I conceived of this article at the beginning of March and by the time I was done writing, the Coronavirus had spread to most African countries leading to major social and economic impact due to lockdowns, restrictions and the newly formed reality. Several articles have since been written on how to navigate through this trying time by conserving cash, aiming for breakeven, focusing on existing customers etc. This article speaks about scale, a topic many would think is for rosier times but one we think is still relevant today because we are confident that there will be life once the coronavirus is under control, the Africa tech opportunity remains large, and some sectors will actually be accelerated. This belief led us to just complete our first investment into an African fintech player, Okra, announced earlier today.
TLcom has been around Africa tech VC for the last decade and we have had the privilege to interact and engage with hundreds of tech companies and from these we have observed common threads. This article shares key areas of focus for scaling Africa tech companies, depending on the type of clients (B2B or B2C) and the nature of product or service (physical or software/virtual goods). “Scale ready” companies are those that have good product-market fit and have sight of sources of positive unit economics. Each business will also have its own peculiarities, the goal here is to speak to some emerging broad themes.
1. Tech-enabled B2B companies:
These businesses are bringing efficiency in traditionally run, typically fragmented, and inefficient sectors that serve corporates and SMEs, including the small informal businesses that are so prevalent across the continent. This is the arena birthed out of the merging of software with physical-world products and services. Examples of services in this category include: logistics (e.g. Kobo360, Sendy), agriculture supply chain (e.g Twiga Foods, Agrocenta), used car sales (e.g Cars45), energy (e.g. Rensource, Solstice), healthcare (e.g. mPharma, Medsaf) etc.
These are attractive spaces to innovate because demand for the products is assured (clients already use the product or service) and the markets are substantially large. The novelty in the solutions is brought through aggregation and introduction of technology to cut process times, increase access and enhance customer experience. Companies in this space are generally lower gross margin businesses (mimicking the companies they are disrupting) and require more working capital financing when compared to pure software companies given that they are more operationally heavy.
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Superior operational efficiency is key to scaling successfully (which when done well creates a strong competitive advantage) in this category because the companies are moving physical goods in markets with inadequate infrastructure; and unlike pure software businesses, a larger portion of COGS remain as you grow. Identify the levers required to ensure a long-term ability to match supply and demand for your service (e.g for Agrocenta demand comes from manufacturers and supply are the farmers). Additionally, detect the parts of your operational chain to provide inhouse and those to outsource as this can over time reduce operational weight. Lastly, think strategically about additional revenue streams to pursue through value added services to customers; the deep connection these businesses have with their clients, by virtue of the service offered and the trust created, advantageously positions them to offer more services.
2. B2B ‘pure’ software companies:
Are digitizing and automating processes for corporates and SMEs to support business processes thanks to affordable connectivity, and emergence of cloud which allows for sharing of computing resources and paying for services when you need them. Companies in this category are providing services in marketing (e.g Terragon, Mobiz), customer experience and data analytics (e.g Ajua, Ongair), accounting/expense management (e.g Accounteer, Popote), digitizing cooperatives (e.g Riby, Kwara), digitising fintech infrastructure (Okra, Paystack), etc. One of the relevant outcomes of these efforts is that consumer facing industries (telcos, banking, insurance, FMCG, retail) are gaining much better visibility on the African consumer, resulting in better segmentation and increased ability to acquire and retain target customers (see model 3 below).
The attraction to this space is the fact that SMEs in Africa have historically been underserved and start-ups are waking them up to the role technology plays in accelerating the growth of SMEs. Software companies provide horizontal services that cut across different sectors and therefore address a potentially sizable market. Moreover, software businesses are high margin and have great customer retention given the high switching costs due to the required technical integrations. Noteworthy is that enterprise sales in Africa are characterised by long sales cycles given procurement processes, especially with corporates.
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Strong enterprise sales, technology and product teams are critical to winning in B2B software sales. For many start-ups, selling software requires time given the lack of an established brand (SAP and Oracle have been around longer and spent millions upon millions on marketing), need to convince the enterprises that their current solution is not optimal, and building trust as historically African enterprises have not bought software from African companies. Partnerships with organizations already servicing your target businesses (telcos, banks, industry associations etc) can allow for wider distribution channels. Without question, the product and tech team are also key because this is your ‘factory.’ Invest in hiring best in class tech and product teams, and this may mean sourcing talent from more technically advanced global markets.
3. B2C companies:
These companies are directly servicing the African consumer either with adapted models or newly created local content targeting consumer needs. For long, the Africa consumer has been underserved and traditional companies have been slow to innovate and met their needs. With 1.2 billion people (and growing) in Africa, the market opportunity is sizable. The African consumer has growing income and is now more accessible and ‘known’ because of high penetration of mobile phones and increased internet connectivity. Some companies providing B2C physical goods/services are realising that it will be difficult to dominate their space without an offline component due to a much smaller middle class and still high cost of data in Africa (e.g. in Kenya you can get an Uber outside the app by making a phone call). The urgency of the need and price point of product and service are critical to win in Africa B2C as the majority of the demand is from low income consumers. To date, the apps/ussd accessible B2C services that have gained the largest usage in Africa are for social media/entertainment, transportation, consumer lending, and betting — services that are crucial to daily life/business or addictive.
B2C companies selling virtual goods need to provide exceptional product/service experience and have significant marketing resources and capabilities to build a brand to win in their segment. Examples of services in this space include consumer lending (e.g Branch, Tala, Fairmoney), education (e.g uLesson, Eneza), digital media (e.g iRoko) etc. This space can have lower barriers to entry (especially if your product is a commodity such as loans) and tends to be competitive, so quickly differentiate your product and build customer loyalty. Additionally, the African consumer remains price sensitive and therefore develop a product that matches customer spend.
B2C companies selling physical goods/experience need to build trust and provide superior customer experience in order to succeed; this means having good control on the parties tasked to deliver on the promised service and significant marketing resources and capabilities to build a brand that attracts and also importantly retains users. Examples of companies in this space include e-commerce platforms (e.g. Sky Garden, Jumia, Kasha), transportation (e.g Safe Boda, Bolt, Swvl), energy (e.g Azuri, Mkopa) etc. These are typically two-sided marketplaces that create network effects by bringing together producers and consumers. Platforms often do not own the supply chain (though in Africa some do, especially in the beginning until they identify dependable partners), but rather control the network of third-party producers and the consumers coming to the platform. Trust is built by having a professional service, being available, receiving and acting on feedback. User experience is enhanced by facilitating the ease and flow of service (e.g. e-commerce entails making sure merchants have products in stock, payment processing and delivery is smooth, and reviews are processed effectively).
Inevitably, despite the best efforts to differentiate your offer, several companies competing in the B2C space should be ready to play the low cost / high volume game, due to the high risk of competition slipping into price leadership. Sometimes this is due to well financed non-African players expanding to the continent, or to local players backed by (too much) international capital anxious to replicate global business models, resulting in high level of cash burn and substandard returns.
While it is true that every company needs to have a good product, strong team and efficient distribution channel; each business however needs deeper core capabilities to succeed based on their service offering and customer type. Our observation has been that these competencies are key for scaling companies in these spaces.
As a founder, it’s important to understand your competitive advantage, and the key features critical for scale and strengthen those capabilities. In tougher times like now, the ability to distil your value proposition is even more critical as customers (businesses or consumers) are all looking to cut cost and focus on the essentials; modifications to sales or execution process, pricing drivers or the on-boarding process to show value quickly can be the difference between your business and its competition, and help drive scale even in the most challenging times.
Andreata Muforo is a Partner at TLcom Capital.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer.