acquisition costs and higher average revenue per user. For instance, providing payment processing services to small businesses or offering financial management tools to cooperatives could be more cost-effective than trying to onboard individual users one by one.

    There’s also growing interest in impact-focused investment models. These approaches prioritize long-term social impact alongside financial returns, potentially allowing for longer runways and more sustainable growth strategies. Such models might be better suited to the realities of building financial infrastructure in emerging markets.

    What Does the Future Hold?

    As Adebayo contemplates his startup’s future, he realizes the path forward will require a delicate balance between growth and sustainability. The dream of bringing financial services to millions of unbanked Africans remains as compelling as ever, but the route to achieving that dream may need to be recalibrated.

    The future of African fintech likely lies in a more nuanced approach to growth and funding. Rather than pursuing rapid scaling at all costs, successful companies must focus on building sustainable unit economics from the ground up. This might mean slower growth in the short term, but it could lead to more robust and impactful companies in the long run.

    This shift may require adjusting their expectations and investment strategies for venture capital firms. Longer investment horizons, more hands-on operational support, and a greater focus on a path to profitability rather than just user growth could become the norm.

    The story of African fintech is far from over. The potential for transformative impact remains enormous, and the ingenuity and determination of entrepreneurs like Adebayo continue to drive innovation across the continent.

    However, realizing this potential will require a reimagining of the current VC-fintech model. By addressing the challenges of high customer acquisition costs, exploring alternative business models, and fostering more supportive regulatory environments, the industry can evolve into a more sustainable and impactful force for financial inclusion.

    As the sun sets on another day of hustle and innovation in Africa’s tech hubs, one thing is clear: the future of fintech on the continent will be shaped not just by technological breakthroughs, but by the ability to create sustainable, profitable businesses that truly serve the needs of Africa’s diverse populations. It’s a challenge that will require patience, creativity, and a willingness to rethink established models – but for those who succeed, the rewards could be transformative, not just for their businesses, but for millions of Africans seeking access to vital financial services.

    This article was contributed by Ajibola Awojobi, Founder & CEO of BorderPal.

  • Where the Senegalese Startup Ecosystem Is and Should Be Going

    Where the Senegalese Startup Ecosystem Is and Should Be Going

    Contributed by Carine Vavasseur, CEO of Ignite.E via Realistic Optimist.

    A growth path

    Considered a model of democratic stability in turbulent West Africa, Senegal has recently witnessed the emergence of its own startup ecosystem. Ambitious economic growth objectives, crystalized by the 2012 “Senegal Emergent” plan, led to digital infrastructure improvements, legislative reforms, and collaborations with foreign savoir-faire (StartupBootcamp Afritech, AfricArena, Open Startup Tunisia, La Startup Station, Draper University…). 

    Following continuous efforts by the Senegalese private sector, the past 5 years have seen the Senegalese government become a driving force behind the ecosystem’s development. This is unlike some of its neighbors such as the Ivory Coast, where the ecosystem evolved more organically. Those governmental efforts are encapsulated in the creation of dedicated agencies such as La Der, where I previously worked, as well as previous existing agencies like ADEPME. 

    While still young, the ecosystem’s flourishing is concrete. Local champions such as Paps and Chargel have raised significant rounds and are scaling fast. Others like Logidoo, Taaral, or Compact are on their way to significant impact. 

    Seminal fintech startup Wave, American-funded but African-nurtured and raised, has chosen Senegal as its initial market. 

    As the ecosystem seeks to elevate and attract foreign investment, deciphering a couple of its specificities is useful. 

    How VCs should approach Senegal 

    VCs won’t drastically modify their approach just to invest in Senegal. Not only is the market too small to justify such granularity, but the size of the Senegalese market means any VC investment will have to be pan-African anyway. 

    That being said, VCs should be cognizant of the different approach to adopt when investing in African startups as a whole. Copy-pasting the investment methodology used for American or European markets is mistaken. Investing in the continent’s startups implies certain subtleties. 

    The context in which African startups operate is often complex: human/financial resources are rare, and the most pertinent problems to be solved are often at the “bottom of the pyramid”. This implies a tacit impact component, as customers served possess a drastically lower buying power than in California, for example.

    When navigating the Senegalese ecosystem, VCs should not hesitate to collaborate. Given the ecosystem’s youth, much of the market data is “declarative” rather than scientifically factual. Trust thus plays a primordial role, and VCs should work together to determine what can be trusted and what can’t. 

    Since truly VC-backable Senegalese companies are still few, VCs should join forces with the actors propping up and birthing such companies. In Senegal, venture studios such as Haskè Ventures have internalized the creation of promising startups and VCs would lose out by not engaging with them. 

    A great example is the LionsTech Invest initiative, a local and international investors community and platform that acts as a three-way bridge between investors, startups, and entrepreneur support organizations. Many opportunities and deals happen there. 

    Source: Sendemo, African Startup Ecosystem Discovery Report (download report here)

    Foreign vs local investors 

    Both foreign and local investors have a role to play in the ecosystem. 

    Local investors are crucial because they have inherent local expertise that founders can benefit from. Additionally, engaging local investors quasi-guarantees that the proceeds from any potential exit will get pumped back into Senegal, in one way or another. 

    That being said, local investors’ coffers are limited and startups will need to raise internationally if they wish to significantly scale. Data shows that the Senegalese startups that have reached the next level have relied on foreign capital to do so. 

    Implementing the right legislation and incentives to facilitate foreign investment is therefore paramount to the ecosystem’s future development. This also shows the need for supporting and growing business angel networks, another crucial piece of the puzzle. 

    A healthy mix of both foreign and local investors constitutes standard best practice for most performant ecosystems around the world. 

    A political risk? 

    In what is otherwise considered a model of African democracy, the run-up to Senegal’s upcoming election has been eventful, to say the least. This has worried some of the ecosystem’s partners and financiers. They fear that a radical change in government would hurt an ecosystem that is so-called “government-dependent”. 

    While the government has played an essential role in the ecosystem’s development, I don’t think dependence is the right word. At its inception, the ecosystem was mainly driven by private actors. At that time, around 8 years ago, I was in CTIC Dakar’s management team, francophone West Africa’s first startup hub established in 2011 on a public-private partnership. 

    Most of the ecosystem-building efforts were, at that time, led by CTIC and players such as Jokkolabs, the OPTIC (under ICT companies’ patronage), individual IT companies, telcos (mainly Sonatel then Tigo), some private companies mainly through their CSR, international NGOs and aid organizations such as GIZ, as well as a few state agencies. 

    The government’s strong intervention to bolster Senegal’s entrepreneurship ecosystem commenced 5 years ago with DER’s creation. That governmental intervention has been a success and has decidedly elevated the ecosystem to a new stage of maturity.

    That gained maturity is precisely why the ecosystem isn’t government-dependent, as some say. Excellent private initiatives have blossomed, and many learning-filled mistakes have been made along the way. Synergies have been tremendously reinforced and have shown concrete results. Even if there is always a need for more collaborations, some of the main interdependencies that needed to be established now exist. They are to be maintained and strengthened. 

    The government has played its role as a catalyst for better joint impact by not occupying a monopolistic position and making sure that all the players can come together through various initiatives. This has naturally positioned it as a trusted third party. 

    The future challenge resides in continuing that positive dynamic, regardless of the new or maintained government in power. The Senegalese state will naturally continue to play a major role, in getting regulation and infrastructure up to speed primarily. It will be the ecosystem’s responsibility to continue nudging it in that ecosystem-building direction. 

    Haskè Ventures

    International aid’s presence 

    International aid organizations have been omnipresent in Senegal’s ecosystem, just as they have in many other African ecosystems. Their presence requires a deep reflection on how the initiatives they finance remain in the ecosystem’s best interest. 

    There needs to be a clarification of the financed projects’ nomenclature. Today, many Senegalese incubators have aid money as part of their funding mix. However, this has led to incubators mixing startups and SMEs, the latter more in line with aid organizations’ KPIs. Mixing both can cause serious challenges. 

    Tech startups and SMEs are structurally different and do not require the same financing, benefit from the same mentors, or hold the same scaling ambition. It would be more effective to create programs tailored uniquely to startups, providing them with startup-relevant guidance. 

    Doing so will require a diversification of these programs’ funding sources, to include more local actors, private investors, and even founders themselves. Successful founders in particular would be the most apt to craft startup-relevant programs. 

    To sum it all up, while international aid’s presence has been fundamental, it is time to deeply rethink the programs the ecosystem is building for its startups, in their subject matters, their participants, as well as their sources of financing. Supporting this shift is one of our objectives at Ignite.E. 

    Conclusion 

    The Senegalese startup ecosystem has come a long way, carried by exceptional private actors and a voluntarist and increasingly implicated government. Much remains to be done by both parties, and it will be up to the first to hold the second up to account regardless of the election results. 

