Bending the World With Other People's Money
Where are the 1000x multiples for venture capitalists in Africa?
The very nature of VC investing goes against common sense. There aren’t many other areas of investment where you go in expecting to never see your money again. But that’s how the world works in VC, with the power law reigning supreme.
What this means is that 2% of the investment a fund makes will most likely be responsible for 98% of its returns. So, what happens to the other 98% invested? Well, the companies often die for one reason or another. The good part is that when the lucky 2% pays off, it’s often a huge payday—anywhere from 10x-1000x payday. That’s enough to create fortunes that spark stories for decades to come and make VCs look like geniuses.
This is the story of Naspers’ $34m investment in Tencent in 2001 which eventually became worth over $100bn. It’s also the story of Mike Markula’s $250k investment in Apple that birthed a trillion-dollar company. The VC party has had a wonderful run over the past three decades, with the companies that rode on its back literally changing the world.
Much like the California Gold Rush birthed the influx of prospectors into California and reinvigorated the economy, VCs are shifting their focus to Africa in hopes of funding the next unicorn. There’s a lot of potential, and being on the frontlines of the continent’s economic takeoff will yield not just gold but glory for them.
But where are the 1000x multiples in Africa?
What does Occam’s Razor tell us?
The quickest way to figure this out is to follow the money. On the back of runaway successes like m-Pesa, Flutterwave, Paystack, Wave Mobile Money, and Sendwave, it’s easy to see that most VC funds flowing into Africa are going to fintech startups.
The thesis is that financial services are the first lever to open up the continent for more economic activity while unbundling the dinosaur-esque offerings of legacy banks on the continent. In 2023, $3.14bn was invested in African startups, and 45% of that went to fintech startups.
This raises the question of whether or not Africa has too many fintechs. The simple answer is no. Despite the many fintechs on the continent, only 55% of Africans have a bank account of some sort. This means that they largely use cash, have no bank accounts, and have very little access to credit and wealth management. This lack constitutes pure alpha for any founder who’d take on these problems. Beyond money transfer operators, the continent needs more consumer and SMB credit startups, wealth management startups, and other creative financial solutions.
For instance, who’s figuring out how to provide credit scores to the informal economy? Who’s trying to help them work out pension contributions and health insurance? While fintech seems swamped with players on the surface, there are large swathes of blue ocean for VCs and founders to make a killing.
Look beyond what you see
There are trends we all see but don’t notice, and it’s important to be able to spot them. One of them is Africa’s population growing young population. Half the population on the continent is under the age of 18, and in 30 years, half the world’s workforce will come from Africa. These people need a good education to get good jobs and earn enough to spend and grow the economy. But education remains one of the most overlooked sectors for founders.
However, some startups are blazing a path in the wild and it’ll be interesting to see where they end up in the next decade. One of them is Foondamate which uses AI to provide free access to textbooks and test questions to students across Africa. It started as a WhatsApp bot, but it’s now raised over $2m from VCs and has users from all over the world.
Another example is Miva Open University, a fully online university providing world-class computer science education to African kids. The question remains whether or not the traditional classroom model of education is viable for the future, given the number of out-of-school children and low disposable income of families in Africa. However, Foondamate is leveraging the ubiquity of phones and WhatsApp to deliver educational solutions at scale.
ULesson, a product built by Sim Shagaya who also founded Miva University, has also raised $22m to date to digitize primary and secondary education in Nigeria. While the trends are relatively obvious once you look deep enough, divergent thinking is required to build solutions that scale and can qualify as 1000x plays.
A VC thought experiment
We asked a coupled of VCs this question:
“If you could go back in time to invest in any African startup of your choice, what would you put your money in?”
A few of them gave obvious answers like Paystack, Fawry, and Flutterwave. But the two answers that stood out were BetKing, a gaming company, and Safaricom, the company that built m-Pesa. Make of that what you will.
But here’s what we make of it: hot markets with products built on top of an already at-scale underlying product (football, telecoms, churches etc.) always win. VCs need to pay attention to products built in this manner because they’re distribution monsters.
Look for what isn’t there
Non-consumption is a core fact of life in Africa. As such, it’s not uncommon to see people say they’re building X for Africa, where X is a startup that has succeeded in another market. This strategy has been quite successful. For example, Paystack sold itself as Stripe for Africa, and it was so successful that it literally sold to Stripe for over $200m.
Another startup that keyed into this was Mono. To keep it simple, Mono is Plaid for Africa, but with extra steps. Not only can you retrieve and validate customer financial data with Mono, but you can also retrieve other forms of customer data. Mono currently powers dozens of fintechs in Africa.
Looking at startup successes in somewhat similar markets such as LatAm and SE Asia is a good lens through which to find these plays. For example, Reach Capital’s take on the Edtech market in Brazil is a good framework for thinking about the sector in Africa.
What’s the catch?
The “unicorn-time” (time to get to a $1b valuation) for an African startup is much longer than it is for a Silicon Valley startup. But while it might take longer to see exits, there’s still more than enough room to find 1000x plays as the sectors are still nascent in their adoption of tech.
You can’t blame the VCs though, they need exits to return the funds. An exit today is often better than an exit that may never come tomorrow. It also explains why most VCs on the continent only do early-stage investing. But will VC money be able to bend Africa into shape? We’ll see, but the future is promising!
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