Building BIG companies in non-obvious markets | October 2021

October 2021

On the homepage of the Raba website (we updated our public site to a Notion page, check it out here), we state a defining Raba principle  — building long-term relationships with long-term people.  It’s not a platitude.  We really do care about building these kinds of relationships!  Our hope with each of our partners and founders is that we can build something special, and when there is strong trust and respect, it develops into a relationship that deepens from a business partnership to friendship.  One of my favorite examples of this is an investor (and now friend) with whom I catch up regularly even though he passed on investing in Raba 1.0!  :)

One of the questions we ask when evaluating LP fit is would we want to spend more time with this person — do we want to have them over for dinner?  I’m an average cook at best (getting better), but really like to spend time with people over a meal.  Over time, this has served me and Raba well.  It’s translated into long-term relationships dating back to my first job in New York at Goldman Sachs and to my memorable years in California at Glynn Capital.  The last fifteen years of my life have brought together really great people, many of whom I call friends and co-conspirators in our company-building and investing journey.  This is one of the things I’m most fortunate to have.

Raba is about relationships and performance

We believe building strong relationships is foundational to building a great firm.  A core belief at Raba is that we should be helpful at the earliest stages when getting to know someone, and do it with zero expectations.  Call it karma or whatever, we just believe you will end up benefiting over time.

To get practical, let’s share examples of how philosophy drives results.  A recent example of building long-term relationships with long-term people was our significant investment in Yoco, a company in which we had no pro-rata and had made the mistake of passing on several prior rounds.  Despite not being investors until 2020, we built a tight relationship with founders Katlego and Carl, and have been helpful to them, dating back to our first meeting in 2016.

In our recent investment in Shara, an exciting fast growth company that had a very competitive round, the founders made the case for Raba to take up more than our pro-rata, based on the relationship and value we delivered.  This is a relationship that started with a 2016 angel investment in Twiga, Grant Brooke’s prior company, when the bank that held Twiga’s cash in Kenya went “bankrupt” and the company couldn’t access cash.  We recently reminisced about that event, and Grant remembered the investors who joined the journey when times were uncertain.

A third example is our recent investment in Future Africa, where Raba was invited to join a group of investors and operators to invest in the general partnership.  As the founder stated in a recent shareholder update, “we are being very careful bringing new investors into the GP, as this is our most holy place.”  Our ability to be part of this “holy place” started in 2016 when Iyin Aboyeji was building Flutterwave in our home in San Francisco.  He’s become a close friend since then, and we are excited for this next chapter.  Today, Iyin is the only person in Africa who has founded two African venture backed companies valued at more than $1 billion, and this is just the beginning for him.

We have been busily sowing relationship seeds, and are eager to see the opportunities and partnerships that come from those efforts.

We are pleased to announce that Omar Hagrass has joined Raba as our scout partner in Egypt.  Omar is the CEO and co-founder of Trella, a digital trucking logistics company focused on Egypt, MENA and Pakistan.  We first met Omar two years ago and have found him to be an incredible founder and a terrific person. He’s become a close friend to the partnership, sharing his network of companies and market insights with us.  Prior to founding Trella, Omar was the general manager of Uber in the region, focused on building teams across markets in North Africa and the Middle East.

You have to invest in really REALLY big markets — big TAM (total addressable market) is what it’s all about!  Sure, all else equal, founders want to focus on solving big problems.  But what is truly big?  Defining TAM is often an oversimplified exercise that founders and investors struggle with.  Spoiler alert, it almost always results in a slide that shows a multi billion/trillion dollar market.  My own experience and thinking continues to evolve here, and I believe that we have been and likely will continue to be orders of magnitude off on how big software and internet companies can actually become in non-obvious markets.  We also assume that they can be started and scaled from almost anywhere in the world.

We believe that the top ten African countries are large enough to support significant large venture-backed companies.  We shared the prospects of tapping into large profit and margin pools in our Why Fintech in South Africa piece (here).  South Africa is a market dominated by large banks that generate over $6B in cash (profit) per year.   The most profitable bank generates 32% return on equity, which is 50% higher than Mexican and Brazilian banks (which are incredibly profitable) and more than 200% higher than US banks.

Larger African economies can support several IPO-listed companies.  Why are we so confident?  First, it’s just math (population size, mobile phone reach, underbanked populations), and we increasingly have examples of technology companies in small and non-obvious markets growing up into giant companies.  We wrote about Kaspi (the Kazakh-born fintech super app) in January, and since our writing, the company added more than $10B in market cap and has over 10M monthly active users.  We fundamentally believe (based on concrete examples) that software and internet companies serving these non-obvious domestic markets can have a giant impact and become giant companies.  As venture becomes increasingly democratized and access to funding more available, many of these companies will compete globally after winning at home.

We’ve shown the graph below before, and are updating through Friday, October 8th. It is a 10-year chart of the cumulative public equity returns of Safaricom (Ticker: SCOM) and global technology leaders, including Amazon.com, Apple, Microsoft and Facebook (public in early 2012). You would have done incredibly well — better than a 12X return — owning this basket of US technology companies over the last decade (and doing much much better than most venture funds and with better liquidity!), but you would have done even better owning shares of Safaricom (> 22X). For those of you not familiar with Safaricom, it’s the Kenyan telecom parent company of MPesa, which today has over 50M mobile money users and is one of the leaders in mobile money. Safaricom has a market cap of $16B and we believe its fintech ambitions are just getting started.

Other examples include dLocal, a Uruguayan payments API business with a $15B market cap. Note Uruguay is another non-obvious country, given its population of 3.5M.  dLocal was built to solve emerging markets payments, and it started by serving companies in neighboring Brazil.  dLocal was a spin-out from AstroPay in 2016 (so not a true venture-backed startup), but has since built a fantastic business.  In the most recent quarter, the company generated $165M in trailing twelve month revenue, and reported revenue growth of > 180% YoY with healthy 35 - 40% EBITDA margins.  We believe dLocal is a great comparable for our portfolio company Flutterwave, given the similarity in business model, size, growth and market focus.

All this to say, that dynamic, smart, entrepreneurial people can be found all over the world, and even when building in and for non-obvious and relatively small markets.  To the Raba team, it's not a question of if but when we’ll see the same explosion of at-scale technology companies focused on African markets.

What does ‘Raba’ mean?  I’ve been asked by several people recently what Raba means, so I figured it was time to share the backstory.  As many of you know, my family is from Poland, specifically from the southern part of the country near where the Raba river flows.  So it has symbolic significance for me.  It also has a unique and differentiated characteristic for a river, as it flows north and north-east (an up and to the right growth curve!).  There are many rivers that flow north, the Nile being the most famous.  In researching all of the major rivers that flow north, the Raba stood out as one of the only ones that followed the up and to the right curve, making it personal for me and rare (like great companies), and a fitting name for the partnership!

Schumacher:  This is a documentary of Michale Schumacher, the German Formula 1 champion (available on Netflix).  His intense work ethic, focus and will to win are inspiring.  I bet Schumacher would have succeeded as a founder/company builder — traits that we look for in founders we back.  I don’t know much about the history of his Formula 1 career, but the guy is flat out inspiring, so we wanted to share.  Link to the trailer here.

A piece of the action:  Many successful companies today are reincarnations of companies and projects from the past.  In the US, you have Visa, ACH, and founders like Charles Merrill (of Merrill Lynch) who founded the broker to democratize access to investments — it was basically version 1.0 of Robinhood.  A great book on the history of how transformative early innovations in financial services were built is “A Piece of the Action” by Joseph Nocera.  Link to buy the book here.