    VCs investigating Senegal should first determine an adequate, pan-African investment thesis and participate directly or indirectly in building their pipeline of investable startups. To thrive in Senegal and find the best founders, they shouldn’t hesitate to collaborate and engage extensively with the organizations (venture studios, accelerators) fomenting those rockstar companies. 

    The ecosystem should rethink what programs are truly useful to Senegalese startup founders, and how various funding sources impact the direction these programs take. More

    importantly, each ESO should have a clear and strong vision for itself and the ecosystem, with a plan to achieve it and meaningful KPIs to monitor its impact.

    This article was written for and exclusively published in the Realistic Optimist, a paid publication making sense of the recently globalized startup scene.

    About the Author

    Carine Vavasseur is a leading force behind the Senegalese startup ecosystem. She was an ecosystem builder for La Der, Senegal’s President’s initiative aimed at fostering the country’s entrepreneurship and startup scene. 

    She is now the CEO of Ignite.E, an ecosystem builder within Haskè group (advisory firm and venture studio) with a mandate to build African startup successes through entrepreneurship support organizations’ empowerment.

    She is also a 2023 Mandela Washington Fellow.

  • It is Too Early to Judge African Venture Capital

    It is Too Early to Judge African Venture Capital

    Contributed by Mathias Léopoldie, Co-Founder of Julaya via Realistic Optimist.

    Optimizing for home runs

    It is said that the first venture capital (VC) firm was founded in 1946, in the USA. The American Research & Development Corporation (ARDC) became famous for its $70,000 investment in Digital Equipment Corporation, a computer manufacturer, which went public in 1967 at a whopping $355M valuation. Investors taking risky bets on companies wasn’t new, but the computer era put venture capital’s singular “power law” on full display. 

    A baseball game is an apt analogy to conceptualize how venture capital works. The most exciting play, which also brings outsized returns, is when the ball skyrockets over the fence resulting in a home run. 

    VC is quite similar, as the power law nature implies that a few investments (<5%) will drive most of a fund’s returns. While the number of home runs in baseball might not guarantee winning the season, it does in VC.

    This is why VC is an exciting asset class: sharp skill and experience are necessary, but luck plays a non-negligible role. It is no surprise that, amongst asset classes, VC has the highest dispersion of returns. Participants can either win big or lose a lot.

    Source: VCAdventure

    The African VC ecosystem is young, inching past its first decade of existence. The African internet revolution took a different shape than it did elsewhere: between 2005 and 2019, the share of African households possessing a computer went from 4% to 8%, while other developed economies witnessed a 55% to 80% jump over the same period. 

    One can’t expect a VC industry to suddenly flourish in an economy where microchip-equipped computer and smartphone ownership is so scarce. The heart of the VC industry is called “Silicon Valley” for a reason.

    Another trend, however, calls our attention. Namely, the rise of mobile phones on the continent. Currently, over 80% of Africans own a mobile phone, a figure that reaches close to 100% in some countries. The 2000s-2010s feature phone mass production era is to thank. Transsion Holdings, a Chinese public company, tops the leaderboard in terms of mobile phones sold in Africa, through its portfolio of brands (Tecno, Itel, and Infinix). 

    This offline, ‘computerized’ revolution of sorts is significant for the continent, as a large part of Sub-Saharan Africa’s population still lacks internet access. This includes people who own a feature phone but no smartphone, or people for whom the cost of internet data is prohibitively expensive. Internet’s geographical reach in Africa also remains patchy, further complicating the equation.

    Source: GSMA

    Unsurprisingly, telecom operators have emerged as this mobile phone revolution’s winners. The mobile money industry is a striking example: a fertile mix of USSD technology and agent networks enabled telecom operators to become fintech companies as far back as 2007. Those same telcos now derive a significant amount of their business from the financial services they ushered in. M-Pesa, Kenya’s leading mobile money service provider, now accounts for more than 40% of Safaricom’s (its parent telecom operator) mobile service revenue. 

    In Sub-Saharan Africa, 55% of the population possesses a financial account, with mobile money’s rise boosting that number in recent years. That’s approximately double the amount of Africans with an internet connection.

    Too early to call 

    In this context, many are the Cassandras lamenting venture capital’s failure in Africa. These conclusions seem premature, both because the industry itself is novel but also because the digital ecosystem it operates in is still nascent.

    Even by removing Africa from the picture, venture capital is a long-term industry, and its illiquidity can lead to prolonged exit times. According to Dealroom, only 17% of portfolio startups globally exit within the investment period of 10 years. Initial, tangible VC investments in Africa debuted around 2012. We believe that the pessimists are neither right nor wrong: they’re just pontificating too early.

    That being said, the past decade has drawn the contours of what can be improved and highlighted what has worked.

    # years it takes for portfolio startups to exit, along with exit size (Dealroom)

    The casino analogy

    Casinos constitute another pertinent venture capital analogy. Addiction and money laundering aside, a casino is a fascinating business. In a casino, a few people win exuberant amounts, while the many ‘losers’ subsidize the entire operation. In return for setting up the infrastructure, applying rules, and mediating disputes, the casino pockets a handsome amount of the proceeds as profits.

    Venture capital’s logic is similar to a casino’s. “Winners” are the top decile of skilled VC funds reaping outsized returns. “Losers” are the VC funds that don’t return the amount of money they promised their investors (LPs). The casino itself is the government, collecting tax revenue in return for organizing the game.

    Without casinos’ power law gains distribution, no one would play. It is by design that ‘returns’ are extremely skewed, enabling the casino economy to work. VC is similar: it is by design that most of the returns come from the top decile funds and companies because winning in venture capital is hard. It wouldn’t be possible without the entire ecosystem structure, and failing companies still provide tremendous value to the other players. 

    Mixing profitability and venture scale

    While far from a solely African problem, the confusion between these two terms may cause damage. In light of hostile, macroeconomic conditions, many Africa-focused VCs have started demanding that their startups reach “profitability” even if this means compromising on hyper-growth.

    This is partly a mistake: if investors want to invest in profitable African businesses, they can invest in African banks for example, which exhibit fantastic ROIs. Or switch to private equity. But that isn’t the VC game.

    VCs demanding that their portfolio companies, especially young ones (pre-seed and seed stages), become profitable quasi-eliminates any potential “home-run” companies. The latter can only emerge through market share dominance, a process facilitated by operating at a company-level loss when competitors can’t. Those home-run companies are the only way a VC can reach the outsized returns it promised its LPs.

    Herein lies the confusion between profitability as a whole and positive unit economics at the marginal level. VCs should be encouraging their portfolio companies to reach “venture scale”. Venture scale is the ability to grow at a decreasing and very efficient marginal cost. This implies tinkering and getting unit economics to a point where the revenue generated from each unit sold is superior to what it costs to make it. This metric is referred to as the “contribution margin”.

    A company with a positive contribution margin, which can be unprofitable as a whole because it has very high fixed costs (such as R&D), has a clear path to long-term profitability. This justifies pumping large amounts of money into it, enabling the company to reach the economies of scale it needs to win.

    Companies continuing their fundraising route, and even going public, with iffy contribution margins either speed-run their death (Airlift) or make their lives significantly harder (SWVL). Those are the business models VCs should be wary of. However, a blind focus on company-level profitability for the sake of profitability doesn’t make much sense in the VC context. There are very useful data points that companies can follow to see if they are on the right path, such as the “burn multiple” or the “magic number”. 

    VCs investing in African startups should be cognizant of this difference as they hit the brakes during the current funding winter.

    African VC: Expensive and risky, replete with singular challenges

    The early innings of the African venture capital ecosystem have made two things clear: venture capital in Africa is expensive and risky.

    It is expensive because lagging infrastructure might nudge startups to build out their own, which costs money, additional time, and expertise. If the infrastructure needed can’t be built in-house, such as public infrastructure (roads, etc…), the startup will have to contend with the higher prices resulting from the existing infrastructure’s inefficiencies. This is a salient problem for logistics startups, for example.

    Funding high-growth businesses in Africa can thus turn out to be an expensive endeavor, generating infrastructure costs that wouldn’t be necessary in other, more developed markets. 

    It is riskier if funded by international funds in international currencies (USD, Euros, GB Pounds, etc…). Take Nigeria for example, one of the continent’s venture capital darlings. Earlier last year, the Central Bank of Nigeria floated the local currency (the naira) away from its traditional peg to the USD, in a bid to liberalize the economy. The move led to the naira’s sharp and sudden devaluation, revealing overarching uncertainty about its strength. 

    This was a disaster for Nigerian startups, especially those that reported their revenue numbers in dollars (a given if foreign investors are on the cap table). The devaluation meant that similar revenue in naira from one month to another could render just half the value in dollars.

    If Nigerian startups had converted any USD from their funding rounds into naira, their buying power was also drastically slashed. From the investor’s point of view, the startup’s $USD valuation got trimmed almost overnight, due to factors outside the founders’ control. This also creates currency translation issues, making reporting of actual performance of ventures in local and USD currencies trickier and less reliable.

