Africa’s S Curves
The unique shape of the African tech opportunity
There’s no way around it. 2023 was a brutal year for Africa’s tech ecosystem. Funding dropped by almost 50% and startups closures filled the headlines while those with runway slowed down expansion plans. The tone of investors shifted as well, with every group chat and podcast interview now filled with advice about trimming down expenses and preparing for a funding winter. It’s not unwarranted advice either.
At some point during the Zero Interest Rate Policy (ZIRP) years, the perceived momentum of African tech exceeded reality. The rapid influx of capital created an illusion that the future of African tech could be brute-forced into existence with cash and exuberance. Much of this capital came from global investors new to Africa, bringing with them Silicon Valley’s ZIRP era archetypes and models. In 2021, 77% of active investors in Africa were international.
A young tech ecosystem naturally shapes itself around the vision of its funding sources, and African tech was no exception. As portfolios were marked up, secondary markets thrived, and term sheets flowed, cracks began to show. Instances of poor diligence or over-enthusiasm highlighted deeper systemic issues. There were instances like this, and this, and definitely this. We had moved fast, and we had broken things.
Individual instances of poor diligence or over-exuberance is one thing, but African tech’s coming of age in the ZIRP era meant that our foundation itself was built on transient principles. And unlike Silicon Valley’s near seamless pivot from crypto to AI, our ecosystem takes longer to adapt. It certainly feels like VC in Africa is now stuck in a dead space left behind by the previous era of momentum-based decision-making.
The significant drop in deals in 2023 largely stemmed from the retreat of North American, European, and Asia-Pacific investors. This withdrawal coincided with record-breaking raises by African venture firms, amassing hundreds of millions in fresh capital. In theory, this should be a boon for African VCs, yet activity remains subdued; The first half of 2024 saw a 60% funding drop in equity funding activity vs a year ago.
Now more than ever, it’s critical that African VCs send a clear message about what we believe in, why we believe it, and how we plan to support the potential of the continent in the coming years. To do so, I think we need to get back to first principles.
S Curves & Venture Capital
The venture capital model of tech investing is based on the S curve. Here’s an article from a quarter century ago that explains this concept. And here’s a recent take from Tribe Capital as the AI cycle heats up. S curves are foundational to VC.
Traditionally, venture capitalists profit by investing in emerging tech before it’s mainstream and exiting when growth plateaus, making way for the next S curve. To do this, VCs look for signals that tech is approaching an inflection point when we start to see new tech gain traction in the market.
For early-stage investors (pre-seed to Series A/B), success hinges on betting before consensus forms around the potential of a new technology and its market leaders. Missing this window crushes returns, as startup valuations surge as consensus forms that a new technology will indeed dominate the market. However, if an investor takes that bet too early, their portfolio startup risks running out of money before they hit that inflection point.
There could be several reasons why a market isn’t ready for a tech inflection point including:
- Customers don’t need new tech
- Customers don’t trust new tech
- Customers can’t afford new tech
- Customers don’t have access to infrastructure for new tech
- Customers don’t believe new tech provides enough value vs. old tech
When Silicon Valley VCs are too early, it’s usually because new tech startups are not addressing a real, enduring need. Think about the failed takeoff of the metaverse, the rise and fall of pandemic-dependent social networks like Clubhouse, or the absolute disaster that was new media like Quibi.
Rarely are Silicon Valley VCs too early because of the other reasons. Even niche U.S. markets can be substantial; for instance, the $45 billion American pet food sector exceeds the GDP of most African countries. That’s why carbon-friendly cat food startups are backed by Y Combinator. Combined with near ubiquitous physical and digital distribution channels, the success of new tech is less of a question about market readiness, but more of a question of value proposition.
Now let’s think about the readiness of African markets.
A founder in Africa contends with almost the opposite set of barriers to adoption. Many of Africa’s startups are tackling fundamental needs: food, finance, healthcare, logistics, etc. However, when it comes to new tech providing for these needs, they run into every one of those above reasons of why the market may be too early. In fact, the more “disruptive” new tech is in Africa, the deeper these market readiness issues often become. What seems innovative on a pitch deck is instead too expensive, too unfamiliar, too unreliable, or too unnecessary once confronted with on-the-ground realities.
