Africa’s telcos are at once the best and worst investments in Africa tech. On one hand, costs are high, upgrade cycles are shrinking, and there’s competition in every layer. But, they have the largest number of users and sell a product that’s more important than food. Despite anaemic growth, telco bulls believe the trajectory is about to change. That’s unlikely. The reality is somewhere in the middle.

Mobile internet access has transformed Africa. The African consumer is “mobile-only” and more people are online than ever before. Lives have changed, and fortunes have been made. The largest telcos have grown to hundreds of millions of subscribers and more. They have become the largest companies where they operate. For example, MTN is the largest taxpayer in Nigeria (both intentionally and unintentionally). They create good jobs, and have an overwhelming distribution advantage.

All these haven’t helped them recently. Their customers are rejecting high margin voice and SMS, using free alternatives instead. Well-funded fintechs are threatening to turn telcos to dumb pipes. Even worse, the upgrade cycles are accelerating as customer needs are exploding. Telcos are making less money per user as users expectations grow.
Yet, there’s still money in bringing people online. Internet penetration is still less than the global average. 80% of Africa’s mobile connections are of the slower, less capable 2G/3G variety. But, unless there are material changes in cost structure (e.g., Jio or OpenRAN), it’s clear that the next customer will be less profitable for the telcos. Africa’s inequality is well-documented, and the wealthiest people are already online. In a world of declining ARPUs, subscriber growth will not be enough. The future is in value-added services. Besides customer growth, telcos have to figure out how to get more from the customers they have now. Safaricom’s M-Pesa validates the opportunity in high-value financial services. Every telco is asking “Beyond voice, data and phone, how do I get a share of my customer’s wallet?”

That’s the space to watch. Every telco is rebranding from “Telco to TechCo”. MTN went as far as creating a new brand. And then there’s mobile money in Africa’s biggest, poorest and most unbanked market, Nigeria. Smartmoney believes this is an opportunity for the ages. On the back of this, MTN and Airtel have raised money at eye-popping valuations.

Can Africa’s telcos transform from government-protected oligopolies to nimble, responsive technology companies? Can MTN provide a better experience for Nigeria’s SME’s than any of the one million startups doing this? Time will tell, but the telcos will have to win this battle to create any kind of value in the long term.

African startups have raised more money in Q3 2021 than they did in 2020. Yet that is not even enough, and neither does it suggest a bubble in African startup investing. 

Like all capital markets, Africa is downstream of loose western monetary policy. Interest rates are low and investors are hungry for yield. Despite being high risk with many countries facing economic distress, African Eurobonds are 4x oversubscribed . There is money sloshing around the global economy looking for a place to rest. Why not Africa’s startups?

Skeptics say these companies cannot justify these sky-high valuations. The true market is small, customers cannot pay, and property rights are inconsistent. That may be true, but even in the worst case scenarios, the impact will be limited. Some Many investors will lose money, sure, but they knew the game before they started playing it. No singular implosion will be the reason investor sentiment turns. Case in point: Jumia. Even in the depths of its rollercoaster public market journey, African investment continued growing. 

It’s also not that much money. Relative to Africa’s population, economies, infrastructure deficit, or any other metric, startup fundraising has a long way to go. No African country is as developed country as Japan that lacks for nothing? 

Africa’s startup problems need asset heavy solutions. Your startup wants to build Electronic Health Records software? You need to pay for internet, electricity and on-site support.It is not enough to build a successful drug procurement platform for pharmacies, you must alsooperate your own.. There’s no USPS for Africa’s Amazon to piggyback on. In the West, you optimize your Facebook ads to find a seam and you’re off to the races. Some asset-light companies exist, but these are the exceptions that prove the rule.

Fundraising has positive externalities. When done right, these vast sums of money will buy African services, hire Africans and build infrastructure and services for Africans. In the US, the 2000s dot-com bubble built the infrastructure for a new generation of internet companies. Wages for skilled workers will go up as productivity increase. More young people will be attracted to a career in technology and consider starting a business themselves. 

Finally, the opportunity is massive. People are coming online faster than ever. Africa’s internet usage growth over the last 20 years is many times larger the “Jeff Bezos number”. Data costs are falling and will continue to do so, even as more of this young, mobile-first population comes online. The world is only just starting to pay attention. African entrepreneurs need the capital to build for these people. Keep it coming.

The best adverts don’t resemble ads. It’s why it’s getting harder to tell which Instagram story is an ad or from your friends, or why your favorite influencer puts “#ad” at the bottom of the post telling you just how much they’ve been working out lately.¹

US venture capitalists and Tech companies do the same thing. Their CEOs write marketing pitches thinly disguised as books. Stripe moonlights as a book publisher. Basecamp has a blog, podcast and independently publishes books. 

