Thoughts on African Ventures and the Way Forward

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Owolabi Olatunji is co-founder and chief executive officer (CEO) of Nigerian real estate marketplace Hutbay. In this exclusive guest post for Disrupt Africa, he takes us through his experiences of running a business in Africa and the future for startups on the continent.

“Their dreams were stronger than the obstacles in their way.” – Jim Rohn

The startup ecosystem in Africa in the last five years have experienced meaningful growth. Comparing the last two years, according to VC4Africa, total invested capital more than doubled from US$12 million to US$26.9 million. We now have more Africa-focused investors, more accelerators/incubators and entrepreneurs that are frontally taking up the challenge of building tomorrow’s Africa’s corporate titans. Governments in several African countries, from Kenya to Nigeria up to Egypt, are also not relenting in supporting and making policies that encourage technology entrepreneurship.

As we forge ahead in the quest to build legendary companies from scratch, companies that solve fundamental problems in Africa, there are mistakes we can easily avoid by studying the ecosystems and case-studies of our western and Asian counterparts who obviously are pioneers in startup entrepreneurship. Every market is different, just as every climate is different. But the fundamental law of nature is still applicable everywhere.

On Team Building

“A single tree cannot make a forest”. Nothing great can be achieved without collaborative efforts. Tomorrow’s legendary companies are today’s startups that appreciate the value of collective efforts and know how to harness it.

But a startup visionary just starting out often do not have the capital to attract talents to its cause. This is where the concept of co-founders come into play. To seek for someone or people who have the needed skills and attitude and are ready to “partner” with you to move the business from zero to one while they themselves earn next to nothing in the meantime.

However, finding that right partner or co-founder is not as easy as it sounds. A right partner is someone with the perfect skill-set and the right attitude who will work and persevere with the main visionary to ensure that the business breaks even. “Skill set alone is not enough. If you must start with co-founder(s), make sure you have been friends for many years”. For the very strenuous nature of startups, the long time it may take to hit key milestones, the challenge of maintaining a steady cash-flow, can put any partnership into serious strain. One of the major causes of startup failures is founder’s implosion.

Founder’s implosion is like swallowing cyanide: you die almost immediately. It is therefore very pertinent that much thought is given by African startup entrepreneurs into who their co-founders will be, if any at all. Beware of founder’s match-making event, they don’t work. “Founders should share a prehistory before they start a company togetherotherwise they’re just rolling dice”. Too many founders is bad for startups. “The best scenario is two co-founders; the next best scenario is a solo founder. The worst scenario is bad co-founders” (Paul Graham).

Beware of part-time or remote employees as well; avoid them in the early days. “As a culture is still gelling, it’s important to have everyone in the same building”. Remote employees add to the communication overhead which is not a good thing for a young startup.

Above all, avoid hiring “professional managers” to run your startup, at least in its early stages. This “will lead you to the graveyard”. “You should not put anyone between the founders and the users for as long as possible – that means the founders need to do sales, customer support, etc” (Sam Altman).

Product Development

China and Russia have shown that it is possible for indigenous startups to compete with their western counterparts and win. African startups should also dominate their own markets, at least. The days of a tiny (overhyped) US startup with office 12,547 kilometers away in Palo Alto dominating our local markets and getting all the juice should be over.

The way forward for African startups is to innovate aggressively, iterate faster and quickly adopt latest technology. The African founder that have it ingrained in his heart that his products will not be inferior to foreign alternatives will have ready adoption from local markets and could eventually dominate.

Of course capital and patience is needed to build an awesome product. Investors in African startups should encourage founders to come up with great products as they iterate away from their MVP. This will require more capital investment and time. But it will be for the good of all. Without an awesome product, spending money on ads and marketing will be a waste or not efficient as little will convert.

On Business Model

As we set out to shake up industries, we need to evaluate what we truly are capable of; there is limit to what technology can do after all. A lot of industries in Africa is overripe for disruption; others are not. Choosing what to disrupt should be like choosing where to fight the enemy as a war breaks out. More often, the place where a battle occurs is a great determinant as to who will win the battle. The US army, despite their superior force and equipment, had a very hard time defeating the Vietcong in the jungle of Vietnam. A lion, as strong as it is, will be shred into pieces by a great white shark if the lion dare ventures into the open ocean.

