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Playing the long game in Africa's start-up sector 21 Oct 2016

 Mark Zuckerberg and me

So what's the similarity between Mark Zuckerberg and me? Mark is co-founder of Facebook and the 5th richest person on the planet (worth about US$55.8 billion on Bloomberg Billionaires Index as of September 27, 2016). Last year, he announced that he and his wife Priscilla Chan would give away the majority of their wealth over the course of their lives to "advancing human potential and promoting equality" in the spirit of the Giving Pledge. Time magazine has named Zuckerberg among the 100 wealthiest and most influential people in the world.
    
So not a lot of similarity – except that both Mr. Zuckerberg and I were in Lagos recently (not at the same time, though). And we both were there because of the burgeoning tech sector in Lagos and Africa as a whole.

TMT Africa in Lagos

My trip to Lagos in September was to attend the TMT Africa conference that was held in the city for the first time. Dentons has been a long time sponsor and supporter of TMT Africa because of our leading Africa TMT (telecoms, media and technology) practice. So when Dominic Lowndes of TMT Africa asked me to chair a couple of panels in Lagos, I accepted, happily.

Shortly after the Zuckerberg visit, PricewaterhouseCoopers released a report called, Disrupting Africa – Riding the wave of the digital revolution. The general themes of both the PwC report and the TMT Africa event focused on how Africa is leapfrogging old technology, embracing new technology and disrupting established conventions and businesses. Also, technology is changing lives, commerce, and it is helping to pull people out of poverty.  

Role of the internet

Zuckerberg talked of the pivotal role the internet can play in changing the economy and the lives of people all over the world. The challenge in Africa today is that less than 30% of Africans have access to mobile broadband (compared to 45% in Asia), and only 15% have access to the internet at home. And most of those who are unconnected are rural, low-income people and female.

Reality check

All well and good.  As they say – no one denies that motherhood and apple pie are good things. But I had some questions in my mind. What are the experiences of some of these African “technopreneurs” despite the opportunities in the start-up space as highlighted by Zuckerberg's visit? And can you make money in these sectors as an investor?

I had the good fortune of meeting a few of them at the TMT Africa conference and a networking event in Lagos organised by Corbyn Munnik and Matt Miller of Sliide -- an Android app that enables users to view news and brands on the locked screen of their mobile phones. The participants were all young, intelligent and brimming with enthusiasm, energy and ideas. They were upfront about the challenges they faced. I came away having learnt a lot from them but also full of admiration for their grit and determination to succeed in what is in many ways a very difficult environment.

Problems and solutions

The general impression I had of these companies is that the opportunities to create and grow tech businesses in Africa are abundant. You simply find a technology solution to address that need in your community. For instance, Lagosmums.com provides an online community for mothers to share information on raising children in the ultra-busy city of Lagos.

The difference between Africa and more developed markets is that technology solutions in developed markets are mostly about making things more efficient. Whereas in Africa, it's often to fill a void where no services are being provided or the available service is poor. A good example is where in developed countries, advancement in technology is being leveraged to make the use of energy more efficient (think remote-controlled devices to control your heating and smart metres). Whereas in Africa, off-grid power solutions are being used to provide power where there is none.

Sliide and hunger for airtime and mobile data

Most people in developed countries take mobile data access for granted, often paying for unlimited data or large bundles of data. I asked my 18-year-old son how much airtime data he consumes. His answer – he doesn't have a clue!

However, the African consumer is much more data cost-conscious. Corbyn told me that the average Nigerian only pays for 130MBs of data. So Sliide launched a lock-screen content delivery platform in Nigeria in March this year. Users accept advertising on their locked screens and in return they earn free airtime every month. The free airtime is paid for from a portion of the advertising revenue that Sliide receives.

The Sliide technology brings together users, brands/ad networks and mobile network operators to meet the need of cost-conscious Nigerians who want more airtime or mobile data but are unwilling or unable to pay for it. It sounds like a win-win solution as advertisers can reach consumers with targeted, relevant content, through their most frequently used device – the mobile. Consumers get more mobile data and airtime; while Sliide and the advertisers make money from putting the ecosystem together.

Will it make money? Who knows but it does have the backing of Lexi Novitske of Singularity Investments (owned by Issam Darwish of IHS family office/VC). Singularity is (arguably) the most active venture capitalist in the region. And Sliide is looking to close their Series A funding in Q2 2017.

