Building BIG companies in non-obvious markets, part II | April 2023

April 2023

To those of you who joined our summit in February, thank you, it was awesome to be with so many of you (photos below).  To those who could not be with us, we hope to host you in Cape Town in the future.

Non-obvious markets, part 2

We shared our first piece on non-obvious markets in October 2021.  We argued that less obvious markets when combined with business models that leverage software and the internet can yield large and sustaining enterprise value.  Two examples are Kaspi in Kazakhstan ($2.75B in trailing twelve month revenue) and Capitec in South Africa ($1.4B in TTM revenue), both of which are single country market winners and very profitable.

To help inform our areas of focus, we study businesses that exhibit high gross margins and operating profits over extended periods of time.  Fintechs, particularly in payments and banking, have proven to be attractive investments because they improve the way businesses and consumers make payments, store capital, and access credit.  These services have powered the incumbents in our less obvious markets to earn outsized profit margins.

Over the long-term, however, these incumbents are structurally disadvantaged in an important way, mainly managing their business on legacy technology infrastructure (something we’ve confirmed in conversations with bank executives), making innovation very challenging.  We know incumbents aren’t static and that they tend to have resource and customer base advantages.  But their management teams have to walk a fine line to maintain a consistent set of profit driven metrics for public shareholders.  It would take a gutsy CEO to change course, potentially disrupting core lines of business and sacrifice cash flow, to invest in projects that have unknown payoffs.  And this is where we find opportunities for younger, faster moving companies.

But why do legacy players generate outsized returns?¬† The simple answer is competition.¬† Competition is what ultimately drives long-term profits in any industry.¬† Our hypothesis is that too much venture in a certain market or vertical erodes value for all participants, as multiple companies go up for the same jump ball ‚ÄĒ lot‚Äôs of capital raised but very little sustained value built at the end of the day.¬† A recent tweet asked the question ‚Äúhow many venture-backed companies (over the last 15 years) in the US are materially profitable?‚Ä̬† The answer was a short list ‚ÄĒ link¬†here.¬† Is this perhaps the report card of too much capital chasing too many of the same ideas ‚ÄĒ undermining profits for all?

If you break down any company, there is a continuum between hyper competition (where companies earn no economic value) and monopoly.¬† There are important structural reasons that African financial services businesses tend to operate in the latter camp.¬† First, they tend to be big fish in smaller ponds, as venture investors generally focus on larger¬†markets¬†than even the biggest African economies.¬† Second, banking regulations discourage new entrants, and add cost to would-be competitors.¬† There is a natural moat favoring first movers in these financial domains.¬† Since African venture investing at scale is still early, we haven‚Äôt had a full cycle to challenge incumbents, build superior products, acquire licensing and benefit from compounding economic value.¬† Raba companies have on average been building for 3.3 years ‚ÄĒ it is too early to judge, but we‚Äôre confident that we‚Äôre positioned to generate the desired results.

There is a very important sub point here.  Once a venture-backed company achieves leadership status (several Raba companies are close) in a particular market or vertical, they have a unique position vs. peers in other markets.  Because our markets are perceived as too small to support several winners, investors tend to coalesce around the market leader and the strong get stronger.  On that continuum between hyper competition and monopoly, software-focused models that compete on innovation (superior products and services) and have the capital and time to acquire licensing can capture market share and build outsized economic value.  A technology company should have superior operating leverage as the customer base grows, further improving their services making their data even more valuable.  Making it even harder for incumbents to compete.  Think of it as network effects, played out at the local level.

‚ÄúSmall‚Ä̬†markets¬†can lead to big results

During a recent earnings call, dLocal, an emerging markets payments company, shared country level data of their business lines in Chile and Argentina, where they generate $52M and $77M of revenue per annum with growth rates of 43% and 54%, respectively.  Chile, with a population of 19.5M, has at least 56 competitors offering online payments services, including Checkout.com, Raypd, PayPal, and Mercado Pago (payments arm of e-commerce company Mercardo Libre).  The prevailing view is that these are small markets, but dLocal has been able to build an exciting business.  There are important parallels to our markets.