    This is not an issue in developed markets with stronger currencies and free capital flows, such as the US or Europe. It can be reasonably assumed that this issue has contributed to Nigeria’s drop in startup investment.

    To sum it all up: African venture capital is expensive because startups have to build out or deal with decrepit infrastructure hence requiring specific business models, and comparatively riskier since valuations are subject to currency-induced volatility.

    Source: Africa The Big Deal

    Fraud in African tech: an optical illusion?

    The past year was also punctuated by the downfall of some well-funded African startups, failures attributed to a nebulous mix of founder wrongdoing, financial mismanagement, and outright fraud. As is often the case, very few people will uncover the full story behind these crashes.

    Some observers were quick to generalize the trend, using these failures as proxies to gauge the integrity of all other African founders. Shady founders do and will always exist, regardless of the ecosystem’s maturity. There is an argument to be made that the safeguards against those founders are potentially lower in young ecosystems such as Africa, where governance standards have not yet been standardized and where investors are less aware of African markets’ specific features. That is a solvable problem.

    These are normal ecosystem growing pains that need to be rationally addressed but are no cause for doomsday rhetoric.

    What’s needed: liquidity

    Venture capital’s equation is simple: can you invest in startups that will exit, and will those exits return (much) more money than your LPs put in while creating economic value for the clients, suppliers, and all stakeholders?

    Exits, meaning a startup getting acquired or going public, are crucial to the venture capital ecosystem’s health. VCs are investing with the intention of outsized exits, but sometimes those turn out to be impossible. Adverse market conditions, a non-scalable business model, founder conflict… Exits can be jeopardized for various reasons.

    When such a situation arises, invested VCs will sometimes face the choice of either settling down for a smaller exit or losing their money outright. We believe that the importance of these small exits, such as “acquihires” should not be underestimated as they remain important for VCs required to distribute to their LPs. Typically, they will also provide cash-outs for angel investors, employees, public institutions, and founders. These cash-outs will hopefully convince these stakeholders to pour money back into the ecosystem, launching a virtuous flywheel.

    While the number of exits has been increasing on the continent, actual numbers of their combined value are hard to come through (many deals don’t disclose their terms). Briter Bridges also interestingly notes that the countries and sectors receiving the most amount of funding aren’t necessarily the ones with the most lucrative exit paths.

    Liquidity events are essential to Africa’s VC market. So far, most of the attention has gone toward fundraising numbers, a relevant proxy for market sentiment but not market viability or growth. More attention should be paid to the African exit market, its intricacies, its possibilities, and its obstacles.

    The future of African M&A

    An overwhelming majority of exits for African startups today entail a merger/acquisition (M&A). 

    Two African M&A trends are likely to materialize over the next couple of years.

    First is the consolidation of African startups operating in the same sector yet different geographies, and struggling to live up to the valuation they raised. The recent Wasoko-MaxAB merger announcement is an example of such.

    Second is the potential rise of “south-south” startup acquisitions. The socio-demographic similarities between emerging markets make the solution built in one place potentially applicable to another, even thousands of miles away. This seems to be truer for lesser regulated sectors, such as edtech or e-commerce, but harder for more supervised ones, like fintech. The recent Orcas-Baims acquisition is an example of such a deal.

    Players such as Brazil’s Ebanx, Estonia’s Bolt, and Russia’s Yango Delivery all operate in Africa and represent new competitors (and potential acquirers) for local African startups. This could stimulate the local M&A scene, but more importantly, entice other well-capitalized startups in emerging markets to expand to Africa.

    Conclusion

    Venture capital in Africa is a recent phenomenon, one whose success can’t yet be pronounced due to the sector’s long-term nature. These early years have highlighted the specificities of African venture capital, some of which aren’t relatable to more developed markets or even other emerging markets. This means copy-pasting Western frameworks in the African context is a faulty and lazy approach.

    Foreign and local VCs investing in African startups should seek to deeply understand the continent’s intricacies, and develop fresh strategies to deal with them.

    The ecosystem should give itself time. Adopting a longer-term view discounts short-term pessimism and allows one to rationally solve the challenges that arise. African venture capital can be a fantastic locomotive for African growth, but railroads don’t get built overnight. 

    As the Bambara saying puts it, munyu tè nimisa : one never regrets patience.

    This article was written for and exclusively published in the Realistic Optimist, a paid publication making sense of the recently globalized startup scene.

    About the Author

    Mathias Léopoldie is the co-founder of Julaya, an Ivory Coast-based startup that offers digital payment and lending accounts for African companies of all sizes. Julaya serves over 1,500 companies, processes $400M of transactions, and has raised $10M in funding.

    Julaya has offices in Benin, Senegal, France, and Ivory Coast.

    Mathias would like to thank Mohamed Diabi (CEO at AFRKN Ventures) and Hannah Subayi Kamuanga (Partner at Launch Africa Ventures) for their thorough advice on this piece.

  • Who is Fixing the Finance Gap in Africa?

    Who is Fixing the Finance Gap in Africa?

    Contributed by Yannick Deza, publisher of Data Bites.

    How data & technology are ushering a new era of business financing, from the lessons of M-Kopa to the success of Untapped Global.

    The Internet promised us a dematerialized society, where information, services, and money would travel through its digital rails at the speed of light.

    Software – with almost zero cost of replication and distribution – would be the new oil.

    The world would be a global village where prosperity & democracy would triumph.

    LMAO 😅

    There is some truth to this early 2000s tecno-optimism.

    I am writing this article from my bedroom. Thanks to LinkedIn, Substack, and Gmail, I can distribute my content for free and be part of global conversations.

    If I push hard on data analytics, I can learn how to better engage with my audience and eventually upsell a paid subscription (at best), or cross-sell healthy ginger drinks and productivity courses (at worst).

    How many gatekeepers have I avoided thanks to a bunch of geeks wearing pajamas, writing code in their dorms, and playing Dungeons & Dragons?

    And even if we zoom out and think about the continent, we can say the Internet Revolution has partly delivered on its promise. How many Africans have benefited from access to financial services, remote job opportunities, better & tailored education, and free entertainment? A whole lot!

    There is a problem with this story, though. The problem with the Digital Eden narrative is that it omits one crucial, underlying assumption: software is only useful when it sits “on top” of something.

    We don’t eat software, we don’t shelter with software, we don’t commute with software, we don’t irrigate our lands with software.

    Software enables, software improves. Software does not make.

    To say with the Maslow Pyramid: pure software is useful at the top, not at the bottom.

    You can leapfrog landline internet because everyone has a mobile phone, fine.

    But you can’t leapfrog the two fundamental layers on top of which software can unlock its benefits: physical assets and business structures, to move atoms & transform raw stuff.

    Digital technology comes as a booster/equalizer. We might not eat software, but we can improve the productivity of agricultural land with software. Sure, once we have functioning water pipes and businesses taking care of them.

    It is hard to move backward

    In short, as much as we’d love to live in the metaverse, the economy needs physical, productive assets to deliver your food to the table, your 🍑 to the office, and even your email to the server. And it needs business structures that organize these assets, maintain them, and invest in them, from microscopes to trucks to refrigerators.

    And…. here we come to the ❤️ of this article:

    1. In Africa, most of these “business structures” are small-sized, informal businesses.
    2. They desperately need financing to buy, upgrade, and maintain these physical assets.
    3. They can’t get it (SMEs’ finance gap accounts for $136 billion 🥲)

    So let me raise the following question then: if software cannot replace tractors & sewing machines, can it at least make us better at funding them? Can technology help us respond to African businesses’ capital needs?

    Big Problems 🗻 x Old Incumbents 👴🏽 =New Opportunities 🦋

    When we think of financing, we instinctively think of banks.

    In Africa, they don’t always have a good reputation.

    To cite Kwamena Afful, co-founder of Microtraction in an episode of The Flip:

    “African banks mobilize deposits from big enterprises, governments, and high net worth individuals, and deploy these deposits in treasury bills and federal debt. That’s their business model. They are not interested in lending to consumers or small businesses”.

    It’s a punchline, but there is some truth to it.

    Private credit levels are pretty low in Africa, and when it comes to SMEs, things get even dryer. As the infamous report from Proparco highlights, banks’ loans devoted to small firms in Africa “represent half of that of their counterparts in developing economies” (5% vs 13%). On top of that, only 68.7 % of SME loan applications are approved by banks in Africa, against 81.4 % in other developing countries.

    But wait: SMEs in the continent account for 40% of GDP and 80% of employment.

    So what are banks even doing with their time? Why don’t they just go out there and finance these businesses?

    Of course, the answer is “complex”. But apart from banks’ problems with upstream access to capital (read: global investor shying away and crazy high interest rates), I think the main reason is:

    • ineffective due diligence: the methodology used to assess the credit risk of the borrower
    • lack of data: the data input needed for the risk management models to work

    Let me clarify.

