As Raba approaches its one year anniversary, it’s clear that the cornerstones for our long-term success are, first, our ability to work productively with founders and, second, a systematic approach to critically evaluating investment decisions.
Our goal with founders is to build long-term trusting relationships that set them up for success. The result one year in is a strong network of founders who we engage regularly to help strengthen their networks and to source new potential opportunities. We are now starting to see second-time founders build their next companies.
To continue to hone our investment decisions, we’ve been tracking each decision (pass or invest), categorizing key assumptions (and rating them) with additional qualitative background. Over time (and with more data), we will be able to better assess our decision making framework. We especially want to understand errors of omission, where we had an opportunity to invest and decide not to invest in what becomes an incredibly successful company. We welcome any thoughts you have on models to measure investment decisions and frameworks for improved decision-making.
In this update, we will dive deeper into API businesses, as we believe they will play a critical role in the development of technology across Africa.
Why we really like APIs
Most of you are familiar with APIs (application program interface), but for those who are new to the acronym, think of APIs as software intermediaries that facilitate communication between applications. They are the digital equivalents of a restaurant waiter. Think of yourself ordering food from a waiter who delivers that order to the kitchen (where the food is prepared) and then picks up the food to bring to your table. Unlike the physical world example, however, APIs can be delivered and scaled incredibly fast and at near-zero marginal cost, and are an extremely powerful business model to study and appreciate.
Why we really like APIs...
First, APIs make building and iterating software faster and help unlock innovation (and that is a great thing for technology company builders!). API business models have a unique set of growth drivers. First, they can scale through a large and growing channel — the software developer community. Think of developers across technology companies as an extension of your sales team. They build their technology using your APIs and train their teams to do the same, and when developers move to join or start other companies, they do it all over again. Second, APIs are flexible and easy to integrate. They don’t require you to buy expensive, complicated software, so they reduce the friction in getting started developing a product (the flip side, however, is that they are easy to replace and you have to continue to add valuable services to your API offerings). Third, API services usage grows as the company grows, and allowing API companies to grow revenues without additional upselling. The combination of easy and flexible deployment and scale-advantaged distribution models help power growth at companies like Twilio in communications ($31B market cap), Stripe in payments ($36B valuation), and Plaid in financial services (acquired by Visa earlier this year for $5.3B).
Why now — haven’t APIs been around for a long time?
Yes, APIs have been around for a long time and have been important scaffolding in building software. What is different now is the rise of third party API-driven companies (like the three cited above) that offer flexible, easy to integrate but powerful APIs that software developers can leverage to build applications and functionality without having to build out the foundational layers or complex integrations (and manage them!). Take for example a company like Uber that operates across the African continent. They leverage Flutterwave’s APIs to process various payment types across countries and currencies easily through a single API. Without such an API, Uber could build its own payments infrastructure and go through the process of applying for various financial authority payments licenses (something I’d argue is not a core capability) or integrate with numerous payments players across markets, and be forced to manage their code base and the underlying relationships with each vendor (work that Flutterwave has already done and Uber can leverage).
As mentioned in our digitisation of cash update, over $1.2 trillion in cash transactions are completed each year in Africa (for context, the North American cash and check market is about $4 trillion). Africa’s digital payments landscape is highly fragmented across 275 mobile wallets and over 500 banks with little to no interoperability and virtually no APIs to connect payment types. This makes it a market that is uniquely suited for fintech-focused API software companies to build infrastructure. Equally important, there is a growing GitHub developer community growing across the continent (Africa was the fastest-growing Github user continent in the world in 2019) and among large country developers (with more than 10k contributors), Kenya and Nigeria grew 70%+ last year (among some of the fastest-growing globally). It’s an exciting time for developers across the continent and companies building APIs are tapping into this young and growing developer community.
At Raba, we are working on several exciting opportunities with companies that are honing their API strategies as well as potential new investment companies that are leveraging this powerful model to build and scale across the continent.
Amazon announced that they are adding 3,000 jobs in South Africa (bringing the total to 7,000). More on the story here.