Africa Accelerating
Our collective world has gone through rapid change since we set out on the journey we did 4 years ago, but boy did 2020 keep us on our toes! Our confidence that world-class companies are being built in Africa has entered a new phase as we witness the scale potential of our most successful portfolio companies.
Rewind to 2017 and a handful of small VC funds were trying to establish market validation. As is typical at this time of year, estimates of the amount of venture activity in Africa in 2020 are still rolling out, but the consensus is that over $1bn in VC funding and $1bn in M&A was seen in 2020. Suffice it to say that capital deployment has increased at least 5x since we set out. With the Great Digitization that resulted from the Covid-19 pandemic, frontier markets are better connected digitally than ever. Ideas and capital now meet much faster. Opportunity discovery, the availability of capital, company formation and competition have all advanced rapidly. 2021 arrived with African VC operating at a higher velocity.
At Lateral Capital, we had our busiest year yet with 11 investments made including 7 new portfolio companies (taking the total to 16) and 4 follow-on up rounds. Most importantly, surviving a year of shutdowns, travel limitations, employee health and safety, remote fundraising, diligence and customer interactions across Africa drew us closer than ever to our founders. These challenges demonstrated incredible resolve on the part of our founders and team. In retrospect, 2020 provided a catalyst in testing our investment thesis and portfolio operations. Founders doubled down on culture and a narrow set of key performance indicators around product and traction and have raised the bar in terms of what can be achieved with a financing round.
Network effects mattered more. While we have always prided ourselves in the number of opportunities that we review annually, in 2020 we relied on the endorsement of other founders, our advisors, fellow VCs and customers more than ever to meet and assess companies. With the urgent digitization and ‘remote everything’ adaptation we saw in 2020 in which we all lived on Zoom, Google Meet, WhatsApp and Clubhouse, access to the networks of others through long-term relationships became a proxy for due diligence, business development and value creation. It is crazy to think that 40% of our team has never met, and our 3 co-founders have not met in person in over 12 months…
The great tailwind from this new normal resulted in the world getting an intimate look at the rising African startup scene.
In what follows we share thoughts on the State of Play of African technology companies.
“ The total amount of invested venture capital is still a fraction of total global venture capital funding, especially relative to the size of Africa’s population, but this gap presents potential first-mover advantages for investors”
2020 e-Conomy report, Google and IFC, a member of the World Bank Group
According to the Briter Bridges 2020 African VC funding report,the continent saw $2.4 billion in capital deployed and acquisition value last year. Briter estimates a minimum of $1.07 billion in disclosed funding, including: equity, debt, grants, mezzanine financing, convertible and SAFE notes and $1.12 billion in disclosed M&A market, and at least $243 million in non-publicly disclosed deals according to the information made.
As has been the case over the past 5 years, Fintech accounted for the majority of total M&A volumes (90% in 2020), with high profile acquisitions such as Paystack, DPO Group, and SendWave, and over a third of all non-acquisition funds deployed, followed by cleantech and healthcare. The same fintech domination is reflected in Lateral Capital’s portfolio composition with 7 of our 16 portfolio companies being fintech companies covering lending, payroll automation, API platforms and trade tech.
Baobab Insights adds that the total number of VC deals increased from a 2019 total of 486 to 504 and that with services moving online in response to the COVID-19 pandemic, healthcare technology, education and e-commerce sectors also saw an increase in their share of deals (28.9%, 42.9% and 36.8% increases respectively from 2019 to 2020).
A summary of the 5-year trend in financing African Tech Startups is as follows:
Source: Baobab Insights and Briter Bridges 2020 African Tech Funding Reports
● Exit this way…
Looking back to 2018, the most common question we received was around exits. Fast forward to 2020 and a compelling trend of acquisitions in our markets has been established, with a roughly even split between VC $’s invested and M&A led liquidity in Africa in 2020. $1.1B in acquisitions in Africa included Stripe’s $200m+ acquisition of Paystack, and WorldRemit’s $500m+ acquisition of SendWave.
As Osarumen Osamuyi brilliantly points out in this thought piece:
“The conversation around a lack of exits in Africa is premature. Ecosystems have to go through experimentation and scaling before liquidity starts to emerge. This process is well on its way in the African ecosystem. The past few years has brought the rise of sophisticated African early stage VC funds, total funding into the ecosystem is starting to accelerate, … The continent only just had its first unicorn. China had its first unicorn in 2010, and it took five years for it to get to five unicorns; the year after that, it had twenty. Ecosystems develop very slowly, and then all at once. As startups build infrastructure using technology, they inadvertently create new markets. We’ve seen this happen in China, South East Asia and Latin America, it’s only just beginning in Africa.”
Further, two of the best returning public listings over the past 12 months have been those of Jumia (9.6x, albeit not without challenges in achieving profitability) and Egyptian payments company Fawry (4.8x). The highly anticipated listing of Nigerian Interswitch is again expected in 2021 after a $200m financing round led by Visa in 2019.
