In 2016, Africa Internet Group (Jumia’s former parent company) raised $493 million at a $1 billion valuation making it Africa’s first tech unicorn. Jumia comprises 10 businesses (sharing the brand name) spread across 23 African nations. The company which launched in 2012, generated about $234 million in revenue in 2015, a 265% increase from the previous year. It also recorded a 41.8% YoY growth in gross merchandise value in 2017 despite its profitability challenge.
When Jumia joined the unicorn club in 2016, 34 others also joined with more than half of them being US companies. CB Insights’ data shows that there about 258 unicorns globally. There has not been another billion dollar tech company in Africa since Jumia, making the ecommerce company the only one on the continent. There are however two other ‘non-tech’ unicorns in South Africa, Promasidor (food) and Cell C (telecoms). While fintech company Interswitch is expected to attain this status when its much anticipated billion dollar IPO happens, it is uncertain when it will. What will it take to create another billion dollar tech company in Africa?
First, we’ll try to probe whether African unicorns matter.
Do African Unicorns Matter?
David Hsu (Management Professor at Wharton) commenting on Jumia’s unicorn achievement put it this way: “It’s a highly visible, symbolic and substantive marker”. “It shows that there’s enough by way of demand, as well as a platform that [AIG] is able to put in place to justify that marker.”
Another Wharton Professor, Katherine Klein sums up it: “The very label of the first unicorn can convince local and foreign investors that this is possible”. “We should see more capital flowing in, slowly but surely.”
Having more billion dollar tech companies is a signal to investors about the potential of the market thereby increasing the amount of funding deals. It’s also an invitation to global businesses (although there are already some of them) whose services startups require to invest in local talent and infrastructure. Having said this, African startups should not be fixated on attaining unicorn status at the expense of building sustainable businesses. There are a good number of gazelles across the continent which should really be the main goal for African founders. The continent also needs zebras, a fairly new phenomenon.
So why have we not had another billion dollar success story?
The Familiar Problems
First, tech entrepreneurship is still relatively new in Africa when compared with more mature markets like the US. You can trace tech entrepreneurship in the US as far back as the 70s (or even earlier) when Microsoft and Apple were founded. It wasn’t until the 2000s that tech entrepreneurship started to take off in Africa.
Then there are the very familiar problems of poor infrastructure, difficult policy environment and limited access to capital. These problems are some of the major barriers to scaling and innovation across Africa.They are well-known (and fairly so) as you’ll come across them in many opinion articles and research papers. A 2018 Google-sponsored reported on tech entrepreneurship in Nigeria highlights these problems stating that more than 50% of founders have to bootstrap their businesses. This very limited access to capital especially at later stages is the same story across the rest of Africa. Lexi Novitske, Principal Investment Officer at Singularity Investments believes that there can still be another tech unicorn (like Jumia) irrespective of these problems. “This will happen (we’ll see another billion dollar company) despite the slowness of government to create a conducive environment for innovation (I applaud their efforts, but they just don’t quite understand yet), despite the continued complaints about lack of capital in the market, and despite (or likely because of) underdeveloped infrastructure.”
We are already seeing founders side-step infrastructural challenges to scale their business. For example, it is not uncommon to see e-commerce startups owning their own motorbike fleet in order to circumvent logistics problems. This leads us to another obstacle to creating the next African tech unicorn that is rarely discussed.
Failure, Risk Taking & Ambition
There seems to be a fear of failure and lack of experimentation within the African context. This is quite understandable because the cost of failing can be very devastating financially, emotionally and professionally. The African startup ecosystem needs to embrace failure and experimentation so there can be more innovative local solutions to global problems which will potentially create the next tech unicorn. Neku Atawodi-Edun, Country Director (Lagos) at MEST Africa put it nicely in a recent article: “Our local ecosystem must also accept that failure is very much part of this game, and in fact the more a person has failed; the likelier they are to succeed.”
In elaborating some more, Neku said Silicon Valley has realized that many successful founders are not first-time successes so the system encourages them to remain within so such founders can create a potential unicorn by leveraging their experience. She contrasted what obtains in the valley to the African context: “…. In Silicon Valley, the culture accepts that 70% of start ups fail, and the ecosystem has thus been designed to mitigate the risk of failure.” In clarifying further she said, “This is one of the “secrets” of Silicon Valley- the awareness that real innovation cannot be achieved without failure!”
Lexi Novitske confirmed the importance of risk taking among founders on the road to creating Africa’s next billion dollar tech company: “Founders need to take big risks – not building another business that replicates others, not by adding an additional feature, but by having the ambition to create a new space that consumers didn’t know they needed (and likely that investors won’t believe exist!) AND by reworking a large, legacy, sleepy existing industry to be able to efficiently tap a mass consumer base through technology. Many of the entrepreneurs that take this leap will fail, but the one to get it right will create a billion-dollar business.”
It is clear that this problem cannot be left to founders alone to tackle, with the right support from angel investors, mentors, VCs and policy makers we’ll see an increase in the appetite for risk-taking and experimentation.
Market Potential & Business Model
There are a few lessons from the Jumia story that are worth noting for startups to achieve a similar feat. One important lesson is its aggressive pan-African expansion within a short time of its existence which definitely fueled its growth. Potential unicorn Interswitch also has a pan-African growth strategy. Startups need to build with the African audience in mind even if they start locally. More founders are now taking this into consideration but it is worth emphasizing. In Lexi’s words “I believe that company (next tech unicorn) will first focus on Nigeria, but will be pan-African, and even global.”
The market is just not large enough in many African nations to fuel growth. Keep in mind that average internet penetration in Africa (2017) is 35% compared to the rest of the world at 58%. Although some businesses might suffer currency losses especially if their costs are in USD, serving multiple African nations helps mitigate exposure to market instability. As an example, after Konga raised its Series C funding in 2015, its initial investor Kinnevik Capital had to lower the value of its share in the company from $48 million to $12 million due to changes in Nigeria’s currency environment. For good measure, one should point out that lack of funds is one reason why some founders can’t scale across Africa.
Another good lesson from Africa’s first tech unicorn is its diversification strategy. Its strategy was both vertical and horizontal. It diversified into different sub-sectors (food, travel, jobs, cars, housing etc.) and created products (payments & logistics) to supports its growth. While its diversification strategy has not been without tough challenges, it’s still worth learning from. Interswitch also has a similar approach with its suite of fintech services (payments infrastructure, transaction processing, financial inclusion etc.) and also vertical solutions for different industries. Founders will need to ask the questions, what market or customer segment are we yet to serve? Whose needs can we also meet with the resources we have?
While the goal is not to jump on the unicorn bandwagon or simply stake a claim to the name, there needs to be a continuous discussion on the path to building big tech businesses in Africa. Doing this will bring up executable solutions that will make tech entrepreneurship a worthwhile adventure for founders, investors and all stakeholders. Founders will also need to keep in mind that the main priority should be to become gazelles before setting sights on the path to unicorn status.