Africa: crisis a once in a decade opportunity
By Rob Eloff, managing partner, Lateral Capital
As one of our portfolio CEOs in Kenya said this week: “It would be a shame to let a crisis go to waste.”
Valuable companies will emerge from Africa irrespective of the Covid-19 pandemic because innovation happens in a backdrop of scarcity in normal times. It will pay to continue to focus on frontier markets while the world is melting down because this innovation is likely to continue at more attractive valuations, with the potential to deliver greater impact than elsewhere.
Funding will slow down, in Asia venture funding slowed ~30% for two consecutive years after the ’02 SARS epidemic and in Latin America funding was down 50% following the 2015 Zika virus outbreak. In the years that followed these crises, the world got to know Alibaba, JD.Com and Nubank.
In Africa technology emerges as a response to everyday challenges
Well known examples include Kenya’s M-Pesa, Africa’s decentralised renewable energy revolution and the prevalence of remote learning in Nigeria.
In his upcoming book “Out Innovate: How Global Entrepreneurs from Delhi to Detroit are Rewriting the Rules of Silicon Valley“, author and friend of Lateral, Alex Lazarow reminds us how companies operate and scale in markets without economic stability or a supportive startup ecosystem.
“Start-ups operating amid conditions of relative scarcity, where capital and talent are hard to come by and economic shocks are more likely to occur, face unique pressures. Yet many have become superstars in their own right. Their formula involves a more balanced approach to growth, a focus on solutions to real problems, and investment in their workforce for the long term. These ‘frontier innovators’ hold important lessons for companies of all sizes and in all locations – including Silicon Valley itself.”
Africa breeds anti-fragility
In the African context, key tenets of survival include:
Products and services that solve essential problems vs cyclical trends
- Measuring profitability from the outset rather than a singular focus on growth
- Enabling legacy infrastructure to work better, rather than simply focusing on disruption
- At this strange moment in history, we look to the technology community in Africa for leadership through innovation.
- This week we learned of the Nairobi and Lagos technology community responses to Covid-19.
- Portfolio company Koko Networks has re-calibrated its supply chain which spans across India and Kenya to convert ethanol for cooking fuel to sanitation products as part of a large scale collaboration to avert a humanitarian crisis in Kenya’s urban centres. 4G Capital is also part of the response via its working capital products to essential services for SMEs during the lockdown. Meanwhile portfolio company Lynk, which matches informal workers to demand for their products and services is working to match its B2B team with services delivery challenges. As we know, unless you solve for the poorest of the poor, transmission is a given.
- Lagos based Medsaf has been a leading provider of first response supplies to pharmacies and hospitals.
- Aside from our existing portfolio companies, a founder that we are following closely in Nigeria has a clear response to Covid19. Lifebank founder and CEO Temi Giwa-Tubosun has launched a national Quip register for critical healthcare infrastructure to fight Covid-19 across 200 Nigerian hospitals. Lifebank is then connecting suppliers and technicians to get functioning hardware to where it is needed most.
- In Ghana, digital diagnostics company Redbird has launched its Covid-19 self check and resources app which will also cover Kenya, Nigeria, South Africa and the US.
- In South Africa, Epione.net is leading the charge with its primary care logistics platform response.
- A Kauffman report titled ‘Is This The Black Swan Moment To Solve Big Problems?’ reminds us that:
- 95% of the jobs created in the US over the past 20 years were from companies less than five years of age. Arguably this skew will be even more notable in frontier markets when we look back at 2020.
- VC fund vintages during adverse economic periods tend to outperform. We have written extensively about why a different model to traditional VC makes sense for Africa, but the valuation discount that we are already seeing this quarter cannot be ignored. What happened in more mature emerging markets historically that led to a crisis being a catalyst?
- SARS forced Alibaba and JD.Com online
- The ’02 epidemic directly contributed to the birth and scale up of Chinese e-commerce. How?
- In a look back to how SARS contributed to the birth of e-commerce in China, this post reminds us that:
- “In 2003 e-commerce was just starting to emerge in China. After all, not many people had access to the internet. Alibaba was primarily a B2B platform, connecting US buyers with Chinese suppliers. JD.com was a chain of small electronics shops that launched an online e-commerce site…
- “Alibaba was a four-year-old company that focused on B2B e-commerce, matching American procurement teams with Chinese suppliers. An Alibaba employee caught SARS when she was sent to attend the Canton Fair in May 2003. Alibaba’s 500+ employees were quarantined at home for twelve days and required to work from home.
- “Many countries around the world issued travel warnings for businessmen travelling to China, and thus many turned to Alibaba’s online business to source Chinese goods. Starting in March 2003, Alibaba’s B2B e-commerce business added 4,000 new members and 9,000 listings each day, a 3-5x increase over the pre-SARS rate.”
Similarities and differences to Africa
Africa’s company formation, technology deployment and funding are on track with 2013-2014 South East Asia as outlined in our end of year report. The key differences between the regions remain large scale adoption of e-commerce due to disposable income and last-mile infrastructure constraints, and fragmented regulatory environments. The rails to solve for some of these gaps have started to emerge with technology facilitating cross border payments, regional and continent-wide economic integration and savvy founders now focusing on last-mile logistics.
SARS drove Chinese suppliers and consumers online. That is not going to happen the same way in Africa as we have seen with Jumia‘s struggle to scale. Mobile app-based commerce for specific needs is however starting to scale as we have seen with Lynk’s products and services on its Uber-like trust platform. It is difficult to pinpoint exactly which aspects of this crisis will bring down costs and behavioural barriers to a migration to online scale in Africa, but here are a few speculative guesses:
De-monetisation could accelerate as countries outside of the East African Community, Ghana and Côte d’Ivoire realise that mobile money is not a luxury. Blockchain applications could finally take off with the to decreased friction they provide for consumer wallets when the value of local currency savings fall off a cliff in times of crisis.
Multiplier effects from co-operation between ventures that can plug and play via APIs to leverage each other’s platforms.
Renewable energy that is interoperable between central and microgrids. In Nigeria remote work is impossible when the average Lagosian can rely on only 45 minutes of a 60W lightbulb daily from the central grid.
Once in a decade opportunity
Critical infrastructure needs are similar across Africa’s cities. A forced migration online (Zoom, e-everything) likely brings boundaries, barriers and costs lower and leads to a hustle and innovation gear shift that is already incredibly exciting.
In sub-Saharan Africa there is already an element of “business as usual” for innovators with stretched resources and daily challenges. There will be pain, funding will become scarcer and macro-economic developments command a repricing of all assets, but for the engaged investor that is willing to roll up their sleeves and be part of the solutions demanded by the world’s fastest growing and youngest continent the opportunity to generate once in a decade returns and impact comes with high correlation and alignment.