It’s then likely that Africa’s S curves look different from what we are familiar with in places like Silicon Valley. But just how different?
The Leapfrog That Wasn’t
One of the major storylines of the last African startup cycle was that of the leapfrog. Africa was bypassing desktops and feature phones straight into a smartphone-first economy. Africa would jump to Amazon-style ecommerce from physical retail. Africa would see a renewable energy revolution. The problem with these narratives were two fold — they simply weren’t true at the present, but confusingly, they are likely to eventually be true. The issue however is that in Africa, these tech inflection points are happening on a much more gradual timeline than the narrative suggests. For example:
Renewable Energy
Africa’s ‘green’ energy transition has been lagging behind expectations. While Africa’s renewable energy capacity has always been a small portion of the global capacity, its relative capacity has dropped in the last decade. In 2013, Africa’s total renewable capacity was about 1.9%. In 2022, it was 1.7%.
Worse, this period of time aligns with a boom in solar energy funding in African tech when hundreds of startups raised over $1.9b in disclosed funding. In the last few years, we’ve only seen the solar capacity deficit widen vs. regions like Asia. In 2022, Asia generated 92 times more solar power than Africa, up from 85 times in 2018. If anything, Africa is falling further behind.
There has not been a renewable energy leapfrog across Africa.
Traditional eCommerce
Similarly in the 2010s, an African ecommerce leapfrog story began to develop. Between 2012 and 2015, companies like Jumia, Konga, and Takealot raised almost $900 million in venture capital. In 2014, Jumia’s $150 million raise was half of all venture funding in Africa that year.
Almost all of these companies were adapting Amazon’s model to Africa. They trumpeted the leapfrog narrative, citing the potential of the model to make major inroads in a region where only 1 percent of retail purchases were made online. But we all know that didn’t happen.
Ten years later, Jumia was able to go public but had its share price drop by as much as 90% and is now going through a massive reinvention. Konga was allegedly acquired for ~$10m after raising ~$80m. Takealot, operating in Africa’s most mature ecommerce market in South Africa, cannot find profitability.
Ultimately, it wasn’t that these companies did not have strong operators or technology. The market leapfrog simply did not materialize. Over the ten years since 2014, Africa’s ecommerce rate as a share of total retail continues to hover well under 5%. In South Africa, it’s around 7%, the highest on the continent. In 2014, analysts and survey respondents thought that this number would jump to 50%+ by 2020.
There has not been a traditional ecommerce leapfrog across Africa.
Mobile Internet Usage
The mobile internet narrative is the prevailing leapfrog story in African tech. It is the leapfrog that is supposed to underpin all other leapfrogs.
Since 2019, about 250 million more people in Africa have gained mobile internet coverage. As of 2022, the majority (59%) of those covered by mobile internet in Africa chose not to use it. This is Africa’s mobile internet “usage gap” and it’s only increased from 46% in 2019. By comparison, South Asia, which saw a similarly dramatic increase in the number of people covered by mobile internet, had nearly a 9% decrease in their usage gap. Latin America reduced their usage gap by 4% from 2019 to 2021. In fact, of all the regions tracked by the GSMA across these two time periods, Africa was the only one that had an increased usage gap.
There has not been a mobile internet leapfrog across Africa.
Africa’s tech founders may have molded their companies into the shape of global investor demand in the last few years, but Africa’s markets have been shaped by the evolving needs and limitations of its buyers and sellers, irrespective of tech’s vision for the continent. This is the first half of what we called the Frontier Blindspot.
We believe African S curves have much longer tails. It takes significantly longer for African markets to make (digital) tech shifts and go from one S curve to the next. We believe ZIRP-era venture capital vastly underestimated this factor in African tech and overestimated market readiness for the digital-first solutions they were most comfortable with.
It might be easy to blame the retreat of foreign capital for the stagnation in African tech, but if local ecosystems were always privy to these market realities, why haven’t we seen more venture success stories?
Demographic Dissonance
On the second slide of every African startup and fund deck (including our own) you will learn that by 2050, more than a quarter of the world will be African, outpacing both China and India. You’ll also learn that the median age of the population is 19. By the way, 90% of the population is now covered by mobile networks. It’s the young, digital, and populous message underpinning the African opportunity and it’s what I generally call the “demographic destiny” argument for investing on the continent.
