Why now is the time to support Africa's fintech growth story

I was fortunate to represent QED at the AfroTech conference – what an experience! The atmosphere was electric, with African diaspora from all walks of life (from industry leaders, entrepreneurs, investors and creatives) descending onto Austin, Texas, for a week of knowledge sharing, motivational discussions and inspired storytelling.

As an individual that has dedicated years of my career to supporting and backing African founders, I was happy to provide some insight into why I am bullish on Africa and why now is the time to consider investment in Africa.

Early innings, but trends point to an emerging growth story in Africa.

The African market is maturing and core markets (Nigeria, Egypt, Kenya and South Africa) are showing immense growth. Africa is a developing market; therefore, we are lucky to have the gift of foresight as we look to more mature markets for trends that signal market readiness and ecosystems poised for sustainable growth.    

Some of these trends include:

1) Young and fast-growing population: Africa has 1.4 billion people and a young and growing population – the median age is 18 years, and over the next 20-30 years, the population of more than half of Africa's countries is expected to double (adding another 1 billion) and will represent approximately one-fourth of the world's population. The long-term outlook of the population is promising.

2) Rapid population urbanization: Over the next 20 years, approximately 24 million Africans will live in cities annually – compared to 11 million in India and 9 million in China.

3) Rising digitization and declining internet costs: Key markets are seeing increasing smartphone and internet penetration combined with declining internet costs.

From a venture perspective, a market becomes quite interesting when we see more than four unicorns emerge. Last year alone, we saw five unicorns come from the continent – Wave (Senegal), Flutterwave (Nigeria), OPay (Nigeria), Adela (Nigeria), and Chipper (Ghana). Before that, only three companies (Jumia and InterSwitch in Nigeria and Fawry in Egypt) had achieved unicorn status.

Given my fintech lens, I’d be remiss not to point out that of the five unicorns in 2021, four were fintech companies. This excludes companies like Paystack (acquired by Stripe, a strategic) and Sendwave (acquired by WorldRemit, a strategic) that were acquired at sub-billion-dollar valuations in the year that went a long way to signal the bourgeoning growth and massive opportunity that is emerging from the continent. The fact that most unicorns are fintech companies is not surprising given the emerging nature of Africa’s markets, where there is high demand for broader access to financial services that are largely unmet.

Overall, the above trends tell a growth story coming from the African continent that mirrors the growth seen in the early stages of LatAm, India, and SE Asia.

Massive greenfield opportunities for founders up for the challenge

There are massive opportunities to build highly impactful, scalable and innovative companies within the continent. However, founders should approach with caution. Building in the continent comes with its unique challenges (I'll touch on these below) that are often tough to navigate. An implant strategy without localizing the model, go-to-market etc. is futile; but when done right, looking to developed markets for inspiration to solve everyday problems in Africa can be very rewarding.

It is also helpful that most categories and themes within various African markets are greenfield opportunities – completely untapped and ripe for the taking. Take Nigeria, for instance; credit represents one of those opportunities. The middle class is the bedrock on which economies are built; however, socioeconomically, no real middle class exists within Nigeria. To spur economic growth, it is crucial to create a middle class and leverage is the best way to give people the opportunity to climb from their current socioeconomic status into the next. But the challenge in credit is a lack of credit infrastructure – there is no real credit bureau or universal credit score within Nigeria – making it a complex problem to solve. The opportunity to build a credit business – providing B2B liquidity (revenue financing, cash advance etc.) and consumer liquidity (airtime advance, overdraft, earn wage access etc.) – is massive and would be immensely impactful if done well.

It’s not all champagne and roses

Clearly, I am bullish about the growth opportunities within the continent. Real businesses are being built across Africa – and as in other markets, some are profitable or have a clear path to profitability, while others lack a path to profitability. However, there are key challenges to scale that the market faces and any founder interested in building within the continent should be prepared to navigate.

Africa is a challenging operating environment – to name a few challenges: lack of infrastructure, uncertain regulatory environment and rising talent drain – which was highly exacerbated by increased global digitization that occurred post COVID-19 pandemic. This, combined with macro shocks and currency risk, makes for a challenging market. So how does an investor get to conviction given such challenges?