    You generally have 3 macro-categories of lending practice:

    • collateral-based lending
    • cash flow-based lending
    • relationship-based lending

    Collateral-based lending relies on tangible assets, such as real estate or equipment, that the borrower pledges as security for the loan.

    This is an obstacle for many SMEs in the continent as:

    • they lack eligible assets to pledge as collateral;
    • the value of collateral assets can be required to be up to 80-100% of the value of the loan (IFC);
    • movable assets – like inventory and receivables – are not accepted as collateral;
    • assets’ appraisal is complex and can lead to operational overhead and increased risk

    This makes collateral-based lending complex, expensive, and often unfeasible.

    Cash flow-based lending focuses on the borrower’s ability to generate sufficient cash flow from operations to meet debt obligations.

    To do that, you usually need two things:

    • income statements & balance sheets: to assess the future cash flows of the borrower
    • market data & market intelligence: to assess the health of the sector the company operates in

    Guess what? Both things are very hard to find in the context of African SMEs.

    Many SMEs barely maintain the financial records needed for income statements.

    And and if you’ve ever tried to do some market research on the region you know that market intelligence is non-parvenu.

    So what?

    Lack of collaterals and hard-to-predict cash flows make these businesses 1) riskier according to banks’ current credit risk models, and 2) costly, in terms of due diligence costs, which are not justified by the size of the loan.

    This is why, ultimately, African banks prefer to finance large enterprises (who usually don’t face these problems) and resort to relationship-based lending practices, which stress the borrower’s history, character, and overall trustworthiness developed through previous interactions.

    #saaaad 😢

    If we could find a way to lighten lending operations, access data more easily, and upgrade risk-management models, would we be able to finance more physical assets?

    Is there a way technology can help us overcome these challenges?

    Welcome to the world of “smart” assets… 🧠🛠️

    During the past decade, several companies have come up with unique approaches to solve the finance drought of the “unbanked.

    An interesting case, making the headlines for its innovative approach to financing, is Kenya’s gemstone: M-Kopa.

    They have pioneered a new way to finance high-value consumer goods such as off-grid solar systems, smartphones, TVs, and refrigerators.

    How did M-Kopa solve for lowering operations costs and improving data availability? With the clever combination of 3 technologies: mobile money, IoT (SIM cards) embedded in their products, and remote locking technologies.

    If I borrow a smartphone with M-Kopa:

    • the loan is secured by the asset provided, i.e. the smartphone;
    • I pay daily installments with mobile money;
    • If I fail to pay, a remote trigger will lock my phone, so that I won’t be able to use it anymore (except for charging money to pay the amount due 😅)

    The same holds for a solar system and any other product. Transparent data on assets’ usage and repayments, coupled with remote control over the asset, has proved an effective instrument in establishing initial trust with borrowers.

    My repayment rates are then used for credit scoring, enabling me to access further cash loans once the smartphone is paid in full, with the phone resecured as collateral (again).

    As simple as it seems, this model alone unleashed a lot of money and a lot of impact. As the GSMA report says:

    “The explosive rise of pay-as-you-go (PAYG) in the off-grid energy sector, for example, has played a significant role in widening access to energy. Combining mobile money systems with machine-to-machine (M2M) communication and remote locking has made off-grid energy products more accessible and affordable to billions worldwide, bringing power for the first time to 25-30 million people worldwide between 2015 and 2020”

    The recipe for success: a mix of operational excellence, IoT technology, and digital payments.

    Great!

    While this model proved valuable for consumers, we must remember that we want to finance businesses!

    M-Kopa lends essentials with a relatively low price tag.

    Is there a way we can draw from the lessons of this model and apply them to finance physical, productive assets that cost more money?

    …& the world of Untapped’s smart financing 🧠✨

    Back in 2021, I tried to put money into an investing vehicle by the name of Untapped Global.

    I was intrigued by their model as it combined all the ingredients I was looking for at the time: a data-driven approach; a high-returns portfolio; and a tangible, positive social impact.

    It turned out that I wasn’t an accredited investor and I couldn’t invest with them (sigh 😞), so I eventually ended up switching to Daba (who I didn’t know yet at the time).

    However, I’ve kept an eye on them over the years, until I could finally sit down with Lundie Strom, Untapped’s Investor Relations & Partnerships Head, to chat and get a better overview of their model.

    The fascinating conversation that followed convinced me that they may be on the right track: taking the best of M-Kopa and adding their own twist to it.

    I’ll go through what I consider to be the four pillars of their model:

    • Revenue-share
    • Operating partners
    • Iterative approach
    • Real-time data

    1) Revenue-based financing 💸💸💸

    One of Africa’s most-funded startups, Moove, recently made the headlines as it received a 100M investment from Uber, valuing the company at 750M.

    Its main business model? Revenue-based vehicle financing.

    In a revenue-based financing (or revenue-share) agreement, a business receives funding in exchange for a percentage of its future revenue until a specified amount is repaid.

    Instead of a fixed amount of money (+ interest rate) to be paid at regular intervals, as with traditional loans, revenue-share repayments fluctuate with the business’s income, providing flexibility during low-revenue periods and faster repayment times during bonanza: investors’ returns are aligned with the company’s performance.

    In the case of Moove, they finance cars for Uber drivers. The loan is repaid with a share of the revenues the Uber driver makes: as simple as that.

    At a high level, Untapped does the same. It finances productive assets and gets paid back with the revenues these assets generate.

    What type of assets does Untapped finance? Cars? Motorbikes? Generators? Well, all of them. It doesn’t really matter.

    And here is what distinguishes Untapped from Moove, and what makes their model more interesting and more scalable.

    2) Operating partners ⛑️⛑️⛑️

    Moove is good at financing cars for Uber drivers. It is not a trivial task and they had to become good at it.

    Why? Two reasons.

    First ☝🏽, managing a fleet of vehicles demands domain expertise and operational overhead.

    Moove needs to develop proprietary tech & manage the integration with Uber to have visibility on how the vehicles are utilized, how much revenue is generated, and receive timely payments. It is a lot of plumbing.

    They also need to partner with car manufacturers for steady supply & support services, and create a system to onboard drivers and evaluate their creditworthiness and performance. Again, a lot of plumbing.

    Second ✌🏽, Moove itself is subject to credit risk. They don’t purchase the vehicles from their balance sheet money: it would be too capital-intensive. They have to take up loans/financing from creditors. And given they offer revenue-share deals to their drivers, they have to juggle between variable repayments from drivers vs fixed installments they owe their creditors.

    This is the main reason we don’t see many companies like Moove around. While revenue-share agreements are attractive to drivers, part of their business risk rolls up to the company borrowing them.

    Now, how does Untapped fit in this picture?

    “We don’t know how to manage a fleet of vehicles”, says Lundie.

    “We partner with the likes of Moove, who know the realities on the ground, and relieve them from part of their credit risk by striking a revenue-share agreement with them”.

    “We don’t want to replace Moove. We want to invest in dozens of the best Mooves across multiple industries, geographies, currencies – and be their complementary source of capital”.

    In this sense, an operating partner is a company focused on one vertical (like Moove with cars).

    No matter if, instead of cars, the company is financing electric bikes, solar-powered irrigation equipment, smart refrigerators, or thermal printers. As long as it:

    • knows how to manage operations on the ground, and
    • has the technical skills to collect & integrate data from the assets and the underlying businesses

    Untapped can invest in it!

    As a result, the interests of all the actors, from the drivers to the Mooves, to the ultimate investors in the physical assets, are aligned. Aligned along what? Well, the revenues the assets generate!

    A little sketch:

    Ok cool, so how does Untapped manage its own risk?

    3) Iterative approach 🌀🌀🌀

    “We always invest in two stages. No matter the size of the company, at the beginning every operating partner starts with a pilot”.

    This means $50-100k as a first check for a 4 to 6-month period: “We put money in your hands and see what you can do”.

    In practice, this helps the team tick some boxes: how many assets can you deploy? What is the quality of your data? Can you integrate data with our platform? Can you pay it back in time?

    If the results are good, the company enters a scaleup stage, where investments range from 500k to 5M.

    At this stage, the operating partner is expected to have already managed the data integration and be working on the payment integration, which is the hardest part (moving money from local wallets in Ghana to local wallets in the US, for example).

    Out of 59 companies, only 7 have entered the scaleup phase.

    “Our goal is to really pick up the best ones, those who need 5 million a year, and can achieve that scale and the impact”.

    This approach of spreading the seeds and harvesting the good ones allows Untapped to manage risk efficiently while gathering loads of data.

    And it’s ultimately in the data that lies the core competitive advantage of this model.

    4) Real-time data 📈📈📈

    Imagine a world where, when you invest in an African entrepreneur, you can have visibility on where each asset is deployed and how much money it’s making, in real-time. This is the vision of the Smart Asset Financing platform developed by Untapped.

