Small business — the next frontier? | March 2020

March 2020

I had an excellent trip to the US, where I spent time with many of Raba’s LPs.  It’s clear to me that we have built (and continue to build) an incredible network of exceptionally high-quality partners at Raba, and therein lies one of our core pillars of strategic value-add.  Mobilizing our network for the companies we work with allows us to deliver critical advice and key introductions that can be transformative for young companies.  Our goal is to be best in class in these early stage collaborations, building on the strengths of our engaged and diverse partnership.

In six months since our initial capital raise, we have had four of our early-stage companies raise follow-on rounds.  Those rounds have averaged $24.9M in new equity, and have included two Series A, one Series B, and one Series C.

We are now heads down on a number of exciting new investment prospects.  I look forward to sharing more with you in the next Raba review.

Thank you for your partnership!

Small business — the next frontier?

Most economic activity globally is at the small business level.  Formal small and medium-sized enterprises (SMEs) represent 60-70% of employment and 55% of GDP in developed economies, and over 40% of GDP in developing economies.  In Africa, informal businesses — virtually all of which are small businesses — make up 90% of consumer retail sales.  Small business is the dominant form of commerce, and we are focused on backing founders who are building software and marketplaces that help small business owners attract and retain customers, as well as create data footprints that enable access to credit and other financial services to help them grow.

A little more background on SMEs is useful here.

The definition of an SME varies by region.  In the US, an SME is an independently owned company with fewer than 500 employees; in Europe, it’s 200.  In Africa, there’s the concept of an MSME — micro, small and medium-sized enterprises — where small is fewer than 50 employees and micro is fewer than 10. Not surprisingly, small business as a segment has traditionally been hard to reach, as contract values are small and selling costs are high relative to potential lifetime value.  The distribution bottleneck in reaching small business customers has historically been prohibitively expensive, but digital technology is changing that calculus.  The ubiquity of mobile devices has allowed technology companies to expand their reach, using social media and creative incentive models, and build scale operations serving a small business customer base.

In addition, we are seeing a change in how business owners operate with the introduction of consumer-like business tools.  The adoption of new technologies is driven by a younger generation of founders and company leaders who grew up using their phones to manage their everyday lives.  The broad opportunity we’ve identified is to provide world-class tools to manage their business lives.  Incumbent processes tend to be a hodgepodge of paper and pen or Google sheets, and those behaviors can be hard to change.  New solutions require intuitive tools that are efficient and easy to use, and provide significantly more value than the status quo.  Regulation will also play a role in driving adoption of technology tools.  Governments have an incentive to increase transparency in order to gain visibility into their economies and to collect more tax.  The good news is that better digital information will lower the cost of capital.  Traditionally, small businesses pay egregiously high rates to access capital, due to both their risk profile and the lack of transparency — and thereby trust — with lenders and banks.

We have seen a wave of founders build successful companies focused on small businesses.  From our experience with Over (mobile software for creatives that was recently acquired by GoDaddy), Yoco (payments and software), and Twiga (logistics and payments), we have seen proof points of businesses being able to identify an important market need, reach small business customers efficiently, and build platforms that progress from a core use case to expanded and adjacent use cases based on customers needs.  Through mobile distribution channels, those companies scale into what were previously unattractive and hard to reach markets.

Stanford GSB

In early February, I gave a lecture on African early stage investing at the Stanford GSB.  It’s been one of my favorite things to plan for and take part in for the past three years.  I find the students eager to learn more and seek out opportunities to build companies in emerging markets, especially in Africa.  Many of these young people will shape the future of technology in emerging markets (and globally).  We continue to see strong interest from talented young people who want to build or join important companies that are changing the world.  This is one of the most important trends that will shape emerging ecosystems for years to come.  I’ve included a photo from the class below.