Disruption is good if it doesn’t lead to direct or fierce competition with powerful elements in the society or established players. “Competition is bad for startups and disruptors are people who look for trouble and find it. Disruptive kids get sent to the principal’s office. Disruptive companies often pick fights they can’t win” (Peter Thiel).

Our business model must not pitch us directly against the government or established players except when we are very sure to have the upper hand easily. For instance, Napster was a disruptor; LimeWire was another. But they chose the wrong thing to disrupt, they got their business model wrong; they chose the wrong battlefield. Rather than work with the music industry and record labels to help use technology to distribute their contents more efficiently, Napster and LimeWire sought to bypass the music industry in the distribution channel. The result is the death of these once-a-promising startups.

But consider Pandora, iTunes and Spotify. They are also disruptors. But they are disruptors helping the music industry and record label to better distribute their content. The result is a win-win for both parties.

African startups must be careful not to repeat the mistakes of the past. Choosing the right business model is as important as the product itself.

Branding and Distribution

Africans are great consumers of western and Asian (especially Japanese and Korean) products. In Nigeria, we often prefer these foreign products to locally made alternatives. Why is this? The answer is simple: either the foreign product is of better quality or it is because it has better branding.

Good branding alone is not sufficient. Superior product always bear a mark of quality and good branding. African startups must pay closer attention to branding. From logo, to slogan to user experience to customer service, careful thoughts must be given to ensure our products and company stand out. If we pay great attention to both the contents (products) and its container (branding, packaging), our people will use our products and services, indeed prefer them to foreign alternatives. Alibaba, Baidu and Tencent did this in China (Government policy aside, these were good alternatives to their western alternatives), Yandex and Telegram own their markets in Russia while Flipkart, Ola, Inmobi owns their own turf in India as well.

African startups should own their own turf too. For instance, Hutbay should own and dominate the online real estate space in its own markets and Paga should dominate the online payment space in its own markets.

Distribution is also very key. Branding is not enough. Startup entrepreneurs must look for cost-effective ways to push their brands out in front of the right consumers. Organic growth at the early stage may not be enough but can be very helpful as it can provides an early pool of beta users to your products or service and from their feedbacks founders can iterate their product until certain percentage of their users are comfortable with the product. Growing organically also helps startup test and fine-tune their business model, ensure they get it right, before going all out.

On Revenue Model

The ultimate objective of any startup is to have a growing net revenue and eventual profit as soon as possible to be able to sustain the company in the long run. This is achieved by creating something of value (software tools, eyeballs, users, etc.) that the market is willing to pay for.

Most non-tech businesses generate revenue almost from year one. That they could generate revenue quickly doesn’t make them great businesses. “A great business is defined by its ability to generate cash flows in the future.” These non-tech businesses are able to do this because their own process of creating value and monetizing it is very short. “Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue. Most of a tech company’s value will come at least 10 to 15 years in the future.” It is a geometric revenue and not a linear revenue for startups.

And this brings us to what kind of revenue should African startup pursue. Google, Facebook, YouTube, Instagram are instances of startups whose net revenue were in the red for years before they started pushing for real revenue. These companies first differentiate themselves by building a strong product that has so much value and that resonates with their targeted audience; once they reach a particular threshold of user satisfaction, they then started pushing for revenue. Africa’s legendary companies of tomorrow are those who are creating so much value now that can easily be monetized in the future

The key is to build something of great value (and this takes time and lots of capital), start capturing the value we create and keep building more value and then capturing more of this value.

On Spending and Frugality

“Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower” – excerpt from Sequoia’s website.

African founders must be careful, in fact, they should resist any urge to spend lavishly especially in the early days of their startup even if the money flows easily. Lavish spending breeds a culture of indiscipline and the early days of a startup are very crucial for the company’s DNA is set in its early days. Lack of financial discipline will kill you faster just as lack of money would. If you are in doubt, ask the founders of Pets.com and SearchMe.

African founders should spend money on what are materially important to the success of their startup, the perfect domain name or the most lavish office space, however, may not be one of them.