Africa’s demographic destiny thesis is easy to lean into because given time, it’ll come to fruition. The next generation of young Africans will indeed be a global force over the coming handful of decades; twenty to thirty years. It’s also likely that over this longer period of time, Africa will realize some of the technology shifts we touched on previously.
And so we are told to be patient. We are told our capital also needs to be patient.
However, too many of us have not grappled with the cognitive dissonance of promoting Africa’s demographic destiny while at the same time not coming to grips with its dual-edged reality. While the population is indeed surging, it has not resulted in increased productivity. Since 1990, African GDP growth has stagnated at about 1.1% per year. We believe that less than 5% of Africans are consuming more than $10 per day.
And while the population is indeed young, the above mentioned productivity lag has resulted in pockets of extremely high youth unemployment. According to its own government, 61% of those aged 15 to 24 in South Africa are unemployed. In Nigeria, its National Bureau of Statistics reported that youth employment stood at 53% in 2022. Left to current trajectories, Africa’s population surge looks like a path to the biggest youth unemployment crisis the world has ever seen — a much less convincing start to a pitch deck.
But it doesn’t have to stay this way. Africa’s potential is not solely tied to its demographic destiny. There are deep pockets of opportunity today that can shift the potential of markets and proactively address the needs of tomorrow. For example:
Social Selling
In terms of usage, WhatsApp is the most popular mobile product in Africa. By 2018 it was already the most popular messaging app in Africa and a driver of internet uptake. By 2021 Kenya, South Africa, and Nigeria stood atop the world in WhatsApp penetration for internet users aged 16–64 with rates ~ 90%+.
In less than ten years, WhatsApp had gone from zero installs to just about full ubiquity with internet users in some African countries. More interestingly, the penetration rate in Africa’s biggest markets has grown more quickly than in countries like Indonesia, India, and Brazil. In fact, it took Indonesia until the end of 2023 to pass 90% WhatsApp penetration — a full 3 to 4 years slower than Nigeria, Kenya, or South Africa.
It’s then no surprise that social selling and social commerce have followed suit. While the data is nascent, multiple surveys have found impressive traction. In a 6 country study, the GSMA found that 60% of micro businesses and 49% of small businesses use social media as their only source of digital commerce. Another survey found that social media had become the biggest sales channel for surveyed retailers, accounting for over 43% of sales, while physical stores came in at less than half of sales at 20%.
In DFS Lab’s own research in Indonesia, we found another critical trend when it came to social selling — it provided a path to a first job, especially for rural women. In our study, we found that 10% of our respondents found their first jobs through social selling and that these first-time sellers were 2 times more likely to be women. We have not yet done this study in Africa, but it would be shortsighted to deny the possibility that social selling opens up similar opportunities on the continent.
Food Value Chain
Food is often 50%+ of the household wallet in Africa. Lowering food costs in Africa lowers the financial burden of every African household. Beyond fighting food price inflation, there’s one clear area to tackle — wastage.
While Sub-Saharan Africa’s household food wastage is some of the lowest in the world, food wastage in the producer to retail supply chain is some of the highest in the world at ~37%. In Southeast Asia, this wastage rate is closer to 17%. Most of this wastage occurs in the transport and storage steps and here’s where we’re seeing incredible progress.
Several platforms in Africa are tackling this issue and delivering results today. These platforms are combining existing tech like telematics and digital market-making with operational optimization to drive down wastage from 50% to 5%, a staggering 90% improvement. These are huge efficiency gains that could unlock the $4 billion lost to wastage each year and convert that to new digital jobs, lower food costs, and higher incomes in Africa’s most important sector.
Mobile Money
Mobile money is the poster child for tech-enabled progress in today’s Africa. M-Pesa in Kenya was launched in 2007 and 4 years later the service covered over 50% of Kenyan adults. For most, M-Pesa was the first time they gained access to formal financial services. By comparison, it took more than 15 years for digital payments to gain similar traction in the United States. A 2021 survey showed just how steep the M-Pesa adoption curve was:
We should remember that mobile money is primarily an innovation in distribution, not tech. USSD, the underlying technology behind mobile money, is decades old. It was designed specifically to work on existing (not smart) feature phones. At its core, it’s an offline service that relies on a mix of existing digital infrastructure and a physical network of agents. Mobile money was not a shift in S curves.
