Why B2B beats B2C for early-stage African tech startups

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South African insurtech startup Vimosure launched last March with a business-to-consumer (B2C) approach, but soon pivoted, switching to business-to-business (B2B) in November.

Vimosure, a mobile marketplace application that initially targeted individual consumers, is not the only African tech startup to have struggled with a B2C model in the last couple of years. Co-founder Refiloe Matlapeng said the startup had noticed a number of obstacles when it came to making a success of B2B, most notably what she called the “loyalty loop” and attracting new customers.

“Consumers are habitual. Any new product to them means more time, more effort, and more money. Breaking that loyalty loop was difficult because in this age of social media, consumers are more inclined to their loyalty with the old brand,” she said.

“As a tech startup building a new mobile app product, at one point you will have glitches. Impatience is one of the things consumers had whenever there was no immediate delivery of the product or delivery in a way they did not expect. They stopped engaging. Or they visit the platform once and never again maybe because they did not understand something there.”

Getting enough traction is a major challenge for B2C startups.

“In most cases, there is no point in monetising a consumer product unless there are hundreds of thousands of users. It just did not make sense in numbers. Plus, consumers are increasingly habituated to getting some products for free from companies,” said Matlapeng.

On the other hand, Vimosure has seen immediate benefits from its pivot to a B2B model, which he said is lower risk and means it collaborates rather than competes with incumbents.

“It allows us to scale up our volumes quicker because we can make use of existing distribution networks from companies. It also allows us to focus on our core strengths – building great platforms,” Matlapeng said.

“From the perspective of the company, it gave them quick innovation, cheap services, and made them better than their competitors. We no longer came from an angle of disrupting incumbents, but being their partner. Companies can afford to give freely in order to acquire more customers.”

A common issue

Vimosure is not the only African tech company to have had these issues, and sought refuge in B2B business models. Founded in 2012, Gloo.ng specialised in delivering affordable supermarket goods to the doorsteps of clients on a same-day basis. Earlier this year, however, it swapped e-commerce for e-procurement, becoming Gloopro in a move founder and chief executive officer (CEO) Olumide Olusanya put down to the long runway needed to make a success of an e-commerce business on the continent.

He said execution-wise B2C has many more moving parts that need to be flawlessly executed within a small window of opportunity, while with B2B there are fewer aspects that you need to succeed at to win.

“In addition, the jury is still out, in the light of the poverty numbers being released for Africa, on whether there is indeed a consumer base large enough to support venture-scale tech-driven B2C businesses. Recent flameouts in the past two to three years in the B2C space seem to suggest otherwise,” Olusanya said.

Another recent pivoter is South African ed-tech company Tuta-Me, initially an “Uber for tutoring” but now a B2B company offering online learning programmes and allowing corporate entities to sponsor tutoring sessions for bursary students. CEO Dylan Hyslop said the startup had seen the merits of focusing on fewer clients with bigger impact.

“B2C needs to be done at much larger scale; it takes much longer to get to a sustainable place, which inherently needs more funding and runway. It is also often much more competitive, and is heavily affected by changes in the economy, such as inflation rates and costs,” he said.

“B2B business can generally reach a sustainable level much quicker and easier by simply having one or two larger clients. In B2C your scale point is much higher.”

Velani Mboweni is CEO of the Cape Town-based LÜLA, which has carved out a niche for itself with its app that connects corporate commuters to private shuttles on their way to work. LÜLA was yet another business that began life with a consumer-facing model, but changed approach. Mboweni said B2C models were dangerous as the relationship with consumers usually does not involve a contract with a set term period to which startup’s can “hedge” your revenues against.

“Moreso, B2C requires a lot of money to support a salesforce, and also requires a lot of resources to deal with customer support. In B2B, you usually have a relationship or account manager and a single point of call,” he said.

“B2B models allow you to sell or execute easier, without having to build a massive salesforce, and it usually comes with better payment terms. We found that our solution may have people as the end user, but the real value proposition spoken was helping companies quicker.”

Downsides of B2B?

As Tuta-Me’s Hyslop notes, however, “nothing is ever perfect”. Even B2B models come with their own challenges and problems that need to be overcome, and pivoting is not a silver bullet.

“B2B generally has very long sales cycles, so from meeting a client to actually getting paid for the invoice can take up to 18 months depending on the deal. It is also often very hard to get your foot in the door as a small player,” Hyslop said.

Mboweni agreed that sales cycles are longer, with big firms having procurement procedures and logistics that can easily kill a startup if it is cash-strapped.

“Another negative around B2B, which is more of a risk, is that companies engage with startups and use their muscle in some cases to make the startup build specifically for the companies needs, and thus reduces the focus of a startup and results in the company being a “dev house” or auxiliary service supplier to the big company,” he said.

Startups need to take the rough with the smooth, however, with B2B startups generally deemed more investable than their B2C counterparts.

“They’re more fundable in the sense that it is easier to project revenues and discount the cash flows to achieve a more realistic valuation. There are also lower churn rates, in the sense that B2C customers can easily drop a startup faster than a company can,” Mboweni said.

Zachariah George is co-founder and chief investment officer of Startupbootcamp AfriTech, which helps B2B startups connect with corporates via its fintech-focused accelerator programme. Outspoken on the necessities of achieving product-market fit, George says B2B models are one of the only ways a tech startup in Africa can do this without spending massive amounts of money on acquiring customers.

“The reality is that the cost of acquiring customers in Africa is a lot higher than in, say, more mature markets like the US and Western Europe. Therefore, one of the only ways to lower a startup’s cost of acquiring customers is to present its solution as a viable alternative to a large corporation, like a bank, insurer, retailers, telco or technology giant, to solve its own business challenges internally or for their end customers,” he said.

“Because these large institutions have time-tested and legacy customer bases that serve as a prime distribution channel, they are best suited to offer innovative solutions to their existing – and new – customers that already buy or use a product or service of theirs.”

This is key to why B2B startups scale faster than their B2C counterparts, and George believes this is unlikely to change within the next five years.

“The purchasing power of the majority of the population in Africa is still very low, and the ability to reach end consumers directly as a startup will still be very hard, unless it is done through the channels that retailers, telcos, banks and insurers can provide,” he said.

All of which goes to say that it is likely we can expect many more businesses to follow the example of the likes of Vimosure, Tuta-Me, Gloo.ng and LÜLA over the next few years in switching to B2B business models.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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