Here are some examples of scale, growth and margin profiles of financial services businesses operating in ‚Äúsmall¬†markets:‚ÄĚ


New companies joining the partnership:

Fuse: Raba 2.0 led a $2M seed round in Fuse Inc, a fintech infrastructure company.  The company was founded by George Davis and James Smith, both formerly at BVNK (where George headed product and James was a lead engineer).  The pair previously worked at TrueLayer where they built payments and banking infrastructure.  George is a serial entrepreneur who started a machine learning business at 18 that he successfully exited.  He is a builder and we are excited to support him and James in this next chapter at Fuse.

We worked with George and James to put together a strong coalition of investors in Fuse, including Shorooq, TO Ventures, Hisham Al-Falih (Founder of Lean), David de Picciotto (Founder of Pledge and a Sequoia scout), Accel Scout Fund and several other close friends and partners.

Company updates:

Axis Pay: Raba 1.0 company Axis Pay launched its commercial service this quarter, and is onboarding businesses into its software and payments operating system.¬† Axis Pay has built its own payments, banking, and ledger operating system bottoms up (this was a very significant build and confers long-term advantages), and is the only company in Egypt that can both issue and accept mobile money payments ‚ÄĒ two important central bank approved licenses.

BVNK: Raba 2.0 company BVNK, a global B2B payments company that leverages  distributed ledger technology (DLT), continues to grow across multiple fronts.  The business is profitable and continues to build out a strong engineering and product talent  hub, hiring talent away from leading global fintech companies.  BVNK finished Q1 with 25 new customers live, processing over $650M in payments.  BVNK continues to build out their regulatory footprint, with fiat and digital asset licenses in Europe and the UK, alongside a licensing roadmap for Africa and Asia.  The company also launched their new website: bvnk.com

Moment: Raba¬†2.0 was¬†part¬†of the founding investment group incubating Moment, alongside General Catalyst, Rapyd and the MultiChoice Group (Africa‚Äôs largest media company with 20M customers).¬† The company is led by veteran fintech operator Joel Yarbrough, who led Rapyd‚Äôs business in Southeast Asia.¬† The company is hiring across a range of roles ‚ÄĒ if you have great candidates please send them our way.¬† Learn more¬†here.

Shara: Raba 1.0 participated in Shara’s $8.8M extension led by Harvest Ventures and SpeedInvest.  We co-led the company’s seed round in 2021 with Index Ventures.  The company has built out a strong operating and technology team, acquired a banking license and is building a full stack digital bank for businesses and consumers.  This is a similar playbook to Nubank in Brazil, where banking licenses coupled with technology enable a structural competitive advantage vs. legacy players.  Shara will be announcing their raise and updated branding in the coming months.

YellowCard: Raba 1.0 pan-African crypto exchange Yellow Card announced a partnership with Block (formerly known as Square) to facilitate cross-border payments in 16 African countries.  Their Bitcoin-to-fiat on- and off-ramps are powered by TBD, Block’s Bitcoin-focused developer platform.  Learn more here.

In other news | Cape Epic

At the end of March, I completed the Cape Epic with Taylor Gilland (many of you know Taylor, who is at Dragoneer).  The Cape Epic is a multi-stage marathon mountain bike race that covers 650 kilometers and 15,000 meters (~50,000 feet) of vertical climbing, much of it on single track.  Link to a short clip of race conditions, here. It was a race that tests the mental as much as the physical.  I strongly believe in continued physical training as a long-term competitive advantage on business performance.

Next year I’m hoping we can create some friendly competition and have many of you come out to compete.  Send me a note if interested!

Summit photos:


Sunrise Lion's Head hike


George (Raba) & Kiaan (Stitch) kicking off the 2023 summit


Venture panel led by Ameya (Flourish) with Gbenga (QED), Fope (Helios) and Ashish (Paypal)


Two good friends of the partnership, Katlego (Yoco) and Cordel (Carry1st).