#1 — What’s the deal with startup-corporate partnerships in Africa?
Startup-Corporate Partnerships in Africa: Beyond The Deal
This is the first essay in a three-part series reflecting on startup-corporate partnerships in Africa. Published by The Subtext in partnership with Founders Factory Africa.
I. Positive Sum Competition
A popular narrative in the tech industry is that the battle between startups and incumbents comes down to whether the startup gets distribution before the incumbent gets innovation.
In this telling, David (startup) beats Goliath (incumbent) by being nimble, leveraging a technological shift to serve customers in a cheaper, more unique way. Goliath sneers at the obvious inferiority of the new product compared to its own mature offering. But David’s product keeps improving. By the time Goliath recognizes the threat, it is too late: its existing business model, shareholders, regulators, and customer expectations make it impossible for management to respond. Goliath fades into irrelevance as David enjoys the fruits of scale.
While there are multiple examples of this story playing out — Netflix v. Blockbuster comes to mind — it doesn’t always paint the full picture. In reality, startups and corporates co-exist in a complex market environment; just as likely to be collaborators as competitors depending on the context. The interaction can be approached as a positive-sum game.
Partnering with a large corporate could significantly accelerate a startup’s go-to-market. Take Open AI and Microsoft, where Microsoft provided $10B+ in compute and a pre-vetted enterprise client base in exchange for preferential access to OpenAI’s technology. By offering capital, early validation, a business network or regulatory cover, the corporate could also incorporate the results of the startup’s experimentation. There should be no better way to future proof your business.
In Africa especially, where offline distribution is required to sell at scale, large corporates have accumulated all kinds of useful infrastructure: brand equity, physical locations, agent networks, supply chain relationships, “street smarts”, etc. If brought to bear for a startup, these assets could completely change its trajectory — as long as they keep their incentives aligned.
There are not many real world examples yet (more on that shortly), but one worth highlighting is TymeBank. The South African digital bank leveraged MTN’s customer base in 2019 to acquire its initial users, while also providing cash-in, cash-out services via kiosks at Pick ’n’ Pay & Boxer retail outlets. A million customers signed up in the first year. By May 2023, they reported 7 million customers in South Africa, a $100M annual revenue run rate, and a $77.8M pre-Series C round led by Norrsken22 and Blue Earth Capital. Without this sort of acceleration, TymeBank would likely have faced a longer, more arduous path to achieving the same scale.
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There’s another reason this matters today.
- The Nigerian 🇳🇬 Stock Exchange has a total market cap of $50B
- Egypt’s 🇪🇬 two stock exchanges are worth a combined $44B
- Uber was once privately valued at $76B — a credible expectation of an IPO for $100B+
..an unfair but relevant comparison[1]
The US Fed’s recently ended Zero Interest Rate policy drove investors around the world to make riskier and riskier investments to earn their target returns. Emerging markets companies, usually starved of capital to grow, had a banquet prepared between 2020 and 2022.
In Africa, the capital inflow helped drive broad public awareness of technology products; influencing (and sometimes distorting) market dynamics in banking, transportation, and commerce. Over the next five to seven years, though, the continent will need to make a case for itself as a global investment destination — tens of billions in exit value generated at minimum. Given our shallow capital markets, I suspect large corporates may end up a key source of exit liquidity for African startups.
(At the right prices, of course.)
P.S. The outlier here is South Africa 🇿🇦, thanks to its relatively advanced economy and mature corporate ecosystem:
II. A Taxonomy of African Corporate Innovation?
The David & Goliath story above was adapted from Prof. Clay Christensen and Joseph Bower’s theory of disruptive innovation; their 1995 paper detailed how established companies could lose to new entrants when technologies and markets change.
Nearly three decades on, Christensen and Bower’s ideas have become a staple of modern business literature, from books, blogs to even business school curriculums. As a result, today’s business leaders are much more aware and prepared for the threat of disruption than, say, 20 years ago — even if the same organisational forces still apply to large companies.
In Africa, like the rest of the world, most major traditional banks now have a digital banking play or provide some sort of fintech infrastructure; with the slow but sure decline of voice revenues, telcos have expanded into financial services and incentivized over-the-top applications that drive data consumption; meanwhile, FMCGs, who are flexible by necessity, have incorporated restock technology companies as an additional distribution channel for their products. These are adaptations to the market changes that result from the profileration of the internet. Large corporates, driven by the desire to survive these shifts, have become more open to experimentation and collaboration. Where threatened, though, they have not been afraid to press their advantages.
Let’s attempt to organise this activity into a few broad categories.
Internal Incubation
- … is most feasible for firms with a unique scale, infrastructure, cost structure, or regulatory advantage. The approach is attractive because it gives the corporate the most control. After all, a company that successfully “disrupts itself” gets to continue doing business on its own terms.
- This is also what makes it risky: if the teams responsible for innovation aren’t sufficiently separated and empowered, they could end up being captured by the same organisational logic they were meant to subvert. Kodak famously invented the digital camera in 1972 but failed to capitalise on it for fear that it would cannibalise their ‘fantastically profitable film business’. The company filed for bankruptcy in 2012.
- Even with strong execution, success is still not guaranteed for firms who choose to undergo this sort of organisational transformation. Telcos in Africa, for example, have successfully scaled new products in areas like mobile money where their existing assets and capabilities provide an advantage (see: MTN & Safaricom in Ghana, Uganda, and Kenya). However, this success has largely not yet been replicated with pure OTT (over-the-top) products. These are some of the best-run companies on the continent, but the skills and culture required to offer social networking, e-commerce, or modern app-based financial services are just dramatically different than to maintain network infrastructure.