    How hard is it to integrate data from assets and businesses across different regions?

    “This is our real edge. We want to be tech-driven, so our data team is working to do what currently no one is doing”.

    What no one is doing is the following:

    • integrate data from physical assets
    • with data from underlying businesses using these assets (i.e. revenues),
    • from multiple operating partners who deployed them (i.e. tens of Moove, across business verticals);

    To do what?

    • Monitor your entire portfolio in real-time,
    • paying your investors as the money comes in,
    • develop proprietary risk management models

    To me, it sounds a bit like a command center, where you can say: “OK, we financed 10,000 entrepreneurs. What is happening on the ground? How well the money is moving around? How much are we making? Should we scale back on something?”

    It’s a pretty compelling vision.

    The question then is, how far are we from a world like this?

    “Data integration and especially payment integration, is still hard. We need to provide technical assistance to some of our earlier stage operating partners because not everyone has those capabilities yet”. Also, “moving money from local wallets to regional wallets to the US, is still a headache, and a problem that no one completely solved yet”.

    Smart Asset Financing is the first iteration aiming to deliver on this promise, and challenges of this kind can only be solved with tunnel vision.

    So what’s in it for us? 🤷🏽🤷🏽🤷🏽

    After the conversation I had with Lundie, my brain was like “There needs to be more of this”. If we take it back from where we started, it’s a no-brainer.

    SMEs are the lifeblood of the African economy.

    To continue delivering products and services each of us needs, they need capital to purchase and maintain physical assets.

    IoT, digital payments, and the smart distribution of risk & operational overhead have paved the way in solving the two major bottlenecks preventing traditional banks from helping them: credit risk modeling and data availability.

    Untapped has worked its way through novel ways of addressing this challenge. Others are doing that too. We need to learn from them, copy and iterate.

    How much more wealth would there be if there wasn’t just one Moove, but one hundred Mooves?

    How much more resilient our economies would be, if, instead of just cars, we could finance irrigation systems, trucks, and medical devices?

    I don’t know, but I definitely want to hear more stories like this.

  • Undiscovered Founders in African Fintech

    Undiscovered Founders in African Fintech

    Contributed by Ajibola Awojobi, founder of BorderPal.co by ErrandPay.

    Flashy new tech companies and cutting-edge tech get a lot of buzz. But for investors, the real excitement lies in booming tech hubs, areas where new companies are constantly popping up, fueled by money from around the world. These up-and-coming hubs offer a chance for quick profits compared to the crowded tech industries in more advanced markets.

    That has been the tale of fintech in Africa over the past few years. Many in the global investment community have looked at the continent as the “future” or “next frontier” of financial technology, with investments flooding into the sector at an unprecedented rate.

    From 2016 to 2022, funding for African startups grew 18.5x, 45% of which was attributable to fintech, per a McKinsey report. In the eight years to 2023, nearly $4 billion in equity funding was poured into fintech startups, while the sector accounted for around half of the total financing raised last year.

    The surge in funding is partly behind the boom in Africa’s fintech, propelling it to rank as one of the fastest-growing in the world. But the concentration of investor capital on a select few players (in 2023, 75% of all equity funding secured by African fintech startups went to just ten companies) has inadvertently made the sector a “land of giants” of some sort. This top-heavy ecosystem may overlook a vast untapped potential. 

    A handful of well-known names dominate fintech headlines and funding. Companies like Flutterwave, Chipper Cash, MNT Halan, TymeBank, Wave, Jumo, and OPay have become household names, nearly all valued at over $1 billion. While their success is commendable, this concentration of resources raises a crucial question about the broader impact on financial inclusion across the continent. It limits innovation and creates a narrow funnel for financial services distribution, potentially leaving millions underserved.

    Despite the growth of fintech, financial exclusion remains a significant challenge in Africa. Sub-Saharan Africa’s banked population jumped from only 23% in 2011, but most Africans still do not have bank accounts.

    Around 360 million adults in the region do not have access to any form of account—roughly 17% of the global unbanked population, per World Bank estimates. This vast number represents not just a challenge but an enormous opportunity for a different kind of financial innovation and venture building. 

    “Undiscovered Founders”

    Traditional financial institutions and even fintech startups have struggled to reach these populations due to various factors, including low urbanization rates, infrastructure limitations, high operational costs, and a lack of tailored products. This is where the power of undiscovered founders lies.

    These religious leaders, community leaders, and small business owners have established trust, credibility, and deep connections within their local communities. Still, they may lack the technical expertise or capital to launch fintech ventures. They understand their neighbors’ financial needs and challenges, acting as bridges between the formal and informal economic sectors.

    The power of these untapped networks cannot be overstated. In many African communities, trust is currency, and these leaders have spent years building social capital. For instance, a pastor in a rural Nigerian village might have more influence over financial decisions in their community than any glossy marketing campaign from a Lagos-based fintech company.

    While these potential founders hold immense potential through their network and trust, they face significant challenges in leveraging these to provide tech-driven financial services.

    Access to capital is a major obstacle. Banks view them as high-risk borrowers, while traditional venture capital rarely reaches these individuals, making it difficult to secure funding for starting or expanding financial service offerings. In addition, many lack the technical skills to build and maintain fintech platforms, while navigating the complex world of financial regulations can be daunting.

    Here’s where the concept of white labeling emerges as a game-changer. Put simply, white labeling is the practice of one company making a product or service that other companies rebrand and sell as their own. This model could be adapted to empower undiscovered founders by providing them with ready-made, compliant fintech solutions (technological infrastructure and core services) that they can brand and distribute within their networks.

    Imagine a community leader partnering with a fintech company to offer their congregation or local businesses branded mobile wallets or microloans. The established company handles the complex back-end technology and regulatory compliance, while the community leader leverages their trusted network for customer acquisition.

    This approach solves several problems simultaneously: undiscovered founders get affordable access to advanced technology, existing trust networks are leveraged for customer acquisition, and regulatory compliance is ensured through the central platform. It also offers a distinct advantage over traditional funding models. Empowering multiple “mini-startups” across the continent through this model could prove more cost-effective than pouring resources into a single large-scale venture. 

    The analogy of Coca-Cola’s distribution system comes to mind. Its success in reaching even the most remote parts of Africa is attributed to its micro-distribution centers (MDCs) in Africa — small hubs that distribute beverages to small retailers.

    Over 3,000 are usually run by individuals who live in the community; they employ local people and handle the last-mile distribution. They create around 20,000 jobs and generate millions of dollars in annual revenue. Similarly, empowering undiscovered founders creates a capillary network of financial service providers, reaching the farthest corners of the continent.

    Consider the cost-effectiveness: Imagine funding 100 local leaders, each reaching 1,000 individuals, compared to funding one large fintech startup aiming to reach 100,000. The white-labeling model fosters a more cost-efficient and geographically expansive approach to financial inclusion. Instead of one company trying to penetrate diverse markets, hundreds or thousands of local leaders could adapt services to their specific communities.

    Beyond financial inclusion

    Increasing account ownership and usage could increase GDP by up to 14% in economies like Nigeria. By leveraging undiscovered founders, we could accelerate this growth while ensuring it’s more evenly distributed. However, the implications of this model extend far beyond just increasing access to bank accounts or broad financial services. 

    Empowering local leaders as fintech distributors could increase job creation, as each mini-startup creates multiple jobs within its community. Profits from financial services would stay within local communities, and local founders would be best positioned to understand and meet their communities’ specific needs, thereby creating more tailored products. 

    As trusted figures introduce these services, they could play the crucial role of financial educators, dispelling myths and building trust around formal financial services.  Financial literacy is essential for making informed financial decisions and avoiding predatory lending practices. Undiscovered founders can bridge the knowledge gap, fostering a financially responsible citizenry.

    While promising, this model is challenging. Ensuring quality control across numerous mini-startups, managing regulatory compliance, and preventing fraud are all significant considerations. There’s also the question of identifying and vetting potential undiscovered founders, but these challenges are manageable. With proper systems in place, including rigorous vetting processes, ongoing training, and robust monitoring systems, these risks can be mitigated.

    The concept of undiscovered founders represents a paradigm shift in our thinking about fintech distribution in Africa. We can create a more inclusive, resilient, and far-reaching financial ecosystem by leveraging existing trust networks and empowering local leaders.

    This approach aligns with the African proverb, “If you want to go fast, go alone. If you want to go far, go together.” While the current model of concentrated investment may lead to rapid growth for a few companies, empowering undiscovered founders could take us much further in achieving true financial inclusion.

    As we look to the future of fintech in Africa, it’s time to broaden our perspective. The next big innovation in financial inclusion might not come from a tech hub in Nairobi or Lagos but from a small shop owner in rural Tanzania or a community leader in suburban Ghana. By providing these undiscovered founders with the tools they need, we can unlock a new wave of innovation and inclusion, bringing financial services to millions who traditional models have left behind.