These factors are not prohibitive but more representative of the inherent risks associated with investing in emerging markets. The challenges outlined above can be solved with a keen focus on unit economics and risk mitigation. Ensuring that founders take a regulatory-first approach while executing a sustainable business model is key. Additionally, taking a conservative stance on potential FX risk and getting to conviction that a company will be able to outgrow FX slide is important.

What does cause pause is the liquidity options for these various markets – because the goal is ultimately to pull capital out and return funds to investors. Who are my downstream investors? What is my path to an exit? Can I pull my money back out of the market once I exit? These are the key questions that keep me up at night. The answers to these questions determine the stage in which we back startups.

Ideas are nothing without money

I'm often asked if too much capital has been poured into Africa, and my immediate response is, 'ideas are infinite, and money is finite.' There will never be enough money for the number of ideas being born daily within any market – whether those ideas are good ideas that will lead to venture backable businesses is a different story.

When we quickly look back at the evolution of venture capital into the continent, a mere seven years ago, capital was in short supply. There was little to no capital being poured into good ideas. The best founders and the best ideas struggled to get access to catalytic capital to prove their models. Early funders with high conviction in the market started providing small checks to tech-savvy founders looking to build solutions. From there, accelerators, angel networks and small institutionalized funds were born. Soon after, as business models became proven and companies started to grow, early stage global investors began to take note.

Fast forward to today, capital is a commodity. There is excess capital in the earliest stages. There is an overabundance of angel investors eager to pour money into ideas – good and otherwise. Founders who have seen exits or some form of payout over the last decade are providing catalytic capital to back companies at the idea stage. Moreover, global angels and angel networks eager to participate in the continent's growth story have started to pour money into the continent (most doing so without having set foot into the market). Meanwhile, institutional funds (both local and global) have emerged – separating the wheat from the chaff and funding the best ideas and founders as they scale into Seed/Series A. However, the market is still in the early innings – the path to billion-dollar exits is yet to be fully proven, and a funding gap remains in the later stage.

Just as in the earlier years when local angels and institutional funds backed companies at the earliest stages that spurred the growth of the tech ecosystem, we must have local capital follow these companies as they mature. Currently, about 70 percent of funding to African fintech startups comes from outside the continent. This is problematic for a few reasons:

1) African markets are complex and nuanced

2) The journey to scale into a unicorn is long and tortuous

3) Companies will face unique headwinds – regulatory, FX, macroeconomic shocks etc.

The journey to scale will require guidance from investors with deep networks, understanding and resilience – that have the staying power to weather the storms. Local capital is best positioned to fill the funding gap at the later stages – especially now as we work to prove this market and produce larger-ticket outcomes.

I'm not one to point to a problem without offering a solution – so in that vein, I offer up the following. There are many ways this lack of local capital in later stages can be plugged, but one way I touched on was through corporate venture capital arms. In more mature markets, corporate venture capital arms (Google Ventures, Salesforce Ventures, Citi Ventures, GE Ventures, etc.) are backing later-stage innovative startups. This is nonexistent now on the continent. Imagine a world with GTCO Ventures, Dangote Ventures, UBA ventures, Flutterwave Ventures, MTN ventures etc. This would be transformative for the ecosystem and bring local capital and local business capital into the best growth stage startups on the continent.

Investors need to bring tactical support to help companies scale and exit

Investors need to bring more than capital to the table to help African startups scale and achieve successful exits. Given the challenging operating environment and accessibility of capital – especially in the early stages – investors need to bring tangible and tactical know-how to support companies as they scale. In no particular order, I highlight key areas in which investors could help companies within the African market:

1) Navigate the regulatory environment

2) Access debt/later-stage capital

3) Strategically position for exits

4) Create a strong culture and governance structure

5) Build out a clear talent strategy to meet organizational needs

6) Build a sustainable business model to reach scale and profitability

The days of just writing checks and sitting back until an exit occurs are gone – this is especially true when playing in the later stages. Investors should prepare to roll up their sleeves and work to reach their desired exit.

Africa’s story is brewing, now is the time to position to capture growth

The confluence of all these trends signals a story brewing – a growth story that could meet and or surpass that of its more mature peers. Now is the time to take note of what is happening within the African continent and position oneself to capture growth in Africa.

Founders, if you're building a fintech to solve a real problem in Africa, be sure to connect! Investors, if you’d like to trade notes and chat about the African market, reach out!

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