In the final installment of his four-part series, Sw7 co-founder Keith Jones examines the road ahead for Africa’s tech innovation ecosystem and the opportunities for startups within it.
Read the first three installments of the series: One, Two, and Three.
As we have seen from the previous three articles, getting an innovative business to market, creating a high growth business and getting it funded is quite a challenge.
The Services Trap conspires to keep our entrepreneurs stressed and distracted. The Funding Paradox conspires to keep them cash strapped, so they fall into the Services Trap. The Missing Middle conspires to keep the innovation market in the hands of the slow, unwieldy and innovation resistant corporates, that forces the innovators into the Services Trap to support long procurement cycles. We should all go home (or get proper jobs).
It’s not that bad, the first thing the above drivers do is to keep the aggressive international players in check. If we can’t access our market with any degree of consistency and ease, then they are certainly going to struggle. This will mean most of the western players looking to expand beyond their borders will look to the Indian and Asian markets before they look to us.
That leaves the incumbent corporates with the lion’s share of the market. The large corporates will reap some rewards here, but they will soon realise they cannot innovate fast enough to address the opportunities in the market, they will look towards local innovators for help. Anyone who has read Clayton Christiansen’s Innovators Dilemma and has tried to engage with any of the larger players will agree that they do not have the capability to shift quickly enough to address the market. They do have the cash to buy their way back into the market, as they have always done, but have historically been able to do this in a relatively closed, uncompetitive economy.
These large businesses have all been created in the Missing Middle economy, and move as fast as this market has forced them to. Their only competitors have been the other corporates, so this has not been very fast at all. This is all changing, and for the first time, the pace of innovation will be driven by the market, as the Missing Middle begins to become present through smartphone adoption. The Missing Middle have a low disposable income, but they are no longer MIA.
As we have seen from the Funding Paradox, the local funding vehicles are, like the corporates, unlikely to change their behaviour and come down the risk gradient fast enough to make an impact. This means that if a business can succeed in our markets, they will be leaner than businesses in the developed markets and will be more savvy with mobile first behaviours.
Going offshore has typically been very expensive and difficult for African businesses, but with the increasing desire for innovation, high liquidity and faster routes to market being established, I would expect to see an increasing number of our business impacting other global markets. We are particularly well positioned to become the emerging market beta testing region. Competition is tight in the developed markets and the doorway to the emerging markets is wide open. The problem is, we are ‘that country’ Africa that is just too far, too dangerous, too different and for most investors, too risky (and, to top it off, we are that country that has Ebola!).
How is it likely to play out?
We will see a few of the corporates making some efforts at innovation, but they will need to do huge amounts of work at the pace at which they can transact, ingest and scale innovation. It is unlikely they will be able to effect these changes internally at the speed at which the market is changing. Local established funders will wait to invest in the lower risk sectors, when the markets have been proven, which will be too late.
Offshore early stage investors that have the appetite to disperse amounts between US$40,000 and US$200,000 will have an open market, assuming they can disburse effectively. Their failure rates will, as always, depend on timing, and the first ones in are likely to burn more than they thought. The good news is that foreign currency goes a long way in Africa, and the runway it buys is quite a bit longer that it would buy in the West, but then, we need it!
Whoever gets access to the offshore capital and gets the last mile disbursement right, is likely to have a significant market opportunity. The matching vehicles that created the other global innovation markets are largely absent in our markets. Should they materialise, their impact is likely to be profound, again, assuming effective disbursement, the hardest job of all.
We are very similar in many ways to the Asian market and this is often our next easiest stop from here when expanding.
The majority market will remain a bootstrapping market, and the successes will come quickly from those teams that avoid the Services Trap and work hard to get the Skunk works formula right. Meetups and talk of Lean should be pushing the market in this direction, but we are seeing little evidence of this. The problem with all of these global ‘movements’ is that they have evolved in funded, viable, accessible markets where there is no Missing Middle and there is a safety net in the economy. What needs to be taught in Africa is the right way to run a bootstrapped product business without going into the Services Trap. I have not seen a single programme promoting this. Most of the people we engage with at Sw7 have the scars from this trap.
Conclusion
The corporate markets will make some headway, but won’t be able to adapt to meet the innovation. Small to medium owner run technology businesses should survive and thrive. Most of the local VC market will be left in the cold, as by the time they decide to come down the risk gradient, it will be too late. A few offshore early stage investors will have significant successes and will set themselves up very well for the future, which is in the emerging markets. The local scene will be driven by the bootstrapped entrepreneurs. We are likely to see a few individuals that create a fund of funds to help high net worth individuals access the sector and spread bet. I would expect to see a significantly increasing number of international success stories as our more established businesses here attack the global markets. The only unknown is really if the matching funding will materialise, and if it does, if it will ever reach the market.
It sounds as if there is little change, not true. What is set to change, is the size of the innovation market.
What does this mean for the tech entrepreneur in Africa?
- Corporates will be more approachable, expect sales cycles to ‘collapse’ from a year to nine months.
- If you want funding, be realistic.
- Avoid the Services Trap at all costs and build a highly structured Skunk Works. Make sure your senior talent is 100 per cent focused on the product, not the customer or services.
- To try to scale quickly, look for highly creative ways to access the market. Much of the innovation will be from how you scale across the missing middle, not from the technology. If you are not innovating in how you access the market, you are not likely to be high growth.
- Be clear about why you are launching a business. If you want to halve your salary, double your work hours, increase your stress and report to a new boss, raise lots of money. If you want to be independent and run your own business, bootstrap.
Africa is a late developer, and our market is largely inaccessible to much of the West. The more developed markets now have a good understanding of the power of network effect, which they did not have when their own market were developing. This means they know they will have to get in early to get real estate, as the later markets are very expensive or difficult to access.
We are going to go into a high growth cycle in this sector, with or without government support. Effective matching will set the sector up for a boom of sorts, we have the talent and we have the market opportunity. Unfortunately, we will be entering a hype cycle, and will see all sorts of high profile, irrelevant gestures and contributions to the sector. Hopefully these contributions do not distract the entrepreneurs too much and slow the sector down.
We face some significant challenges, but I believe the next three to five years will be the most significant and exciting we have ever seen in the tech sector in Africa.