    The potential is enormous for financial returns and social impact, economic empowerment, and the realization of Africa’s full potential in the global digital economy. It’s time to discover the undiscovered and rewrite the story of fintech in Africa.

  • South African Small-Cap Industrials Offer Investors a Unique Opportunity

    South African Small-Cap Industrials Offer Investors a Unique Opportunity

    Contributed by Chipo Muwowo, Founder of Capital Markets Africa.

    • SA small-cap Industrials enjoy strong earnings potential
    • Some firms have completed judicious acquisitions in recent years
    • Stock prices remain attractive despite significant increases in their value

    African equity markets offer investors great promise. This is even though most African listed companies don’t appear on leading, global frontier and emerging market indices.

    On the Johannesburg Stock Exchange (JSE), Africa’s largest and most liquid stock exchange, one sector that deserves more attention from investors is the small-cap industrials sector.

    In this short piece, we highlight three stocks that could provide investors with a route into South African equities, perhaps for the first time. 

    Why?

    SA industrials enjoy strong earnings potential driven by diversification and good asset management. Some firms have completed judicious acquisitions at home and abroad in recent years, and stock prices remain attractive despite significant increases in their value.

    Afrimat Limited (JSE: AFT)

    Afrimat is a mining and materials company listed on the Johannesburg Stock Exchange. 

    The company supplies a broad range of products: construction materials such as aggregates, bricks, and ready mix concrete; industrial minerals such as lime and lime products; bulk commodities such as iron ore and anthracite; future materials & metals such as phosphate, vermiculite, rare earth,s and green construction materials.

    In addition, Afrimat Mining Services offers full pit-to-port solutions to the mining, construction, and quarry industries throughout Southern Africa.

    Last year, the company generated revenues of ZAR2.8 billion (about $150 million), and operating profit was up 18.8%. CAGR Diluted EPS for the previous five years is up 21.47%.

    Last month, Afrimat had its bid to acquire the South African operations of Lafarge, the global cement manufacturer, approved by the Competition Tribunal. 

    Afrimat CEO Andries van Heerden said of the deal, “It will increase [our] offering in the construction materials space, by expanding the Group’s quarry and ready-mix operations nationally. Additionally, access to the fly ash operations provides a foothold into the cement extender market. The grinding plant will allow Afrimat to grind various materials as value-added products for our current and new customers. In contrast, the cement kilns allow the Group to enter the cement value chain competitively.”

    Hudaco Industries Limited (JSE: HDC)

    Hudaco specializes in the importation and distribution of a broad range of high-quality, branded automotive, industrial, and electronic consumable products (mainly on an exclusive basis) for the South African and wider Southern African region.

    It primarily supplies the consumer markets with stand-by and solar batteries, cooking and heating products, automotive spares and accessories, and more. Under engineering consumables, it supplies diesel engines, hydraulic and pneumatic equipment, electrical cable accessories, and more.



    Over the years, the firm has been acquisitive. Last year, it bought the businesses of Brigit Fire (“to invest in an industry with growth potential and to further diversify the revenue stream”) as well as Plasti-Weld (“as a bolt-on acquisition for Astore Keymak, our thermoplastic pipes and fittings business”).

    Last year, the company generated revenues of ZAR2.46 billion (about $132 million), and operating profit was up 23%. CAGR Diluted EPS for the previous five years is up 26.27%.

    This was despite significant macroeconomic challenges – “chaos at South African ports impacting the supply chain, the impact of unprecedented levels of load-shedding, and rand volatility and weakness increasing cost of inventory,” its annual report noted.

    Argent Industrial Limited (JSE: ART)

    The group sells and trades manufactured steel and steel-related products such as metal gates, railings, and shutters. It owns over 20 vertically integrated subsidiaries in South Africa, the UK, and the US while it sends exports to over 35 countries globally. The Argent group of companies also includes several jet refueling and fuel storage businesses.

    In 2021, it acquired South Africa-based American Shutters, a supplier of “a stylish door and window shutter security system” for ZAR57 million. A year earlier, it acquired UK-based Partington Engineering, a supplier of bespoke trolleys for both the traditional and e-commerce retail sectors, for GBP3.1 million.

    Last year, the company generated revenues of ZAR2.46 billion (about $132 million), and operating profit was up 23%. CAGR Diluted EPS for the previous five years is up 26.27%.

    In a note to investors last year, Rudi van Niekerk of fund manager Desert Lion Capital said, “I strongly believe that the market has been wrong on this one for a while now. Argent is not a hot AI stock. Maybe that is one of the reasons it is ignored by the market. Yet, as a real-world- economy stock, Argent’s earnings growth would make many a tech stock blush.”

  • The Exit Problem: Are African Markets the Solution?

    The Exit Problem: Are African Markets the Solution?

    Contributed by Kyle Schutter, a Partner at Grant & Co.

    To go public, or not…

    I attended the Ibuka accelerator, a program to help get private companies listed,  kickoff event in October at the Nairobi Securities Exchange.

    The Kenyan stock exchange, being the largest in the region, is worth a close look.

    The requirements for listing in Nairobi are minimal and it is not nearly as hard to list as people make it out to be. A company needs only 1 year of track record, doesn’t need to be profitable, only needs to list 15% of its shares, only needs a capitalization of about $100,000, and only needs to have 25 shareholders within a few months of listing.

    So why aren’t more companies doing it?

    The Lagos, Johannesburg, Mauritius, and Nairobi stock exchanges are the most promising places to go public in Africa. We will focus on the Nairobi Securities Exchange as a case study to enable us to deep dive.

    Note: nothing here should be construed as an insult to Africa, Kenya, or the Nairobi Securities Exchange. I love Kenya and hope to work together to find solutions that keep increasing investment in and wealth of Africa.

    Brand Problem

    Listing is only one part of the problem; you must have someone buy your shares. Is there a market that wants to buy shares in these particular companies?

    Kenyan equities (stocks) have not performed well, underperforming against bonds land, and even savings accounts. This isn’t a recent phenomenon, although the current economic downturn has worsened it. It has been going down for 8 years.

    Source: Hass Consult

    The NSE 20 index is down from 6,000 in 2015 to 1,400 in 2023. 

    Why take more risk with equities and get a lower return?

    So, the brand name of Equities in Kenya and Africa is generally not good. What factors lead to this, and how can it be fixed?

    Remember, Investing is a Keynesian Beauty Contest: the goal is not to pick the most beautiful investment but to pick the one that others think is the best. If Kenyan Equities have a bad brand and investors don’t think others will pick them, then no one will pick them, and they will go down.

    Too hard to list… or too easy?

    The requirements of the NSE (Nairobi Securities Exchange) are very entrepreneur-friendly, probably too friendly. There are two ways exchanges should maintain quality: ethics and financial performance. The NSE could improve on both accounts.

    Ethics: the NSE has frozen the shares of Mumias and Kenya Airways, which prevents shareholders from liquidating their shares and props up the companies so they can keep operating rather than declare bankruptcy.

    Financial Performance: Other stock exchanges delist companies if their share price or market capitalization falls too low. The electric scooter startup, Bird, once valued at $3.2b has now been delisted from NYSE because it failed to maintain the $15m market cap minimum threshold and has since gone bankrupt. Stocks that fall below $1.00 per share on the NYSE are also delisted. NSE could also set a minimum price to encourage management to improve performance or face the consequences of being delisted.

    A leadership problem?

    The Ibuka event had an enthusiastic vibe but maintained certain unfortunate* African stereotypes: the event started 1 hour late, and the presentation contained a major data inaccuracy. Timeliness and data integrity must be core to the culture of a stock exchange. *I likely maintained certain American stereotypes at the event: incessant, obnoxious questions. C’est le vie.

    This suggests room for improvement in the NSE company culture and, consequently, for leadership improvement. According to publicly available information, the outgoing CEO of the NSE made Ksh31m (~$210,000), a 19% increase over the previous year, all while making only Ksh14m (~$100,000) for the exchange in profit, a drop of 90% from the previous year. This suggests a problem with his compensation package (and the compensation structuring at the NSE).

    Overall, the NSE Equities market has been down since the NSE CEO was appointed 9 years ago, while the Kenyan economy has grown at ~5% a year. Having met him briefly, I had the impression the CEO of the NSE was more of a politician than a visionary who made things happen. Subsequent conversations with market players have not changed that impression.

    A new CEO has been appointed as the current CEO has ended his two 4 year terms. Hopefully, new leadership will improve the company culture and results. But this 4-year term suggests more room for improvement: why not have the CEO’s tenure be based on performance? Stock exchanges like NYSE don’t have specific terms for their CEOs. But, perhaps the NSE is a quasi-parastatal. And with the “prestige” associated with running a public market there is a risk that new appointees will be based more on politics than competence and compensation will not be tied to results.

