After 3 Years in African VC - I Blame McKinsey

This April, it will be 3 years of me actively investing in early-stage technology startups in Africa. I do not take this lightly. A few things I have learned, but today, I will like to share on the kind of businesses I will actively look out for in my subsequent years in this space.

I spent over four years in Investment Banking, but I quickly realized that IB is not what I will like to do in my 50s. However, 3 years in VC, I can probably say with some form of certainty that I will be here for a very long time. That said, we all know that things evolve so quickly... fingers crossed.

I got into VC because I wanted more. I didn't just want to advise companies on capital raises, collect my fees and go hunting for new deals. I wanted much more. I wanted to build strategy documents on PowerPoint, and see it being implemented. I wanted to see how the main assumptions driving my financial models perform real life. I wanted much more. Early-stage VC affords me this rare opportunity.

In my 3 years in this space, I guess the bravest of all will be the entrepreneur. As an investor, if I lost money on a deal, I can make much more on another deal. If Nigeria ruins its economy, Kenya might keep theirs up. So, my job is simple, try to diversify risks as much as possible. But for most entrepreneurs, his life and that of his children is dependent on that single company, so he has to make it work. So, I will be the first to acknowledge that entrepreneurship is very hard. You don't have to build a company. Some of us should rather get jobs.

I'm sure you're itching to know the type of businesses that I will invest in, but please indulge me, let me lay some background. I'm sure you must have heard or read a lot about Africa - A large young population, growing middle class, millions that are being lifted out of poverty, economic diversification, less dependence on natural resources etc. Many people are making investment decisions based on this report. I know a few young Nigerians that decided to leave the UK after their studies because the "Lions are on the Move" - I blame McKinsey for that. I'm sorry to burst this bubble - Africa is quite not on the rise. The Lions are probably still taking a nap. What if there are no lions at all?

Once we know that the middle class is virtually non-existent, then building a product for that class might be a bad idea. I am sure you have seen this. Jumia is barely alive (even after an IPO). Konga had an untimely death. With all the marketing dollars spent by uber, it has only been able to garner about five thousand drivers in Nigeria. Knowing fully well that most Drivers on Uber are also on Bolt, I can't say with absolute certainty that the total number of drivers in Nigeria's ride-hailing market in Nigeria is more than Eight thousand. Now compare that with the purported 100 million middle-class population in Nigeria - you should expect a permanent surge, but... Additionally, IrokoTV has ~1 million downloads on the Google Play Store (Globally). I will be shocked if Nigeria contributes up to 200k of those downloads.

I will also like to mention, Nigeria is not as important as many have made us feel. UberEats operate in Nairobi, Kenya. Somehow, Uber has not found a place in their heart to offer food delivery in Lagos. Maybe the Lagos food delivery market is not that huge. During our last trip to Nairobi, one of my colleagues noticed the rider of a food delivery business in Nairobi - Glovo, making a delivery at midnight. This is practically impossible in Lagos! For the first time in Africa, I didn't have to direct an Uber driver to get to me. I used UberEasts to get my food, I never for once got a call from the dispatch rider to try and describe my exact location to him. Somehow, they can follow the map. Shocking! Very shocking!

I have also observed terrible habits from consumers. How do you explain the fact that someone orders a ride, then asked the driver to cancel the trip, only to make a private arrangement with the same driver - essentially cutting off the service provider. Or, how do you explain a buyer, ordering a shoe on Jumia, and the merchant called to cancel the order only to deliver the same item to the buyer - cutting off the marketplace. How do you explain someone, buying multiple sim cards, using multiple account numbers to borrow money from a digital lender, with absolutely no plan to of repaying.

Furthermore, most of them are confined to Lagos, Abuja, Accra, Nairobi, etc. Only a few have built a business that can be used in less urban areas. Businesses like Paga, Kudi.ai, etc. The challenge with this business type is that it typically requires a huge capital outlay to build a strong and well-dispersed agent network in Taraba, Benue, and Kisumu. Mpesa is probably the only network that can boast of such distribution

As you have seen, I don't appear to have so much faith in the consumer internet business. So what type of business will I be more disposed to back and why?

I love B2B or B2B2C type businesses and of course Enterprise SaaS. Yes. I prefer businesses that tend to serve other businesses rather than consumers directly. My reason is simple Nigerian (African) consumers are too fragile. They have every incentive to try to circumvent your technology. Artificial Intelligence has not proven to trump Native Intelligence.

SaaS is the only business where you create a product, you sell that product to your customer and you still have the same product to sell to multiple other customers. So, the major point of Due Diligence for me will be the ability of the team to reach high-value enterprises. So imagine an HR solution for businesses, and the founding team has figured out a way to convince GTBank, KPMG and say Workforce Management Centre to use their platform - these founders have proven to me that they can attract high-value clients already, So my investment and support for them will be to assist them to reach more.

And because of the way this product is priced, it is unlikely for most SaaS businesses to have a decline in revenue, except of course where churn (Customers lost) is higher than new customers acquired in a given year. However, guess what, most enterprises typically do not change their software provider except the provider performed poorly in the previous year, destroyed their data or cannot keep up with technology changes.

Think about it, why will a bank change its core banking application provider? The cost of changing sometimes far outweighs the benefit of changing. The cost includes downtimes for customers across multiple platforms. Imaging your GTB online banking system (App, Web, and USSD) was down for just a weekend. Then add ATMs to it. There will be war! So, if a company decides to go ahead and change its provider despite all these risks, then it means that the existing provider is utterly useless!

Even if the technology team finds new features in a competing software provider, they are typically more inclined to ask their current provider to add that feature to their current offering. You can see an Enterprise SaaS business as a real estate play. Once a sky scrapper has been built on a piece of land, it doesn't make any sense to pull that down to build another on the same land except in cases where the cost of leaving that building up far outweighs the benefit of pulling it down.

Additionally, most corporates will not owe their software provider, especially if the software is important to their operations. Imagine a bank being indebted to its email provider? or a law firm refusing to pay its document management solution provider. My point is; the higher up your solution is to the corporate, the less likely they are to owe you.

A similar argument goes for B2B businesses. Imagine a digital lender - say Carbon, Branch, and FairMoney. They offer retail lending. They offer a loan of say 10k Naira to their customer. Now imagine a pivot to providing credit for businesses. Say traders in open markets and street corners. They might be able to offer much larger loans, with significantly lower default rates (Depending on their risk management strategy). The stakes are higher for the trader. He probably has a family to feed. He has been trading for years, only needs the loan to improve inventory, etc. And guess what, there are millions of these petty traders across Nigeria and Africa.

I am not suggesting that B2C businesses are not viable, I am only saying that I might be more inclined to well run B2B business or Enterprise SaaS business than a B2C. This can be backed up by just observing. Some of the biggest and probably most promising businesses in Africa are primarily B2B or B2B2C - Interswitch (Banks), Lori, Kobo, Ligare, Trella (Manufacturers, Importers, and Trucking Companies), Andela (Corporates), FinAccess (Saccos), Twiga (Farmers and Traders), Sokowatch (Manufacturers and Dukas), LifeBank (Blood Banks and Hospitals), NextCounsel (Law firms and Corporates), etc. Their B2C counterparts are barely alive - Jumia leading the pack.