However, it did deeply impact the S curves it was built upon. Mobile money transformed a phone into a financial tool, making it an even more essential device. The ability to purchase airtime digitally (vs. scratch cards) made it easier to use phones everyday. For mobile money users, the feature phone moved sharply up the slope of its S curve.
Now imagine if mobile money waited for the next set of S curves — smartphones and mobile internet. Millions of Africans might have continued to be financially excluded over the last 15 years. It wasn’t until this year that smartphone shipments surpassed feature phone shipments in Africa.
Similarly, if we are to wait and solely bet on the continent’s demographic destiny — a rolling 30 year vision of Africa’s future — we will have failed another generation of African youth. This is the other half of the Frontier Blindspot, that we still underestimate the progress that can (and needs) to be brought on today by the continent’s builders for everyday Africans.
We believe African S curves have much steeper slopes. When pockets of innovation find traction in today’s markets, the improvement, uptake, and movement up an S curve can be dramatic. It’s easy to fall prey to pessimism when you begin to see the limitations of Africa’s leapfrog narrative and miss the massive opportunities ahead of us that are unique to this geography.
This shape to the African tech opportunity means that there’s an incredible amount of value in between the old and new tech curves. Longer tails mean that it takes a substantial amount of time for newer tech to overtake older tech while steeper slopes mean that older tech can provide dramatic improvements within its lifecycle.
However, our ecosystem has not invested with Africa’s S curves in mind. Our myopic focus on the next S curve via “the future of XYZ for Africa” has left us to ignore the current curve. But as I mentioned above, venture capital is about predicting the next S curve. To understand how that might transpire on the continent, we have to take a deeper look at tech inflection points.
That’s coming up in the second half.
Inflection Points in African Markets
A 2016 article called Right Tech, Wrong Time in the Harvard Business Review neatly outlines scenarios when tech reaches inflection points — the moment when we jump from the existing S curve to the next one. There are four scenarios that describe how that may happen:
- Point A: Old tech can’t improve, and the market is ready for new tech, leading to rapid adoption (e.g., Blackberry to iPhone).
- Point B: Old tech can still improve, and the market is ready for new tech, causing a slower transition (e.g., hybrid cars to electric vehicles).
- Point C: Old tech can’t improve, but the market isn’t ready for new tech, so change is delayed until barriers are removed (e.g., traditional TVs to HDTVs).
- Point D: Old tech can improve, but the market isn’t ready for new tech, leading to major gains once the market is ready (e.g., bar codes to RFID chips).
This seems like a complicated set of variables, but we’re actually already quite familiar with these inflection points. That’s because each of them corresponds to a different investment approach that exists in African VC today.
Point A is where new tech is ready to be adopted by the market today, triggering a leapfrog. This was the ZIRP-era approach to African VC. Point D is the opposite, where both tech and markets are not yet ready for change and so we are told we must be patient for Africa’s demographic destiny to be realized decades into the future. This is an approach that’s largely reflected by philanthropic capital.
Let’s fade both of these inflection points for the reasons we covered in the first half about why we believe they suffer from the Frontier Blindside.
So this brings us to Points B and C. These are the inflection points that rightly assume Africa’s digital opportunity sits in a space between atoms and bits and will continue to do so for quite some time. However, not every startup is built to thrive in this space and this is where things get interesting.
The Android Assumption
In Africa, the majority of venture funds have invested with the assumption that we’re headed towards Point C, where winners use tech to upend existing markets. This is the pragmatic parallel to the leapfrog argument, recognizing the lack of market maturity yet still investing in leapfrog technology. It’s the “have your cake and eat it too” approach.
Companies building towards Point C aim to replace informal markets with digital ones. We call these companies androids. There’s an underlying assumption that if the market isn’t yet ready to adopt their tech — often due to inadequate infrastructure — they can simply build that infrastructure and therefore, a ready market from the ground up. Reinforcing Point C’s legitimacy during the ZIRP years is a track record of companies with approaches that experienced explosive initial growth: Tala, Branch, Kuda, Jumia, among others.
