African Venture Capital & the GREAT compounding  | December 2021

African Venture Capital & the GREAT compounding | December 2021

December 2021

Africa venture capital

African startups will attract ~$4.3B in venture funding this year, a record, and 11.2X more than 5 years ago.  Huge growth, no doubt.  But in the context of the global total, Africa attracts less than 1% (74 bps) of all venture capital worldwide.  To normalize the data looking back to 2016, total funding in Africa is about 60 bps of global venture funding, which is roughly the same as the city of Atlanta.  Email us, if you’d like the data.

Some additional context:

  • African crypto usage grew by 1,200% to $105 billion in value in 2021.
  • Africa has over $1.2 trillion in cash transactions; core markets operate at >95% cash.
  • Africa has more than 1.6 million software developers on Github alone.
  • Africa has among the fastest growing developer hubs globally — Nigeria at 50%+.
  • 2 out of 3 people over the age of 15 don’t have a bank account.
  • 85% of businesses with a bank account can’t access credit.
  • Africa’s publicly listed financial services sector has a collective market cap of $168 billion; these are mainly banks, and not one is digitally native.

The opportunity to build and provide digital-first financial products is significant.  We are highly motivated to capture a significant share of these opportunities in the years ahead.

Our partners

As with the founders we invest in, we care a lot about who we ally with as limited partners (side note, I don’t like the term limited partner, so from here on out, we’ll use just partner).  Our partners are building leading global technology investment firms and managing the endowments of leading universities, and they include dozens of founders who have built incredible companies.  This is our tribe, and it gives us an important edge in how we operate and how we work with founders.

As many of you know, I grew up playing competitive tennis, so the analogy I use is that our Raba team is stacked — we have the equivalent of Andre Agassi, Pete Sampras and Serena Williams on one squad.  Each brings a unique edge and network, and gives us a differential advantage.  We consistently use our partner network to both source and diligence companies.

An important KPI that we care deeply about is when African company founders choose to allocate their personal capital with us.  We are excited to report that we have increased founder participation by 2.5X in Fund 2.0 vs our inaugural fund.

What’s next?

In short, we have been heads down.  Over the last few months, we have been helping companies recruit, close financings, and plan ahead.  We have been active in identifying founders who are building the next generation of important software and internet companies on the continent.  As the Raba faithful know, a recurring theme of our investment has been fintech and related infrastructure, given the predominance of cash transactions in our markets.  More recently, we have expanded that domain to include crypto-native companies, including payment infrastructure, DeFi and crypto exchanges.

The GREAT compounding…

If you take a step back and size up the technology activity across sectors in the continent, you will observe what we will call the GREAT compounding…

Let us explain.

As investors, we focus on growth rates, margins, and sizing up the long-term market potential to figure out the potential enterprise value of a company over time.  Let’s go a few layers deeper and think about what the companies are actually building.

Infrastructure fintech companies like Stitch are building rails that verify and connect users with stores of value (e.g., a bank account) to fintechs and other verified users to be able to seamlessly move money.  In building such a network, Stitch can offer instant payments, with low fraud, at incredibly low cost.  In certain markets in Africa, a cross border remittance can cost up to 20%, dampening economic activity.  With over 24 million people in Africa migrating across the continent, and trade corridors developing on the back of the African free trade agreement, we will see significantly more cross border payments.   A trusted payments network would add significant economic value to the system.

On the lending side, companies like Fairmoney (run by our friend Laurin Hainy) are making over 10,000 loans per day in Nigeria alone.  For many customers, this will be their first ever access to credit and puts them on the road to building a digital identity.  There are hundreds of digital lenders across the continent.  The compounding effect of offering access to simple, fast credit is profound.  We’d like to see interest rates (which are still too high) continue to come down.  But access to credit at fair terms is a necessary condition to increasing economic activity.

Human capital compounding

We are seeing a wave of founders who are now on their 2nd or 3rd African startup.  They are training the next generation of product, engineering and finance leadership.  Early stage companies in Africa are increasingly competing with global technology companies like Microsoft or Amazon for the very best talent in Africa.  In the short term, this can be a challenge for companies with startup budgets.  But in the long-term, this is very healthy for the ecosystem and continues to build a layer of globally trained local talent, many of whom will go on to start their own companies.

There is incredible potential in reimagining education — a leading indicator of potential and development.  Companies like ULesson and Bridge Academy (and countless others) are doing just that, providing higher quality education cheaper, faster and better.  Internet companies like Google are investing heavily to teach digital literacy skills and have committed to training over 1 million people in Africa through their programs.  The results of what these companies are building don’t register over months and quarters but compound over long time horizons.