This is much more than a startup’s corporate account creating a meme on Twitter. I’m talking about creating long-form content that requires investing time and money. 

Ostensibly, these companies create content to “give back” or “explain their secret sauce”. More likely, it’s an important part of controlling the narrative around their businesses. The content they create help attract people to join the company and venture capitalists to invest. This is especially helpful for companies who do not have access to the traditional reputation building opportunities available to more established companies. 

Why don’t we see more of this from African VCs and startups? 

My best guess is the participants think the market is too small. In Nigeria tech, all the players are a few degrees removed from each other. Paystack and Flutterwave worked together at founding. A chunk of the new startups founded in 2020 used to be at other companies. If you believe this, then it’s not clear how content can help you hire or attract funding beyond where you are right now. If you’re part of this space, you already know most people you need to know, and those that you don’t, your friends know. And if you don’t know, maybe you should go back to where you were working before.

However this isn’t true at all. The tech scene is growing exponentially in ways that are hard to see in real-time. Startups are attracting senior hires from Nigerian industry. Investor interest is multiplying as more VCs become interested in the Nigerian market. Content is a way for participants to get noticed, either by investors, future partners or prospective employees. 

On the other hand, creating quality content costs time and money, two things young businesses and startups lack. Again, this is a short-sighted view. It is easy to ignore the “marketing” part of content marketing, but getting customers and partners is part of the job at an early stage company. The right content marketing strategy helps you attract the resources you need to grow, whether customers, investors, employees, business partners, etc. 

Not all African startups hold this view. For example, Paystack has a great podcast and creates tons of content. Many founders appear on podcasts and give interviews that build their profiles and those of their companies. In the past few years, a number of startup-focused PR agencies have emerged to guide early stage tech scene participants through all this. But there’s still much more room to grow, and many more stories to tell. And yes, the marketing matters. 

1. Well, that and FTC regulations that state an advert must be clearly disclosed. Otherwise, both creator and advertiser would rather pretend it is not an advert. ↩︎

Whoever figures out secured lending for Nigeria can build a billion-dollar business. Secured lending has worked in other emerging markets, e.g., Brazil with Creditas, and investors tend to bring business models that work in other emerging markets to Nigeria. Jumia’s existence was foreshadowed by FlipKart (2009) and Ola(2010) and they share the same investors. Why not Creditas and Nigeria? Who’s building this? 

It’s not enough to say, “Nigeria is different. Secured lending can’t work here” Rather, it’s looking at what the challenges are and whether intrepid entrepreneurs can overcome them. 

The secured lending opportunity

Secured lending requires borrowers to have collateral and Lenders can claim the collateral if the borrower defaults. Secured loans have higher approval rates, lower default rates and are more likely to be paid in an economic downturn. 

Whoever you ask, the opportunity is big. By some estimates, consumer loans is a NGN10.1T ($24.6B) market opportunity, and this most notably excludes small businesses. Moreso, Nigeria’s lenders believe customers want these loans and see demand increasing.

CREDITAS AS A CASE STUDY 

Creditas is a Brazilian fintech that provides customers with loans secured against a house, car or monthly paycheck. Creditas does not take customer deposits but instead chooses to build financial products around these 3 assets. Creditas has no branches; customers apply online or via WhatsApp and get a decision in minutes. They’ve also raised $564M and, as at Dec 2020, they have reached a $1.75B valuation.

Why Creditas works aka Sao Paulo =/= Lagos

Brazil is not Nigeria and Creditas works in part because of Brazil’s unique circumstances. Brazil has a relatively mature credit market, with $500B of debt outstanding. However, the rates are one of the highest in the world and there’s little competition in their concentrated banking sector. Creditas’ customer is the top 15% of the population with wealth trapped in a house or car. Their ideal customer takes out a loan from Creditas to pay off a higher balance loan from a bank. Brazil also has an economic and regulatory environment that’s favorable to non-bank lending companies. (Real Estate fiduciary liens that let you claim and sell collateralized property without court proceedings, Open Banking, etc)

What’s different about Nigeria? 

Today, most Nigerian banks provide mortgages, car loans or salary advance. However, rates are high and the duration is only 30 days. For example, Fidelity Bank “Fast Loan” for salary earners has a 2% monthly interest rate. To contrast, Carbon, an unsecured fintech lender charges similar rates for twice the duration, with no collateral required.

Regulation makes everything worse. For the Nigerians who have assets, you can’t use those as credit. Existing secured credit options focus on financing new purchases, not securing credit for existing owned items. For many reasons, you can’t get the paperwork required to use a security as collateral, and when you can the banks won’t accept it. I haven’t heard of a Nigerian bank to take an existing car as collateral for a loan, but I’m willing to be wrong. Case in point: Standard Chartered will only accept fixed deposit, mutual funds and treasury bills as collateral.