The perfect domain does not guarantee success. VacationRentals.com was purchased for $35m in 2007. It has not helped the company in any way to be near Airbnb in market share. Color.com was bought for $41m in 2010, yet they are not even among the top 10 photo-sharing app before they closed shop. African startups must avoid spending money on the wrong priorities. Any easy-to-spell, easy-to-pronounce domain will do; what matter most is the product and distribution.

“Hire people with frugal mindset. It is not enough if the founders practice thrift”. You should hire people who are simple, who consume less and enjoy their work.

One of the benefit of frugality in startup is that it helps founders avoid being at the mercy of investors. The other benefit is that it forces you to be disciplined in putting resources into efficient use.

Funding and Investors

One of the most important ingredient for success in startup is proper funding. This is the greatest missing piece in African startup landscape. Funding is a big challenge for African startups and it is likely to remain a constraint.

It is true that angel investing is on the upswing across the continent, “where a few committed individuals are doing their best to initiate the market”. But this is not enough to feed the growth African startups need. VC funding is even rarer. “The African markets are driven by the old school VCs, where they need an Income Statement to engage.” This is largely due to African investors not having the experience in financing tech startups; no last mile skills.

Capital is crucial if we are to fully realize the potential of African startups; real capital is needed. There is little, very little that a $10,000 or $50,000 financing round will do for a startup to move from product development to product-market fit to considerable revenue. Startup funding in Africa needs to cross to the 100s of thousands of dollars range even at the seed level.

Lack of funding, however, should not discourage founders from pursuing their dreams. There is light at the end of the tunnel. Founders should practice frugality, hire slowly, fire fast and try to make some revenue.

It is true that a founder can fund his/her startup by working on a side-project, but this has the downside of taking away the much needed close attention from the startup. Founders should avoid it as much as possible. One step at time, we will get closer to the promised land. As long as we are moving in the right direction, no matter the speed, it is still progress.

African founders, however, should be very choosy in the types of investors they bring on-board. The best tech investors are those who have started or worked with a successful startup in the past. You need investors who understand what it means to go from zero to one and are patient and supportive to help you weather the early days. Beware of the “spray and pray” type of investors, that is, investors who put little money in tens or hundreds of startups with the hope that a sizable portion of these investments will succeed and give them the return they badly desire. The intangible part of investment is as important as the tangible part.

Founders should also beware of losing too much equity or losing control in the early stage of their venture. African investors have a strong penchant for wanting to be in control, desiring large equity at terribly low valuation with terrible anti-dilution provisions. But this is counter-productive and will hurt the startup and the investors and founders may end up with nothing in the long run. Founders control is very vital for a startup success.

76 percent of [Unicorn] founding CEOs led their companies to a liquidity event, and 69 percent are still CEO of their company, many as public company CEOs. This says a lot about these founders in terms of their long-term vision, commitment and their capability to scale from almost nothing in terms of money, product, and people, to their current unicorn company status.” – so who should control the company? VC or founder? Depends if you are building a unicorn or a small niche player.”

For big startup success – founder control is key.

All Happy Companies Are Different

The path to becoming an enduring business is different for every successful startup. There is no fixed pathway to startup success. African founders must chart their own course and may not necessarily clone or copy the model of western companies.

Few days ago, the Australian startup, Atlassian, went IPO. It was a resounding success. Atlassian chose a totally different path to funding, marketing, etc. than what was obtainable in the US preferring to focus squarely on product and development and sales via their website. That model, at least till now, have worked leading to a public valuation of over US$5 billion.

African startup ecosystem is still at its infancy but we can speed up its development by not repeating the mistakes of our western/asian counterparts.

Now is the great opportunity to give birth to Africa’s Microsoft, Amazon, Google, eBay, PayPal, Zillow, Airbnb, Uber, Instagram. The founders of these companies will be those who avoid making the same mistakes that contributed to the failure of many dead startups. The investors in these companies will be those who “partner early, [are]comfortable with the rough imperfection of a new venture [and are willing to]help founders from day zero, when the DNA of their businesses first takes shape.”

Good morning Africa.

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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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