● Beyond the $’s
As the African Technology Revolution accelerates, let’s assess where we are now and where we are headed. The velocity of company formation and capital deployment in Africa speaks to a rapidly maturing ecosystem, but clearly what is under the hood is of even greater importance. What is the state of digital infrastructure and customer prospects at the beginning of 2021?
The Great Acceleration: Covid as a Catalyst
In the Google and IFC co-authored report e-Conomy Africa 2020, the state of Africa’s digital landscape and recent progress is thoroughly examined. The 3 key developments highlighted are:
1. The increased access to affordable and high-speed Internet across the continent
2. The role of African startups in transforming the local economic landscape and creating new market opportunities
3. Africa’s commitment to developing the world’s largest single market under the African Continental Free Trade Area
To quantify the impact of digital transformation on African prosperity, the report estimates that “a 10% increase in digitization, the conversion of information into a digital medium, increases GDP per capita by 1.9% in Africa, compared with 1% in other non-OECD countries. More generally, increasing Internet access to 75% of the population could create 44 million jobs”
In short, the impact of digitization on African prosperity is twice that of other emerging markets..
Nowhere has this rush to digital in Africa been more evident than in fintech. Nigeria saw a large transition to cashless payments with $428bn in electronic transactions, a 42% increase year on year. More importantly, the impact of this shift to digital is likely to outlast Covid-19. Mastercard’s Economy ’21 report expects that 20%-30% of the Covid-related surge in global e-commerce will be a permanent bump in its share of overall retail spending.
The African Consumer
According to African Development Bank data, there are 350+ million middle-class Africans. Removing South Africa, Sub-Saharan Africa’s growing middle class is spending over $400m daily, but unpacking the demographics of African consumers on which many VCs hopes and dreams are pinned, paints a far more complex picture. DFS Lab’ Jake Kendall produced a great breakdown of the reality of the African consumer here.
“The threshold to enter the top 1% of consumers in Africa is around $20/day/adult [~$7,300 per annum annual consumption] which would still be below the national poverty lines in most of the US and Europe.” This 1% represents 15.5m Africans. Portrayed another way, 50% of the African population today (958m people) consume less than $2.25 per day [~$820 per year].
Nigeria, Africa’s largest economy has a total of 3.7m consumers spending above $10 per day, and including main VC hub markets (see below), this represents 35m potential middle class consumers by African standards. The key point being that the African consumer base, while growing quickly, remains highly fragmented and is not homogenous. The path to scale for African ventures cannot rest on the elusive African consumer that is often alluded to. To complicate matters, nearly 300m Africans are employed in the informal sector;with 70–100m expected to face job loss income reduction as a result of Covid-19.
Population of African middle class consumers across 8 markets
Source: African Development Bank, DFS Lab
On a more optimistic note, the rapid impact of the internet economy is clear in Africa’s technology hubs, and speaks to the rapid change we see within our portfolio of investments.
As Timi Ajiboye, founder of Buycoins Africa points out: “The internet is creating a middle class in Nigeria. It’s still early days but it’s happening. There are now so many different ways young adults are earning a (somewhat comfortable) living that simply wasn’t possible just 10 years ago.”
Overall the Lateral Capital thesis of backing founders that enable growing African enterprise customers via digital platforms remains our guiding principle. Turning again to Stephen Deng: “any entrepreneur that can design distribution models that lower cost to acquire and serve customers dramatically will create huge market value and make many more people feasible as customers…. those who can create innovative, low cost ways to acquire and serve users.”
In summary, despite challenges of regulation, infrastructure and a relatively small number of addressable consumers, we are seeing an acceleration in the number of African companies and individuals adopting digital services and products in the worlds fastest growing region. In response, the talented and resilient founders that we meet across Lagos, Nairobi, Cairo and Cape Town are accessing capital more seamlessly and acquiring talent, skills and support faster than ever. African Technology startups are leveraging the products and services of complimentary startups to offer African companies and SMEs solutions to provide to their end consumers. Finally, leading international corporate investors are recognizing this opportunity and acquiring the winners much sooner than anticipated.
Where to from here?
Funding, Scale and Differentiation
● Founders have more choice than ever as to where they accept funding from. No single foreign or local VC jurisdiction is overly dominant. This has led to African founders demonstrating a pragmatic approach to the kind of capital they accept. It is exciting to see founders be bold but realistic about what kind of capital partnership they seek. There is a realisation that Silicon Valley style investing might not be the only approach to building valuable companies in Africa. Fortunately we have advocated for an investment approach that meets the African market where it is since 2019.
● This has also led to a focus on achieving scale across African technology hubs. Now that a greater capital audience has arrived, there are more questions around going beyond an initial market. To this point we have seen a greater number of startups using each others’ products across geographies to reach scale. Whether we are looking at an HR management and payroll solution, to an API platform, or payment rails, companies that are growing quickly are using the complimentary products and services of others. Multiplier effects among successful African companies drive the velocity of value creation.