Also, credit penetration is low. Less than 6% of Nigerians have access to credit, and this has implications for how big lenders can grow in Nigeria. In developed markets, the primary way lenders assess credit worthiness is through credit history. It becomes a chicken and egg problem. No credit in the past equals no credit today. Unless, of course, someone figures out alternative credit scoring (completely different story), or secured credit. 

IT LOOKS BLEAK, BUT WE MAY BE TURNING A CORNER

Some of the core problems are infrastructure related and Entrepreneurs are addressing these problems. In the last few years, many companies have started to build for entrepreneurs, for example solving problems in identity, payments, credit scoring and infrastructure. 

The National Collateral Registry promises to enable movable assets as credit. If it works, borrowers can register movable assets and lenders can confirm prior liens on the same asset. Unclear how successful this has been so far.

Lending depends on understanding Risk

In its simplest form, Lending depends on understanding a customer and being able to measure that customer’s unique risk perfectly. When lenders can’t accurately assess risk, the default is to assume everyone is risky. Most people only lend to friends because they have some assessment of how likely they are to pay back (credit scoring) and what their options for remediation are (zero to none). 

When done right, secured loans are lower risk and should be treated accordingly.

For more on Africa’s lending opportunity and the startups in this space. Listen at afrobility.com/lending

Nigeria is a country of extremes. It is the country of limitless tech opportunity and the country with the highest proportion of poor people. As a result, investor sentiment swings wildly. We’re either the darkest part of the dark continent, or the bright spot for opportunity. 

Today, Nigeria is in the incandescent phase aka “The future is so bright it burns my eyes”.

But why now? Headline acquisitions and fundraising are lagging indicators. The hard work of building a company worth acquiring happens well before TechCrunch. Also, Nigeria’s economy has continued on the same wobbly path as it has for the past decade. Something else is going on. 

Acquisitions and Fundraising news are smokescreens

The last 12 months have been amazing for the Nigerian tech scene. Paystack was acquired by Stripe. Flutterwave reached unicorn status. Jumia went from $3 per share in April 2020 to $62 in November of the same year. 

But these stand in opposition to Nigeria’s economic reality. The fundamentals of the economy are in free-fall. Nigeria’s jobless rate has quadrupled over the last 5 years and today, less than half of Nigeria’s labor force is fully employed. Violence and insurgency threaten lives and property in Nigeria’s north-east. It is harder to start a business in Nigeria than in Egypt, South Africa, or Ghana. Permits take months instead of days, and incoherent government policy is a cloud over startups that could rain any moment. All this as the population inches towards 300 million by 2050. 

Despite these dire circumstances, there’s still opportunity. 

What Nigerian entrepreneurs are doing differently

Successful Nigerian entrepreneurs are fearless and many go against conventional advice. They try new business models and are starting to attract capital on their own terms. 

THEY BUILD FOR BUILDERS

Businesses are the primary customers for 4 of 5 Nigerian startups in Y Combinator W21. This is also true for the W20 batch. 

These B2B startups are important because they make entrepreneurship less risky. The businesses use the startup’s services to make money so they are easier to get and keep. Also, the more customers you get, the less sensitive you are to individual businesses.

Because businesses use the startups to make their lives easier, they are easier to acquire and retain. Today, Paystack and Flutterwave make it possible for businesses to pay and get paid. They eliminate an important business risk for other businesses. These B2B startups also enable new business models that were previously impossible. Many of the savings, stock trading, and food delivery apps are only possible because of these B2B companies that handle, say, payments or identity verification. 

These B2B startups provide the building blocks for other entrepreneurs. Over the next few years, the best companies will build for other builders. 

THEY BUILD FOR THE CONSUMERS IN THE MIDDLE

Nigeria’s upper class is minuscule relative to the rest of the population. Yet, because of the size of the country, the middle class remains a significant market. There’s not enough of the upper class to build a big consumer business and the lowest income classes are either too poor or too expensive to serve. The opportunity is in the middle class. These customers’ needs are not met by the current solutions, and the high-end options are out of reach either because they’re too expensive, or for other structural reasons (e.g., I can’t use Venmo for P2P in Nigeria because licenses)

The startup that comes to mind here is uLesson. Their product, education, is one that most want. Nigeria’s upper middle class can afford to send their children to the best schools. They hire private tutors for after-school classes. The rest of the middle class have to make do with the available schools and find ways to supplement their children’s education. For these customers, uLesson provides an affordable, technology-enhanced supplement. They price this product on the middle-class’ willingness to pay, and have recently raised prices to reflect this (and of course, to cover their costs). 

See this HBR article for more on building for customers in the middle. 