    Furthermore, 8 years isn’t enough time to turn something around. A true visionary would want 15 good years to build something great. Imagine Steve Jobs had to leave Apple in 2005 before the iPhone came out. Or Elon had to leave before the Model S came out? The 2×4-year term could be disposed of.

    The newly appointed CEO looks to be a strong choice. He is a lawyer/accountant and Partner from EY. We were hoping for an entrepreneur. Hopefully, he will be an entrepreneurial lawyer/accountant.

    Capital flight?

    Another explanation for poor NSE performance is that foreign investors are leaving the African stock markets, especially the Kenyan stock market.

    However, the Ksh 125b loss due to foreign investors leaving is only part of why the NSE has lost Ksh 1.5 trillion in value since 2021. Capital flight explains less than 10% of the story.

    Anti-Free Market behavior

    Here are two examples:

    • The NSE has frozen the trading of Kenya Airlines and Mumias, both of which have substantial government ownership. Kenya Airlines shares have been frozen for 4 years, renewed annually each year with the explanation that Kenya Airways needed time to restructure. In 2022, Kenya Airways lost about $40m. In 2023, they lost about $150m. The more time they get to restructure, the worse it gets. Both companies should go bankrupt, and shareholders should be able to sell their shares. The exchange freezing shares makes investors nervous. By comparison, the NYSE only froze trading for 1 day, and that was when the World Trade Center buildings were attacked in 2001.
    • That the CEO of the CMA has attempted to put price floors on stock prices is concerning. “Capital Markets Authority (CMA) chief executive Wycliff Shamia told the Star that the move has been necessitated by the fact some of the companies have very strong fundamentals but the valuation is quite low.” Yes, this is how free markets work. The market decides what something is worth, not the government. The latter would be communism.

    Preference for other investments

    Investors would rather speculate on land because Kenya has no property tax. GoK should fairly tax other parts of the economy, like creating a 0.1 to 1% annual Property Tax on land so that people can’t just sit on their land and speculate without contributing to the economy. All other developed and emerging economies have an annual Property Tax; it’s time Kenya did the same. Property tax is generally recognized as the least bad tax for economic growth and yet Kenya doesn’t have it and isn’t even considering it. See here how property tax could be implemented in Kenya and make all parties happy. With the devolved county governments, this could more easily be accomplished than in the past.

    The effect of no property tax is clear in the numbers: Kenyan real estate is 75x bigger than equities ($678b vs $9b); meanwhile, by comparison, US real estate is only 2x bigger than US equities ($96T vs $46T). The US equities market sources capital from around the world because people trust Uncle Sam to treat equities fairly, but people don’t (yet) trust Uncle Kamau to do the same. I think the lack of Property Tax is the nail in the coffin of the NSE, and without this reform, there can be no vibrant equities market. (Note: the only meaningful property tax that exists is the capital gains tax when a property is sold, and even then, people can easily underreport the sale price, which is much harder to do on a public equities market. Some counties like Nairobi charge property tax at around $5-30 per year, which is a joke. There is also a tax on Rental payments, but this is not a tax on the property but a tax on a business being done on the property, making matters worse by disincentivizing property development.)

    Because Treasury Bonds are over 15%, investors put their money there rather than risk equities. Hopefully, after the Eurobond payment in June 2024, Treasury yields will reduce and more money will flow back to the equities market.

    The opportunity

    But there are reasons to be bullish on African stock markets. African markets, excluding South Africa, have a relatively small proportion of their GDP trading. There is room for the equities market to grow 10x to align with other markets like the US, South Africa, and India.

    Source: Wikipedia and related exchanges

    Further, Kenya is the region’s largest and most liquid market and could be a regional player—it is already one of the most liquid markets in Africa. By aggregating regional companies onto its exchange, NSE could grow another 10x. On top of that, GDP will compound to 63% growth over the next 10 years. This brings the total NSE market cap potential to ~630x growth over the next 10 years… if NSE can play its cards right. 630x growth would put the NSE in line with India, so it’s not impossible, as discussed below.

    On top of that, Annual Turnover (trading of the shares) is relatively low compared to other markets at 4.7% on NSE, ~40x less trading than the US, adjusted for market cap.

    There is room for more economic activity on African stock markets.

    So where is this 630x growth going to come from?

    1. Increase valuation. The P/E (price to earnings) ratio is only 4.9 on NSE, a sign that investors have low growth expectations. This is half its historical level and 1/4th the ~20 P/E seen on US exchanges, a 4x growth potential for NSE stocks. This is due to uncertainty, low expectations, and discounting for inflation.
    2. More companies listing. About 1% of US companies are publicly listed compared to 0.001%ish (my guesstimate) of Kenyan companies. Realistically, 10x growth potential (as most Kenyan businesses are too small to go public).
    3. NSE quality. If the NSE can improve quality that will improve investor confidence and 2-10x growth.
    4. Virtuous Cycle. There are the compounding effects of a growing market, generating interest and crowding in more capital.
    5. Encourage international investors on local trading platforms. Currently, American, Canadian, Singaporean, and other foreign investors are discouraged from investing through existing brokerage channels and online trading platforms as the regulations in those countries are too costly to manage given the small public market. But as the market grows and trading platforms enable more foreign investors you can imagine that as returns are becoming more predictable with lower returns in the West, some intrepid investors will take an interest in Africa. 2x opportunity
    6. Distribution on international trading platforms. Like Robinhood, Charles Schwab, etc. 10x opportunity.
    7. Cross-listing from other countries in East, Central, and Southern Africa. Theoretically, a 10x opportunity, but in reality, maybe a 2x. Already, some of this is happening. Bank of Kigali (Rwanda) and Umeme (Uganda) are listed in their own countries but cross-listed on NSE. Crosslisting is relatively easy. Evidence suggests that cross-listing increases company valuation, so the cost of cross-listing more than pays for itself. (Source: Peristiani, Federal Reserve Bank of New York, 2010) Old Mutual, for example, is cross-listed on 5 exchanges. A Kenyan equities lawyer confirmed this would be a workable strategy.
    8. Behavioral nudges. There is no way for Kenyan trading apps to automatically reinvest dividends, while automatic reinvestment of dividends is possible in other markets like the US. This could boost share price by 5% per year. This would cut out stock brokers and their fees. My little research online suggests the CMA (Capital Markets Authority) currently prevents automatic dividend reinvestment due to pressure from stock brokers.
    9. Better trading UX. New trading apps that make it easy to buy shares can 2x capital yet again. I tried to sign up with 6 different trading apps and brokers. 3 didn’t allow Americans, Dutch, Singaporeans, or Canadians to trade. The others each had cumbersome documentation requirements: one required a scanned copy of a notarized copy of my passport. What’s the point of a copy of something notarized? The friction to buy shares as a foreigner or local is severe.
    10. Reduced trading fees. This is the big one. CDSC and other government entities can reduce the tax on trading, which is currently at 0.36%. If a stock is only expected to gain 10% a year, paying 0.36% per trade precludes an efficient market that quickly buys and sells. For comparison, the NYSE has a fee on trades of $0.001 (which comes to 0.003% for a typical $30/share stock, 1/100th the price of Kenyan fees). Broker fees are also extremely high in Kenya at 1-1.5%, 10x higher than in the US at 0-0.1%. Reducing fees would not directly increase market cap, but a 10x reduction in fees might increase liquidity 10x, bringing the NSE more in line with other exchanges, from 4.7% turnover to perhaps 50% turnover. Increasing liquidity would perhaps increase the market cap by 2-10x by increasing P/E and crowding in more companies.
    11. Improving taxation. Right now, US investors in Kenyan companies get taxed twice. Thus, going through Mauritius is advantageous.

    Case study 1:

    I tried to sign up for various trading apps (Exness, Sterling, AIB-AXYS, ABC). Finally, after a week I was able to sign up on EFG Hermes. I tried to trade using the Market Price but the Market Price was 2x the Limit Price. I was told by customer service to ignore the Market Price. Once I did make a trade it took two days for my trade to be reflected in the app. After many customer service requests, my trade was reflected but then the app showed I had a negative account balance. After another customer service call that has been fixed. Then my password stopped working.

    I can see why there might not be a lot of retail investors in Kenyan securities as the buying experience does not inspire confidence. But it does show an opportunity for someone to build a better trading experience.

    Why are companies resistant to going public?

    Before we determine whether listing at all would benefit companies, let’s consider:

    • does going public preclude a company from raising additional institutional capital?
    • what are the tax implications?
    • what are the compliance costs?
    • with interest rates as they are, is now really the right time to list?

    Treasuries are 15% in Kenya at the moment, so raising equity is a hard sell. But global interest rates are unlikely to stay high, so perhaps a reduction down to 10% in the coming years will be good for equities. Also, land prices, the other investment option, may run out of room to grow further as rural land prices in Kenya are already about the same as rural land prices in the US, channeling more investment to equities.

