Last week, in the first edition of a four-part series, Sw7 co-founder Keith Jones looked at the Services Trap, and how a lack of funding drives startups towards services. In the second installment below, Jones takes a look at the market drivers at a macro level.
Firstly, we are going to split the market into local and global opportunities. We are encouraged by the best practice accelerators to solve a local problem, or one that you have a deep understanding of. For the purposes of this article, I am going to consider the global stage as the normal market, one that is being analysed by cleverer folk than I. We are going to discuss the local opportunities as those that are specific to Africa, or African in nature, which could be aligned to pan-African opportunities or be positioned to scale into the emerging markets, or the “majority market”, as Philip Kiracofe, a United States (US) venture capitalist (VC), calls it.
What defines your business is how you are innovating, and the market you are addressing, whether B2C or B2B.
Innovation is done in the following ways (thank you Clayton Christiansen of Innovators Dilemma, for the foundation):
True innovation – you build or create a technology or process that is truly new.
Incremental innovation – you take an existing process or technology and improve on it.
Sector innovation – you bring technology and process from one market sector and either combine it or introduce it to a new market.
Market innovation – you are either first to market in that market, or you have found a new way to access the market that is faster and more cost effective than the alternatives.
To create a high-growth businesses, the market needs to be both accessible and addressable. The rate at which the market is innovating is driven by these two factors. In Africa, accessibility is driven exclusively by smartphone adoption; we are a mobile first economy. Once the market is accessible, addressability, how you can reach out to and connect to these users, is the next challenge.
The lack of accessibility and addressability of the majority market is The Missing Middle in Africa. They can’t be found or reached digitally with any ease and this prevents the creation of the high growth businesses we are seeing in the developed markets. As we are a mobile first market, we have to build on device, which brings the higher costs and complexity associated with building a multi-channel product.
A significant point of departure, here, is the mobile first statement. The developed markets bring a web, desktop, tablet, phone mindset with them. Everything they build is based on this premise. When we say Africa is mobile first, what we really mean is we are mobile only, and the on-device app must be useful when used in the context of helping the user interact with the bricks and mortar world they live in. Andre De Wet, one of our mentors, articulates this point more eloquently that I could.
The large incumbent players in Africa, the banks, telcos and retailers, have access to the majority market in a way that no one else does. These businesses would be the ideal partners to slingshot innovators to the top of the market. The problem is they can’t, they don’t know how. They will take the innovators in to nine to twelve month sales cycles and then take another year to roll the product out. As an innovator, the majority market is either inaccessible or too expensive to access directly.
The consumer base is not tech savvy and has a low disposable income, so the revenue per user (RPU) will be low. Many people have figured this out and realise they have to go for the top of the market where the RPU is higher. I believe that at the top end of the market in countries like South Africa, Kenya and Nigeria, we have one of the most stalked consumer markets on the planet. This makes these users less open, more fickle, and even harder to engage with than in developed markets.
The large incumbents have a stranglehold on our market at the moment, but the good news for entrepreneurs is that the rate of adoption of smartphones is outstripping the rate at which they can innovate. The gap in the market is opening at the rate of smartphone adoption. This is the opportunity we have in Africa, to engage with a new community of users that the developed markets do not understand in a market they don’t know how to access.
If you want to build a high growth business in Africa, you need to be a very strong market innovator, or you need to look at the B2B market. If you go B2B, the chances of success are much higher, but the opportunity to have explosive growth is diminished. Your growth will be limited to how quickly the large players can adopt or scale your offering. The Devil and the Deep Blue Sea.
If you are positioned to lead a niche as the market lifts, it probably won’t happen. The market is opening up in fits and starts, which means that if you are waiting for your niche to flip, you will probably run out of runway before it does. Your strategy needs to include a plan of how you are going to go and get your market, rather than waiting for it to come to you.
The biggest factor that drives how much market share you need is the definition of success in an African context. There is no safety net in Africa, and success for many is the ability to put food on the table, create jobs, live well and offer their children a good education. The best chance an entrepreneur has of doing this is by bootstrapping a geared B2B business. World domination is a great concept, but the culture of ‘good’ failure has to be approached with caution in Africa. The first question that has to be answered is “Why are you doing this and what do you hope to get out of it?” The second is “What are the consequences of failure?” The West encourages a high risk, high return model, jump right in and you’ll figure it out. Driving this into our markets without any understanding of the consequences is irresponsible.
If you want to be a high growth business in Africa, you need to have a heavy dose of market innovation in your offering. The opportunities in the B2B market will increase as the larger players fall further behind the innovation curve, but their ability to absorb and scale new technologies is unlikely to keep pace.