Strategic Investments & Acquisitions
- A corporate could also acquire or invest resources into a startup or joint venture with the intention to generate long-term benefits beyond dollars and cents. Strategic investments grant the corporate access to an emerging technology/market while keeping the ‘team innovating’ separated from the broader organization.
- This arrangement allows the smaller entity to remain autonomous, and leaves room for both sides to derisk by involving other investors or partners; if it succeeds, the large corporate profits both directly ($$$) and indirectly (improved competitive position) from the investment.
- A few notable examples: MTN’s investment in Jumia, Yamaha’s investment in MAX, Multichoice’s fintech joint venture with Rapyd and General Catalyst, or Orange’s investments in Yoco, Bizao, and Africa’s Talking.
- Strategic investments are typically seen as a precursor of a potential acquisition. The canonical example here is Stripe’s $8M investment in Paystack’s Series A in 2018, and eventual acquisition for $200M in 2020.
- Acquisitions make the most sense where the corporate 1/ is willing and able to invest the resources required, and 2/ needs full control (of technology/IP, operations, talent, etc.) to realize the benefits of the collaboration. Otherwise, it would probably be more prudent to make a strategic investment or simply partner.
Cohort-Based Programs & Ad-Hoc Partnerships
- Large corporates who partner with startups on the continent have generally done so in two ways: cohort-based programs and ad-hoc partnerships.
- In a cohort-based program, a set of startups that share similar characteristics participate in an accelerator, hackathon, or other programmatic initiative over a pre-specified period. The content of the program will ultimately depend on the corporate and their goals, but tactically speaking, the aim is to 1/ enable the startups understand the corporate’s domain and access its resources, 2/ introduce them to key POCs across the company and set them up to ship value quickly.
- Cohort-based programs have the theoretical benefit of establishing a clear interface between each startup and the corporate organization. Because the initiative must have been pre-approved by company leadership, startups who come in through one of these programs can reasonably expect a certain level of engagement from the different departments they need to interact with.
- Cohort-based programs sometimes come with equity capital from the corporate e.g. Honeywell Group’s Itanna Accelerator.
- Meanwhile, ad-hoc partnerships are usually formed on a case-by-case basis, focused on a more specific problem area, and can be initiated by either the corporate or startup. Some examples include Uber x Moove for vehicle financing and fleet management; Wema Bank x Flutterwave for virtual account numbers; and Ukheshe x Mastercard x Telkom x Nedbank for WhatsApp virtual cards.
III. Towards More Productive Partnerships
Even when the parties intend to work together, most partnership conversations do not make it beyond the meeting room table. For the few deals that get closed, even fewer have any meaningful impact beyond the hype from the press release.
This should not be surprising: vast inter-organisational asymmetries between startups and corporates make it tricky for them to collaborate[2].
Startups are less likely to focus on maximising short-term revenue, for example, as they have theoretically unbounded upside; in the search for Product-Market Fit, user adoption, market feedback, regulatory cover are all valid reasons to invest in a partnership.
The corporate partner, meanwhile, must prove the commercial value of the collaboration against multiple viable alternatives. Adopting an innovative new product/service could come with significant costs (e.g. payments to an infrastructure vendor to enable recurring subscription functionality for a mobile money wallet) that the corporate must bear regardless of the success of the project. And if it’s a publicly-traded company, shareholder pressure on revenue generation becomes a real live player in boardroom and leadership discussions.
In a recent qualitative study produced by Founders Factory Africa, Standard Bank, Paystack, and PAWA, corporate interviewees highlighted organisational compliance and strategic alignment as the most critical to determining the value proposition of a partnership. It makes sense: operating at the scale of thousands of employees comes with certain “transaction costs” to getting anything done, with the inertia kept in place (necessarily) by layers of bureaucracy. As a result, even simple actions could require a lot of organisational effort to execute.
Big companies often externalise these costs in the form of longer decision-making cycles, supplier compliance requirements, complex technology integrations, or any number of legal, operational, or regulatory checkpoints. One of the most important factors of success in a partnership, then, is whether the partner can bear these costs in stride. Other big companies, by definition, have the resources (and experience) to manage, but startups by default do not — even if they may have a suitable product.
This is why press release partnerships can be so costly. Time spent jumping through hoops to get the deal done is not spent building the business. The loss of focus could be detrimental to a startup whose biggest asset is its ability to experiment efficiently. Worse still, these costs may continue to accumulate once the deal is signed.
Of course, most people don’t deliberately set out to waste their own time, so getting a bit smarter about this is worth it. There is a lot of good tactical advice online about how to get a deal done; a lot of it is high-signal. But beyond the deal, there are any number of factors that could impact the amount of value created through a partnership: shifting organisational priorities; misaligned expectations; poor execution; politics and personal incentives, to name a few.
Over the next two essays, we will 1/ reflect on why partnerships between startups and corporates fail, and 2/ learn how to approach partnerships from operators with deep experience on the continent. Meet the Avengers:
- Bruno Akpaka, Digital Financial Services expert (15+ years); currently Director of Partnerships at Migo
- Patricia Ndikumana, Head of Customer Insights (ex-Head of Partnerships) at Wasoko
- Wiza Jalakasi, Africa Market Development Director at Brazilian fintech EBANX
- Ayotunde Aladejana, Partnerships Lead at Founders’ Factory Africa
In a previous life, I was privileged to help entrepreneurs in the Middle-East, Africa, and Turkey navigate their partnerships with a big tech corporate — including making some mistakes myself. This is partly a way for me to reflect on what I’ve learned from the experience.
With love,
Osarumen
Next Week: How To Partner With A Corporate
Foot Notes
- Another unfair but relevant comparison: Remittances to Africa in 2018 alone ($40B) was 5x 🤯 the total amount raised via IPOs on the continent between 2017 and 2021 ($8.1B)
- It is notable that TymeBank first started as a project between MTN and Deloitte Consulting
