In the first edition of a four-part weekly series, Keith Jones, co-founder of South African startup accelerator Sw7, takes us through the conditions that are driving Africa’s burgeoning tech innovation scene, what is holding it back and what opportunities exist for those operating in the space.
In Africa, we say we are different, we are not like other emerging markets and people fresh off the plane don’t seem to believe us. Well, we are different, and in these articles I am going to try to unpack what makes us different, what the barriers to our growth in the sector are, and then, in the last article, I am going to suggest some ideas as to how the technology innovation market is going to unfold.
The four articles have been broken down into The Services Trap, The Missing Middle, The Funding Paradox and lastly, The Road Ahead and the Opportunities. There is no doubt we are poised for significant growth and are in for an exciting time, how it all unfolds will be largely be driven by the legacy issues we are dealing with.
The Services Trap
The first three articles define the market drivers and the landscape, and the last defines how it may play out. The first three drivers are all interlinked, I have opted to start with The Services Trap, as the content will hopefully resonate with many of the tech entrepreneurs in the region.
We are an unfunded, bootstrapping market, in which it is very hard to get seed and Series A capital, and accessing high growth markets is both hard and expensive. Most businesses tend to either launch as, or be drawn into, services businesses, where they are doing hourly billing work to pay the overheads.
In Africa, we have a significant tech skills shortage, which has a two-fold effect. Salaries of good people are relatively high, and, if you are good at what you do, getting services work is, generally speaking, quite easy. The high salaries means the salary/billing rate ratio is not a good one, as large businesses tend to be unwilling or unable to pay significantly higher billing rates for the right quality. Services businesses need to float around the magical seventy percent billability rate to make a profit. In developed markets, the salary/billing rate ratio is better, and because we are in a capitalist system, in these markets, finding work is harder.
What this means for us is that launching a services business is quite easy, but making money is harder here as we require higher billing percentages to cover costs. In Africa, to run a successful services business and get capacity in your team to build product, means you have to become quite a good services business, which means building the business and servicing the customer has to consume all of the attention of the senior team. If you do get good at offering services and managing staff, the culture of what you do becomes embedded in your business, and switching away from this to become a product business becomes increasingly difficult.
Building services businesses as a stepping-stone to a product business is a hard choice, as the product does often not make it to market, or if it gets to market and goes to the Living Dead, where there is enough revenue to warrant not stopping the product, but not enough to build it into a viable business. This is because the attention and drive of the senior team is always on the customer and dealing with never ending staffing issues and ensuring you don’t bench some of your expensive resources.
This is not a good option, but the market offers few alternatives. The head count of the business is also very important, as there are different levels a business goes through. Each of these growth stages requires significant time, energy and resources to embed firstly leadership, then a leadership team, and then a middle management layer and so on. The skills shortage means that the energy that needs to be invested in creating and maintaining an effective team is a constant and draining challenge.
Once you get beyond a certain headcount your future is set, where you have lots of headaches and shareholder value is determined by the last six months of billing. As the services team grows, the revenue from any new product tends to pale into insignificance when compared to billing work and the opportunity cost of expensive resources on the bench.
The answer is a sound strategy and a good understanding of what kind of business you are going to create from day one and a plan of how you are going to build it. To be a product business, the most talented and senior people in the team have to be product, not customer or services, focused. The best bootstrapped businesses we have seen is where the senior developers and team are supported by billing work from a few other founders. As the product gets to market and sales increase, the team migrates across.
The Services Trap in Africa has teeth of steel, and escaping requires careful planning, high energy and a strong force of will. The problem is, running a services business is energy sapping and maintaining motivation and focus is hard. A shouting customer is hard to ignore, as is an internal staffing crisis. If services businesses think that they can get the junior staff to firstly create and then take to market, a disruptive product, this is a bit delusional. If you are bootstrapping through services, which is highly likely, the first thing to look for is the undivided and unwavering engagement and support of the senior team to the product strategy, and secondly, a clearly document plan of how the business is going to create, and then launch, their disruptive product.
Getting distracted by the first or second large customer or partner is common, and the full support of the business to a Skunk works approach has to be absolute. Every business we have worked with has underestimated the stress and angst created by shifting their business away from services to product. A lot of businesses do not have the energy or appetite for this transition.
The first differentiator in the African market is that the Services Trap is stronger here than in other markets and the skunk works approach is not that culturally embedded. The cultural approach ranges from ‘yee-hah’ to ‘it will be all right on the night’ to ‘JFDI’ and ‘make a plan’. This lack of a structured plan means that many startup tech businesses are drawn from the edge of the services whirlpool towards the headache and despair at the centre, and end up becoming the proud owner of an hourly-based, services business.