Challenges and opportunities

The general consensus was that (notwithstanding all the hype of the Zuckerberg visit to Lagos) it's tough to be a tech company (or any start-up) in Nigeria. The challenges include lack of access to capital; poor physical infrastructure (think lack of power and other utilities); inadequate local talent pool; lack of a start-up ecosystem; exchange rate and currency control issues; and weak fiscal and regulatory environment.

Access to capital is improving as Silicon Valley and the investment community have suddenly woken up to the opportunities in the “Silicon Savannah”. Plus there is a growing ecosystem both in-country and abroad that is supporting African technopreneurs.  

For example, there is Yabacon Valley – nickname for an area of Yaba on mainland Lagos. It is increasingly becoming Nigeria's technology hub. With hundreds of banking institutions, educational institutions, technology and start-up companies operating in this area. Companies here are increasingly attracting angel investors and venture capitalists.

Y Combinator

The week I was in Lagos was also when Y Combinator (YC) came to town from Silicon Valley. I met Michael Seibel, a partner at YC (courtesy of Maya Horgan-Famodu of Ingressive, an impact facilitation firm that connects companies in Africa with international investors). Siebel is also co-founder of two startups – Justin.tv and Socialcam. The fact that he was in Lagos – and given his background of promoting diversity among start-up founders – is a good omen for the Lagos tech community.

If you have not heard of YC, it is recognised as the world's most powerful start-up incubator and the breeding ground for numerous tech start-ups, including some well-known tech giants of today such as Dropbox, Airbnb and Stripe. From its humble beginnings, YC has evolved into a start-up factory, university, and venture capital fund all rolled into one.

The model is simple, as prefaced on its website:

Twice a year we invest a small amount of money ($120k) in a large number of startups (most recently 107).

The startups move to Silicon Valley for 3 months, during which we work intensively with them to get the company into the best possible shape and refine their pitch to investors. Each cycle culminates in Demo Day, when the startups present their companies to a carefully selected, invite-only audience.

But YC doesn't end on Demo Day. We and the YC alumni network continue to help founders for the life of their company, and beyond.

Having YC pick a start-up to fold into its programme seems to be the magic wand that kick-starts further investments into the start-up. For example, Paystack and Flutterwave (both payment companies) have both benefitted from the YC halo and funding.

Payment tech

And it's the payments space that has caught a lot of attention recently. Paystack has revamped the Nigerian online payment system. Iyin Aboyeji (co-founder of Andela who recently left the start-up) has launched Flutterwave as an African digital payment infrastructure company that enables payments across multiple platforms to anyone in Africa.

It's become a competitive space with more and more new players getting in to compete with the banks and the big players such as Interswitch, Jumiapay, Kongapay, Paga and the global giant, PayPal. And the banks are not taking it lying down. They have developed smart apps to enable bank transfers and bill payments and are increasingly investing in technology. With deeper pockets, better brand names and customer loyalty, banks are going to be difficult to dislodge by these start-ups. The opportunity may lie in working with those who don't have a bank account or access to banking services or working with banks to provide solutions. The good news is that banks are looking at these tech companies as partners or possible acquisition targets.

Can these businesses make money?

The question I had for my mobile money panellists at TMT Africa is one that many investors are struggling with. They understand the potential opportunity in Africa but the jury is not quite there as to whether these companies will be profitable in the short or even medium term. It seems that there is a long road to profitability with many pitfalls along the way.

With new players entering the market all the time, the challenge is for the more established companies and start-ups to stay one step ahead of the game, reduce their transaction and operational costs, grow their customer base and adapt their products to better serve the local market.

Trust in me

As Eghosa Omoigui (EchoVC Partners) said, while “the opportunity is gigantic,” payment companies need to have staying power as it will take a long time and lots of funding before they become truly successful. He said, “The market is irrational as well as uneducated and distrusting, new payments start-ups will need to stay solvent long enough to convert the market to rational, trusting and educated.”

A lot of money seems to have been thrown at getting market share in the e-commerce sector. There will be winners and losers. I suspect the winners will be those that have the tenacity, stamina, financial backing and adaptability to stay the course, win market share and grow.

Getting customers to trust their platforms, making it simple to use and avoiding payment disruptions will all contribute towards who wins in the tech sector in Africa. It looks like a long game and potentially an expensive one. But hey, how long did it take for Amazon to become profitable?