● The urgent digitization already seen from Covid19 will give rise to ventures finally able to overcome the scale challenges inherent in fragmented technology and regulatory ecosystems in Africa. The China 90’s analogy resonates when unpacking the exciting growth of African startups, but the obvious difference ties back to the challenge of achieving scale across 55 different markets with differing infrastructure, regulatory environments, languages and cultures. 5+ years into the African technology revolution, long-sought multiplier effects are now materializing across an emerging category of company offering platforms filling the gaps and decreasing friction.
● Even before this pandemic and economic crisis struck, we were surprised to see that half of our portfolio companies in East Africa were using each other’s products. The idea of multiplier effects within the early stage companies has been a focal point since and we find ourselves honing in on the products and services that rise to the top of the priority list for other fast growing companies in a time when costs are being cut and online where possible is a necessity.
● How deep is your moat? The AWS and YC effects (cost of company formation and availability of capital) are already being seen in the number of undifferentiated competitors in several sectors. Sustainable product differentiation matters a lot more than it did 3 years ago. As we continue to invest in Africa’s startup ecosystem, we place emphasis on sustainable differentiation.
Platforms and Embedded Everything
● We have had a thesis around digital platforms enabling technology to unlock enterprise for a number of years. Our focus has been on companies that offer a better, more affordable or more convenient way to originate products to enterprise customers.
● Within fintech, we have been focused on i) data interoperability between banks and mobile money fintech ecosystems, and ii) on the massive opportunity that is digital identity. A number of companies have emerged with the potential to be the “Plaid for Africa” and touch on both i) and ii). We are therefore thrilled to have backed the founding teams of what we believe to be the champions of access, value and reliability in the burgeoning unified data space, as featured here. In 2019, Plaid’s business model was validated by the attempted Visa acquisition for $5.3bn 6 years after the company was established. A recent SEC ruling deemed Visa’s acquisition anti-competitive and Plaid returns to its mission with great validation as an independent entity. Plaid was built to connect users’ financial accounts to consumer apps via a unified API (application programming interface) platform. Similarly, the greatest challenge that financial services providers face in Africa is fragmentation of their user base across countries, on- and off-line incumbents and other silos. According to GSMA Africa data, in 2006, fewer than 400 public APIs were available globally. By 2016, there were around 15,000 APIs, with 40 new ones created every week. Salesforce generates 50% of its revenues via APIs, eBay generates 60%, and Expedia 90%.
● We hold a strong conviction that API innovations will shape the consumer landscape across Africa — from financial services to health, agriculture, logistics, ecommerce, insurance and beyond. Disruptive startups will rely on accessing unified financial and identity data to serve the growing smartphone-based population. Use cases vary by vertical, fundamentally distilled to leveraging de-fragmented, multi-dimensional consumer data to reduce risk and increase operational efficiencies — from onboarding to underwriting and beyond.
Zach Perret, CEO and Founder of Plaid recapped the 3 waves of Fintech that we have witnessed over the past decade during a fireside chat call attended by Lateral in late January. We see embedded technology and digital platforms applying beyond fintech, most obviously as startups embrace developers and the technology teams at legacy businesses as their primary customer.
The 3 Waves of Fintech:
The cadence of early (pre-seed) stage African companies building on this framework sets us up for an exciting new year of investment, as outlined here by TechCrunch.
De(centralized)Fi(nance)
No ‘year ahead’ prognosis would be complete without touching on DeFi. We have been actively exploring a number of enterprise layer blockchain applications to compliment AppZone’s Hyperledger clearing product Zone, and potential future products within our API leaders and Kountable on the tradetech front. Africans are the second largest users of cryptocurrencies outside of the US. Africa is the most promising region for the adoption of crypto and blockchain with use cases that solve aforementioned problems of fragmentation, regulation and friction costs. Four unique trends drive this: attractive demographics, currency stability, inflation, and poor financial infrastructure. Google Trend data indicates that Uganda, Nigeria, South Africa, Kenya and Ghana all rank in the top 10 search functions on the topic of cryptocurrency. Watch this space.
Back to the customer
● Finally, we believe that it is essential for African technology companies and investors to build deeper relationships with the African corporate customer to truly understand their needs. As we predominantly focus on companies offering B2B and B2B2C solutions we are deepening our relationships with the customers of our portfolio companies. There is no better remote diligence exercise than working with a founding team to acquire a customer for their product/service in a remote first world!
Commitment to Gender Diversity
● The pernicious challenge of underrepresentation in gender diversity is a challenge that requires greater commitment by all participants in the ecosystem. Data compiled by our friends at Briter indicate that only 15.2% of the 1,840 African co-founders in their VC funding report were female. Currently 31% of our portfolio companies have female co-founders and we will look to build on this start in 2021.
Thanks to the support and learnings from all founders and investors in the African Technology ecosystem. We would love to hear from you. Let’s keep building!
- Team Lateral