However, informal markets are incredibly difficult to dislodge. They only exist because they work. If startups are born looking to create product-market fit (PMF), informal markets are born out of PMF. They are often trust-based, just-in-time, and decentralized. Consider small merchant financing in Africa as an example. The informal solution involves a local distributor who offers a friendly merchant a bit of extra time to pay for goods when cash is tight. These types of informal inventory advances happen frequently and are based on specific, personal relationships.
On the other hand, digital lending platforms aim to create a credit scoring infrastructure that can underwrite merchants using digitized transaction data. By design, these models exclude the need for social trust. It’s no surprise digital credit for merchants has seen limited success in Africa, especially with informal businesses, as social trust is difficult (and costly) to replace.
Furthermore, what if African markets aren’t even moving towards Point C to begin with?
What if instead of Point C, which assumes markets will bend to tech-as-infrastructure, it’s tech itself that needs to be malleable? What if the current S curve hasn’t plateaued, but rather, we’re just starting to hit its upward trajectory?
If that were true, we’d see a series of Point C companies hit revenue ceilings earlier than expected as they’d be outstripping their markets’ readiness to adopt. We’d see a series of tech-first companies being outmaneuvered by those building with a Point B mindset that augments, rather than replaces existing markets with their informal infrastructure.
And those who are building towards Point B have taken advantage. This is where Safaricom has taken a 30 year-old technology and eaten every fintech’s lunch in Kenya. This is where Moniepoint is challenging Flutterwave for the transaction crown in Nigeria through an army of agents armed with POS devices. This is where messaging bests direct-to-door ecommerce, and where local retail is re-imagined rather than replaced.
As the consequences of sky high valuations started to catch up to hard-fought — but not venture-scale — traction, we’d see companies with few choices:
- Expand internationally to break out of Africa’s S curve — diversify away from the African market
- Cut ambitions of scale and serve those market segments who are ready and willing to adopt at a Point A — limit the African market
- Sit on years of runway (become zombies) and wait for the demographic destiny at Point D — pause for the (future) African market
On the VC side, this has resulted in a lot of soul-searching. Those who previously found conviction from the “deal heat” that global investors brought to fundraising rounds now find themselves without that signal to rely upon. At the same time, market realities are dismantling ZIRP-era investment theses — so much so that the VC model itself is being questioned in Africa.
In response, we’ve passively fallen back on the comfort of the demographic destiny approach. If Point C doesn’t exist, it’s natural to pin our hopes on Point D in the (far) future. Dry powder in African VC has lost its spark. It’s become too patient.
This is the dead space in African VC today, a consequence of an ecosystem that priced startups like they were headed to a Point C inflection point when they’re now pivoting away from serving the African market at scale altogether.
So what will get us out of this dead space? What might the next decade of African VC look like if we are to break out of the Frontier Blindspot and rethink what’s possible today?
Our Cyborg Thesis
At this point, we’ve made several assumptions about African tech:
- African S curves have very long tails so tech inflections can take much longer
- African S curves have very steep slopes so performance improvements can be much greater
- African tech is moving towards inflection Point B so tech can have a better chance to augment rather than replace existing markets
What results is an opportunity to improve the current tech curve that is uniquely massive in Africa. We call this opportunity area “cybernetic commerce.”
The term itself sounds out there, but we believe this is the combination that underpins the next evolution of African tech.
Cybernetic /ˌsībərˈnediks/ — communications and automatic control systems in both machines and living things
Commerce /ˈkämərs/ — the activity of buying and selling, especially on a large scale
We’ve written a bit about cyborg approaches before, and we continue to believe that it’s this mix of online & offline, digital & physical, legacy & next-gen, that will frame the next opportunity set of venture capital on the continent.
At its core, cybernetic commerce is a tech-enabled extension of Africa’s informal (and semi-informal) markets, the part of the continent that accounts for 50% of its GDP and 83% of its employment. It’s what will determine if Africa’s demographic destiny is our generation’s greatest development story, or its biggest crisis.
We have an opportunity to transform the trajectory of everyday commerce in Africa and that’s exactly why DFS Lab invests in the continent’s founders today.
Next time, we’ll dive into the pragmatic — the approaches, limitations, and opportunities within cybernetic commerce. Stay tuned.