THEY BUILD FOR THE INTERNATIONAL CUSTOMERS

This is more relevant to services or software. Services are unrestricted by physical borders, and in most cases have near-zero marginal costs. 

This is already happening. Startups like Moneymie are going after the immigrant population using remittances and money transfer as a hook. Individual creators are selling NFTs and making a lot of money. Sight unseen, a Nigerian produced a billboard-charting song for Tekashi 6ix9ine.

Startups that serve international customers develop good habits as these customers tend to have a high quality bar. At the same time, the Nigerian entrepreneur can provide these services at a much lower cost with better margins. Shola Akinlade, Paystack CEO, built and sold a software solution to 200,000 international customers before starting Paystack. The best customers for Nigerian entrepreneurs may not be in Nigeria or even Africa. 

Whatever happens, entrepreneurs need to keep building. Nigeria’s collective and individual success will have to happen despite the current macro trends.

Nigerian startups have a person. This person signs the transactional and follow-up emails, follows up with customers on promotions and acts as the virtual face of the company. These are actual people, not manufactured names for a Helpdesk request. For example, Uche is the city manager for Taxify in Lagos and the other people work with their startups. This would be like in 2011, when Uber launches in New York, and all the city manager signs all receipts and ride confirmations.

This is very different from the asset-light, “Here’s a link to our help page” approach to customer service of western tech companies. These Nigerian startups discard the corporate veneer to become human, while the startups in the US are more likely to want to resemble a corporation.

In Nigeria, people love to complain about these accounts. They send too many emails and are too aggressive. However, they perform an under-appreciated function: They humanize the consumer startups that want to change human behavior. You may not trust a new online-only bank, but maybe you will trust Nosa from Kuda. This meets the customer expectation that there’s someone you can call when things go wrong with this new product or service.

This is just one of many ways that building a tech company in Nigeria is different from conventional Silicon Valley.

How much should I charge Nigerians for my product

Pricing products for the mass market

There’s a limit to how much consumer products can charge users and remain widely available. Many technology companies charge the user nothing, or pass on the costs to the seller or interested third parties. Amazon offers users free shipping and charges sellers to reach customers. Google charges nothing to store your photos but they charge businesses who want to reach you. These models work because the customer has spending power independent of the service they are currently using. Also, businesses know they can meet their business outcomes if they can reach the company’s consumers. Taken to the extreme, WeChat and Alibaba, the biggest Chinese tech firms, own the user, and support a network of services to make money from the businesses who want to reach their users. The business model varies from advertising to transaction fees, but the principle is the same: I have the users, and you must pay me to reach them.

These models hit a wall in Nigeria and many other African countries.

Why this doesn’t work in Nigeria

Most people in Nigeria have too little spending power, and it is difficult to meet a price point that creates big and build a profitable business. Take Facebook for example. In the “Rest of World” which is mostly African countries, Facebook made Average Revenue Per User (ARPU) per quarter of $2.77 in Q4 ’20 vs $53.56 in the US and Canada. The low ARPU is not due to a small number of users. Given Facebook’s revenue is from advertising, lower ARPU means fewer businesses are willing to pay to reach customers in these “rest of world” markets.

Africa’s telcos are similar. MTN, Nigeria’s largest telco, has an ARPU of N1,467.02 ($3.5) per month as at Q3 2020. In contrasts, telcos in the US hover around the $30 — $50 range. In many African countries, telcos are the definition of mass-market and have tens of millions of customers. Yet, the most successful of them have lower ARPUs, in part due to the lower spending power of the population.

In addition, the African middle class is not as big as many $JMIA bulls think. In Nigeria, half of the population lives in extreme poverty, in absolute number more than any other country in the world. Also, those who can are [emigrating in droves], further hollowing out the middle class.

What does this mean for my business?

For Nigerian businesses, there is a trade-off between being big and profitable. Few businesses can be both. One isn’t better than the other, but it is important to make that choice early and with intention. Those who choose to be profitable must raise prices, as Netflix continues to do. Africa’s operational complexity means that it is difficult to reduce costs. For example, uLesson recently raised prices 40% after lowering them [a year ago].

For business owners, how lucky do you feel? How much real or perceived value does your business provide to users? Your revenue is competing with your customer’s food, housing and mobile phone budget. Are you providing commensurate perceived value compared to those things? This is hard to do for any business.

Because the middle class is so small, the businesses that do well will focus on non-consumption. As a businessperson, how do I provide my product in a way that brings customers who did not use this service before?

Choosing to be big is fun. It also supports a strong narrative which makes it easier to raise money. However, there are no benefits of scale that can solve structurally bad unit economics.

Many emerging markets founders have to make a choice between big and profitable. Most choose to be big. The next time you look at a business or startup idea, ask the founder how she will choose between being big and being profitable.