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100X revenue! | July 2022

Dear Partners and friends of Raba,

We won’t spend too much time dissecting or sharing views on the macro environment. 

Why?

Because our mission is to identify and partner with highly talented people early, work closely with founders, and help tilt the probabilities in their favor to build something that matters.  Other pursuits — debating macro and forecasting interest rate moves — are valuable exercises, but they take precious time away from our core mission.  And we are not equipped to make credible predictions regarding macroeconomic trends.

While technology company valuations have shifted, it is important to step back and appreciate the innovation in the technology sector and the size, scale and profitability that technology companies have grown into.  Even the most optimistic investors didn’t project trillion dollar enterprise value companies a decade ago.

We can’t predict what’s in store for the next few months and quarters.  But what is undeniable is that software and the internet are eating up whole industries.  A proxy for this ubiquitous transformation are cloud computing businesses — think of cloud computing as the utility that technology companies depend on to power their businesses.

Here are some stats:

  • Amazon Web Services , growing 37% YoY generated $62 billion in revenue in 2021
  • Microsoft’s Azure , growing 50% YoY generated $60 billion in revenue in 2021

Neither of these businesses existed 20 years ago!

Business model quality matters!

It is human nature to form heuristics to simplify complexity and help us make decisions.  For investors, heuristics serve as reference points and mental models, and new standards often emerge.  One new rule of thumb established in the last few years is the “100X club,” which sets multi billion dollar valuations at 100 or more times run-rate revenue (right or wrong, this heuristic never quite made it to our part of the world).  One driver of this valuation methodology was the scale and size technology companies have grown into, especially software and internet models.  Other drivers include accelerated growth scenarios and the speed of capital deployment — as the perceived very best companies were growing fast, it was a bet on growth.

The mathematical justification was that growth of 200% (or more) per year meant that in two years time, the company would be valued at 10X revenue.  And as the availability of capital for private companies grew ($330 billion was invested in the US last year according to Bloomberg, up from $32 billion in 2010), the explosion of venture dollars put upward pressure on valuations.  Investors wanted to own part of the perceived very best companies.  In many of these cases, very little fundamentally changed in the business between rounds — only the valuations went up! 

Hyper growth became a rationalization for almost any valuation.  It is important to note that not all growth is created equal — both the business model and revenue quality are critical drivers of long-term value.

Read on…

As a comparison, historically, only the highest quality technology companies were valued at 10X revenue (for our younger readers, a 10X forward multiple was rarified air reserved for only the very best businesses).  The 10X club was very selective: businesses with high margins (80%+), recurring revenue streams, network effect models, and fast (and efficient!) growth.  Revenue multiples, while not perfect, were used as valuation markers because software companies have near perfect gross margins — build the first copy and distribute digitally with near zero marginal cost.  As founders took on other industries, especially physical world industries with physical cost of goods sold, these hybrid companies inherited the supply chains and margin structure of the industries they set out to disrupt.

Amazingly, similar revenue multiple valuation heuristics were applied (it was myopic focus on revenue only) and didn’t account for underlying business model differences.  Lower margin, more capital intensive businesses are not bad businesses, they can be incredible businesses — they just shouldn’t be valued like software companies.

State of affairs in African tech funding...

The African venture industry has made great strides over the last five years, with several new funds dedicated solely to Africa (like the $200M Norrsken22 Africa Tech Growth Fund that our friends are managing).  Our conservative estimate is that another $1.75 billion in capital will be allocated to African technology funds.  An important source for many of these funds is development finance institutions (DFIs), which have long cycle commitments.  DFIs are also directly co-investing in companies with their venture partners.  One DFI confirmed they will be committing $6 billion in capital for African funds and direct co-investments over the next 5 years (this one DFI program alone represents the sum of all African venture dollars invested between 2015 and 2020!).  As a base of comparison, this would be the equivalent of a single investor dedicating over $710 billion to US venture.

Venture capital firms are only as strong as the partners who fund them, and DFIs act as an important source of long-term patient capital.  For the African technology venture ecosystem, the combination of foundational technology growth opportunities, valuations that never stretched to the moon, and significant patient capital will provide a healthy base to continue to build, despite the challenges ahead.

Our continued focus is on enabling more economic growth and activity

As the Raba faithful know, we are obsessed with horizontal platforms that grow economic activity by enabling the movement of capital.  Part of the appeal is the incredible resiliency of these models.  During the last half century, we’ve had many economic cycles and with it, many companies have come and gone.  But two financial infrastructure companies stand out for their resiliency — Visa and Mastercard.  The duo have continued to compound growth at exceptional rates and have become foundational payments plumbing for consumers and merchants globally.

Some recent numbers on Visa and Mastercard:

  • Generated over $46 billion in revenue last year.
  • 2021 revenue growth of 25%.
  • EBITDA margins of 60 - 70%.