    Compliance costs are Kenyan SMEs’ most commonly cited problem for not listing. However, the compliance costs in Kenya are typically only around $5,000 a month, which they should be doing even as a private company, like maintaining a board of directors and informing shareholders of material changes. Thus, this argument from SMEs doesn’t hold water. 

    In an IPO, a company would sell at least 15% of its shares to raise additional capital. Some companies might be concerned with how they can raise more capital after the IPO. Never fear! There are several options:

    • Corporate Bond: this is just a loan with a maturity. Of note, there is no collateral required for this. Also, it has a bullet payment at the end, which gives the company some breathing room on repayment.
    • Private placement: a select group of investors are invited to buy shares in the company. This can be done even before a public offering and provides more privacy for the company.
    • Rights Issue: this is where shares are offered to existing shareholders only so they are not diluted. This funding method is fairly common in Kenya, though not as common in the US.
    • Secondary Offering: just like a rights issue but open to anyone. This is common in the US. Tesla, for example, has had 8 Secondary Offerings since 2012.
    • All-stock acquisition: not strictly raising capital, but a public company can issue new shares to buy another company without spending cash. For example, Facebook’s acquisitions of WhatsApp and Instagram were mostly paid for in shares. Berkshire Hathaway makes its acquisitions this way, or through retained earnings (reinvested profits) rather than through Secondary Offerings.

    Kenya has many advantages over other markets:

    • Recently, an app developed for retail investors called Dosikaa (I wrote the first review for it on the Play Store—it didn’t work for me) enables anyone to buy shares. Once Dosikaa works out the bugs, this greatly improves the share-buying UX, instead of going to a broker and signing a paper.
    • Kenya doesn’t limit foreign ownership in most companies (aside from banks and telcos) thus, international capital could invest in NSE-listed companies, while other African countries often have more restrictions on foreign ownership.
    • Increased liquidity and market capitalization compared to most other African exchanges.

    There are also downsides:

    • registering a company in Kenya doesn’t have the same tax advantages as Mauritius
    • it doesn’t have nearly the same market depth as Johannesburg or other exchanges. Jumia, despite doing most of its business in Egypt, Kenya, and Nigeria, chose to list on the NYSE. JMIA once traded at $60/share but fell 20x. I bought some shares there at $2.5 last week. Let’s see if they can bounce back. Jumia raised more money on the NYSE than it could have on the NSE, but Jumia also might not have lost as much value if it had been listed in an African market. Local buyers in Kenya would have seen the value it creates by direct interaction on the ground. Thus, there are advantages to listing in Africa vs. New York.

    One possible tax-efficient structure might be to register the holding company in Mauritius, list it in Mauritius, and then cross-list it to NSE (and other African exchanges) to increase liquidity.

    Kenyan stocks have more government and founder ownership than the US; the US has more Retail, ESOP, and ETF (e.g. Index Fund) ownership than Kenya. (Source: CMA and TPC)

    Case Study 2: 

    Flametree, listed on NSE GEMS (the growth board), has an equity value of around $10m, with sales growing about 25% a year. Flametree is a holding company that owns ~15 common spice, shampoo, and water tank brands in Kenya and other African countries. The CEO owns 84% of the company. The market cap is around $1.5m, the P/S is 0.05, P/B is 0.3–this would seem to be a very good buy. The CEO pays himself about $180,000 a year, which seems fair for a company of this size. But Flametree hasn’t paid dividends in years and the CEO has no incentive to. So the shares are kind of stuck in limbo, even as they are undervalued; since the CEO owns 84% there is no opportunity for a hostile takeover. The share price has declined about 90% since listing in 2014.

    Case Study 3:

    Equity Bank vs. KCB. 

    Equity Bank has a P/E of around 3.4 while KCB is around 1.8. Both seem undervalued. However, they have fairly different shareholdings. Largest investors:

    Equity

    – Arise BV (owned by Dutch and Norwegian Development finance institutions)

    – James Mwangi (founder and CEO)

    KCB

    – Government of Kenya

    – NSSF (social security)

    Does ownership by a DFI and the founder help maintain the share price of Equity Bank?

    I bought both Equity and KCB in December. Let’s see how they do.

    Is a stock exchange ‘fit for purpose’ in Africa?

    Just like mobile money in the US looks very different than mobile money in Africa (Venmo vs. Mpesa), perhaps funding large companies faces an analogous problem. Currently, African public markets are roughly a copy/paste of systems that work in the US. But the chances that a market with vastly less wealth, trust, and education would have the same optimal solution seems…small.

    For example, NASDAQ was not even considered a stock market when Apple used it to sell its shares. It was considered an electronic over-the-counter (OTC) system typically reserved for the purgatory of penny stocks. But now it has risen to be the world’s second-largest exchange.

    What would the African version of NASDAQ look like? 

    The EABX OTC system received regulatory approval on Feb 1, 2024. An OTC system for SACCO shares has also been created by Sacco Shares Exchange and SakoSoko.

    MPesa was developed and funded by foreigners; Equity Bank, to this day, has a disproportionate amount of foreign shareholders.

    What could a fit-for-purpose capital market look like? How can international Development Finance Institutions help?

    Criticism of this article

    Due to the nature of this article, many people have written comments to me directly rather than post them publicly. While the majority of comments were positive, I’ll focus on the critical ones here:

    • You are biased and you promote American Exceptionalism [that is, that Americans are somehow better than others.] NSE and the US stock market are not comparable in any way.
      • My goal is not to insult Kenya with this piece; I love Kenya and hope we can do better. I compared the NSE to the NYSE but could as easily have compared it to the Bombay Stock Exchange. NSE could serve all of Africa’s 1.4 billion people just like India’s stock exchanges serve 1.4 billion Indias. India is one country compared to 54 in Africa, but it is divided by religion, language, and culture just like Africa. BRSV exchange works across 7ish countries in West Africa so there’s no reason we can’t do the same in the east. The cross-listing seems like the low-hanging fruit where companies in Rwanda, Zambia, etc cross-list to NSE. We would see more of this if the NSE was more vivacious. So I’m not advocating that we should be like Americans but that there’s existing proof that it’s possible to be better.
    • You cherry-picked your data.
      • After asking for better data, none was shared.
    • CMA is doing a great job of reforming the public markets for the better.
      • When I requested examples, none were shared.

    Macro trends

    There is a trend globally for reduced public market listings. The number of IPOs in the US and UK has halved over the last 25 years.

    This is reflected in Kenya where there have been no IPOs for a while, but in just the first half of 2023, there were 34 Private Equity deals worth $1.3b.

    As the world becomes flatter, there is consolidation. Why list on the London Securities Exchange when you could list on Euronext or Nasdaq?

    Therefore, there is a now or never, go big or go home for the NSE. If it doesn’t become a regional player it will be eclipsed by Mauritius, Johannesburg, Bombay, Euronext, or Nasdaq.

    Go regional or become irrelevant.

    Conclusion

    Why don’t the public markets get fixed in Africa?

    Fixing the capital markets starts with quality:

    • Rebrand the NSE as the African Stock Exchange and implement the below changes to become a regional player.
    • The most important and urgent problem is NSE leadership. The board is currently selecting a new CEO. A lot depends upon this choice. We need a visionary.
    • NSE (Nairobi Securities Exchange) can delist companies trading below $1m market cap, below Ksh 10 per share, or have less than 25% freely floating shares.
    • NSE can maintain a culture of timeliness and data quality.
    • CMA (Capital Markets Authority) can revoke stock broker licenses for trading apps with less than 99% uptime.
    • The government of Kenya can let the shilling float freely to eliminate the black market for currency and restore investor confidence.
    • GoK can fairly tax land which will drive more investment to productive parts of the economy like equities.
    • GoK can reduce interest rates on Treasury bonds. At 15% people would rather buy treasuries than take additional risk for the same (or even less) return on the stock exchange.
    • Reduce trading fees. CDSC, NSE, brokers, and government entities can reduce fees that currently preclude an efficient market and high turnover.
    • Let the free market do its job: Unfreeze listings like Mumias and Kenya Airways and the regulator, the CEO of CMA, could avoid saying things that sound communist.
    • Sell off parastatals and partially government-owned companies. The government of Kenya can sell KenGen and Safaricom to pay off its debt and let companies operate more efficiently on the public markets and in private hands.
    • Allow automatic dividend reinvestment: Public companies can create DRIPs (Dividend Reinvestment Programs) to increase demand for shares by automatically reinvesting dividends
    • Develop a built-for-Africa solution. Innovators and entrepreneurs can consider what an African-native solution to public markets might be that looks very different from the public markets we have in the West.

    Together, these actions would instill confidence in investors and companies, local and foreign.

    Improving the public markets could be a win for everyone. A big win that could 10x the economy. A win for investors, companies, stock brokers, the NSE, international development organizations, and the Kenyan government revenue collection.