Infrastructure compounding

Africa is benefitting from huge capital investments in ports, rail, road, power and internet infrastructure.  As of late 2019, there was over $480 billion in projects across the continent.  If you can’t power up and connect to the internet, then you miss out on the digital transformation of multiple industries.  If you can’t efficiently move products through ports into cities, you miss out on opportunities.  Google has taken a lead on this, with CEO Sundar Pichai pledging $1 billion in investment in Africa to fund projects like Equiano, a subsea cable from Europe that stretches across west and southern Africa.  According to Google, Equiano will result in a 21% decrease in internet costs and a five-fold increase in internet speed in Nigeria, and almost triple internet speed in South Africa.  Meta (Facebook) is making similar infrastructure investments, announcing the 2Africa project, which will be the longest subsea cable system in the world.

Over 80% of economic activity across the continent remains in the informal sector (via small business owners).  There are a number of b2b marketplaces (Sokowatch, MaxAB, Trade Depot to name a few) that are digitizing small businesses, providing them access to improved logistics, lower cost products and for many their first formal financial services.  Just a few years ago, these businesses were largely invisible and unreachable.  Improved connectivity, access to capital, lower cost internet, more infrastructure to move products — it all compounds.

Technology compounding

With improved (and improving) access to food systems, education, internet connectivity and capital (both on the ground and venture funding for bold ideas), we are seeding a number of flywheels that together are compounding to generate more economic potential.  As we’ve described in the past, published GDP numbers will be way behind in capturing this activity.  These very powerful compounding effects are already happening, and from our vantage point as an active early stage investor since 2016, the change is dramatic.

There is also the accelerating adoption of crypto (which we will address in an upcoming letter).  In countries where citizens have little to no trust in the government (in South Africa, 2 of 3 people don’t trust the electoral system) and where the last 10 years have seen declining wealth due to weakening currency and capital controls that limit the movement of money across borders, crypto and ultra fast lower cost payments are increasingly attractive.  We are seeing people and businesses in Africa vote with their wallets.  Crypto usage grew 1,200% last year to $105 billion —  close to the entire amount of tier 1 capital of Africa’s top 100 banks!

We are as you can read optimists, and also students of history.  It is clear that the internet genie in Africa is not going back into the bottle.  Historically, African banks have operated to serve the very few, mainly wealthy individuals and corporations.  They have failed to reach the masses to build more economic activity through traditional banking business lines like credit.  This is a missed opportunity for the banks, but more importantly a huge opportunity for disruption by technology innovators.

Capital compounding

While we are in the early innings of the venture curve, one profound change this year is that technology companies have the breadth of capital to go after legacy institutions, not just through superior business models but with increasingly strong balance sheets.  This year just ended is the first to have 10 financings of over $100M.  We will have several fintech (and other) category winners like we’ve seen in LatAm.  Technology models are perfectly suited to unblock the legacy systems that have made it incredibly hard and expensive to do business across much of the continent.  Global investors have entered the market and are ready to fund more innovation.  COVID helped accelerate digital trends and mandated highly efficient and broadly distributed investment decisions over Zoom.  Our prediction is we will see even larger rounds of financing in 2022 and beyond, especially for category winners where global growth investors look to “crown” a winner.

Information compounding

Founders across the continent have access to the very best people across sectors and geographies.  The founders of companies like Stitch have built tight networks across fintech ecosystems in Africa, US, Europe and Asia, and benefit from this information and network sharing.  This allows for companies irrespective of geography to tap into the very best thinking globally.  One benefit of being the last large ecosystem to attract at-scale venture funding is that we are able to study the very best models and build next generation companies that are unbounded by legacy constraints.

The combination of compounding human capital, technology, infrastructure, capital and information sets the stage for innovation by a new generation of technology company founders.

An underappreciated point is belief compounding loops. Technology founders in Africa are today’s and tomorrow’s role models — a great phrase to sum it up “you can’t be what you don’t see.”  Aspiring entrepreneurs can see what Iyin and GB at Flutterwave have built, and what Kat, Carl and Lungi at Yoco and many others are building.  Inspiring the next generation of future founders to build.


In other news…

Lewis Hamilton’s MasterClass.  While Lewis didn’t win another world championship, he remains incredible.  This MasterClass is a great way to hear his insight on overcoming adversity and a champion’s mentality.  MasterClass requires a subscription, but this class alone is worth it.  Check it out here.

Nic Dlamini.  We wrote about Nic in our July update who was the only black athlete and first black South African to ride in the 2021 Tour de France.  We’ve spent time with Nic recently (both on the bike and off) and he is an inspiration to many, including aspiring riders across the continent.  Despite his success, massive barriers exist for young riders in Africa to compete globally.  Nic is one of only a few Africans who ride at this elite level.  As a firm, we will support competitors like Nic, who is carrying the flag for the sport.

Send me a note if you are interested in learning more.  Here is a link to Nic’s story.