In short, incredible business machines.  We can argue about their duopoly in the market, but there is a lot to learn from the success of each company and their business models (which have been around for 50+ years).  We believe in the power of payments enablement, and have invested in a range of models:

  • Flutterwave, Yoco, Cashi (card acceptance).
  • Stitch (account-to-account).
  • BVNK, Bitnob (crypto).
  • Axis Pay, ThePeer (native fintech wallets).

We are monitoring and studying government led real time payments networks like PIX (Brazil), UPI (India), and IPN (Egypt) and their impact on payments.  If this is an area you’ve researched, we would love to collaborate with you.

The underpinnings for our thesis

Underpinning our focus on the movement of capital is the structural megatrend of people moving online and accessing the digital economy.  To access digital services and economic opportunities, you need a digital means to transact economic value.  Young people across Africa are exposed to economic opportunities that are orders of magnitude larger than their parents, and they are eager early adopters of digital wallets, payments, and other fintech innovations.

According to Deel, the global payroll and compliance company, companies hiring in Africa grew by 800%, far greater than the rest of the world.  This is fundamentally driven by the notion that talent is evenly distributed, but opportunity is not.  Technology doesn't care about borders and tends to democratize these opportunities.  Nowhere is this more profoundly true than in Africa.  While global companies are tapping into talent pools remotely, the most significant recent change is technology companies building local engineering and datacenter hubs in Africa.  Examples from just this year include Google’s Product Development Center in Nairobi, Amazon hiring to launch local AWS offerings in Nigeria and Kenya (here’s a recent job spec), Visa’s first innovation hub in Africa, and Microsoft’s first of two Africa Development Centers in Nairobi (where they’ll hire at least 450 full-time employees). 

This movement has been amazing to witness.  Here’s a screen shot from the Microsoft Nairobi career page:

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With all the progress that African fintech companies have made, we are still at the early innings and still building the infrastructure layer.  The primary competitor to our fintechs is still cash.  To illustrate this opportunity, the graph below shows the percentage of cash transactions in several focus countries:

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source: Mckinsey Global Payments Map, Euromonitor.

We are open for business

We are patient and armed with our second fund and continuing to meet great founders.  As we wrote in “The GREAT compounding", the trends of human capital, infrastructure, technology, and financial capital (note the important DFI point above) will continue to compound in our favor.  One thing we know is that talented people will continue to build despite macro news.

It is important to note that our founders have operated in environments with high interest rates, boom and bust cycles, currency devaluations and persistent “negative” news.  An instructive case is Flutterwave, which was founded in the midst of a recession.  Macro factors matter, but foundational companies thrive through economic cycles and emerge even stronger (weakened competitors entirely go away and companies take market share).  We are confident that the coming period will produce incredible opportunities for our partnership.

Existing portfolio updates:

BVNK: (Raba 2.0) closed a $40M Series A led by Tiger Global with new partners that include Avenir, Kingsway Capital, and Nordstar.  BVNK (started in Cape Town) is becoming a global leader in crypto payments and banking.  Despite the current “crypto winter,” BVNK is continuing to see strong customer traction and scaling their team across functions to meet that demand.  Learn more about open roles here and the round here.

Flutterwave: (Raba 1.0) made two senior hires — Gurbhej Dhillon as its new chief technology officer (CTO) and Oneal Bhambani as its new chief financial officer (CFO).  Gurbhej joins from Marcus by Goldman Sachs, where he was CTO and head of lending engineering.  Before that, he was CTO for Goldman Sachs’ investment banking capital markets team.  Oneal joins from American Express where he was a Vice President and CFO of Kabbage (which American Express acquired) and prior was a Partner at TCW, a leading global asset management firm.  Read more here and here.

Stitch: (Raba 1.0) officially launched its Payouts product. Payouts makes it easier and faster for businesses to move money by sending payments to customers, vendors, suppliers, employees and more via API. This eliminates slow, burdensome integrations and manual processes for businesses, and allows them to better manage their finances. Read more here.

[Confidential]: (Raba 1.0) closed a $40M Series B.  Confidential is continuing to democratize access to digital assets across Africa.

New additions to the partnership:

Thepeer: Raba 2.0 is partnering with founders Kosisochukwu Chike Ononye and Michael “Trojan” Okoh, along with co-investors Musha Ventures, Sunu Capital, Rali_cap, Stitch and Chipper Cash, in a $2.1M seed round.  Thepeer is building an interoperable money movement network between fintech wallets across Africa.  The functionality allows consumers and businesses to seamlessly move money between siloed fintechs and provides merchants with payments acceptance directly from a fintech wallet.  Learn more here.

In other news:

Raba Founder Presentation:  We put together a presentation that draws on our experience navigating the technology funding environment, as well as our research and conversations with the global venture community.  Slides can be found here.

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