The next 10 years... | April 2021

April 2021

The first quarter of 2021 has been nothing short of extraordinary for the African tech ecosystem.  This is reflected both in operating results and capital flows.  Many of our portfolio companies have accelerated growth this quarter.  We look forward to sharing more on our company's results in our upcoming partnership call in May.  Invites coming your way soon.

On the capital side, we’ve seen unprecedented investor interest in early and growth-stage opportunities on the continent.  Flutterwave closed a $170M series C round, and we’ve had a number of global technology investors reach out in recent months to explore opportunities to become more directly involved in Africa.  Several companies in the Raba portfolio are imminently closing growth rounds of over $50M.  As these companies move closer to the public markets, large public liquidity events will drive more interest and growth into the African tech ecosystem.

In this Raba update, we share our thinking on why we believe Africa will be the most exciting tech ecosystem to invest in over the next ten years.  As one of the lead investors in Flutterwave’s recent round put it, “we are excited to support the team as they build the last available payments infrastructure frontier in the world.”

Let’s start with this.  We believe African economic markets are much much larger than conventional metrics suggest.

But Why?

There are many reasons, but the biggest driver is the informal sector, which makes up more than half of all economic activity. By its very nature, the informal sector falls outside of the regulated economy; participants pay little to no tax and rely on cash, making the sector largely invisible to GDP.   An illustration of this is Nigeria’s “rebasing” of GDP eight years ago, revaluing 2013 GDP from $270B to $510B, an 89% increase!

What actually happened? In the rebasing exercise, the base year of comparison was moved from 1990 to 2010.  This corrected for sectors like telecommunications, retail and movies, which were previously not captured or underreported. The telecom sector alone increased from 2% to 7% of GDP.  Nigeria hasn’t rebased GDP since, but here are a few interesting stats:

Since 2010, Nigeria:

Clearly a lot of growth.  But on a per capita basis, GDP is slightly down since 2010.

The following is an interesting bit of MTN (South Arican telco) history shared by a close friend of Raba, Miles Morland, who is a legendary Africa-focused investor and founded not one but two exceptionally well regarded investment groups, Blakeney and DPI.

In February 2001, Nigeria sold four mobile telecom licenses, one of which was to South African MTN.  At the time, there were 300,000 phone lines in the country.  Based on IMF income statistics, the total addressable market in Nigeria would only ever get to 15 million subscribers and that led to MTN bidding and acquiring a license for $285 million.  To put that in perspective, in 2020, MTN Nigeria generated over $3 billion in revenue at 50% EBITDA margins (better than Facebook margins!), and their data subscriber base grew by more than 29% in 2020 (an increase of 7.4 million subscribers).

So what does this mean?  It means that measures of GDP may be really off. This misperception provides incredible opportunities for company builders and investors.  We believe the combination of creators, digital payments, and discovery platforms will open up incredible economic gains across Africa for the decade to come.

The creator economy, digital art, NFT, what’s that??

Today, in Lagos, artists like Osinachi, a self-taught 29-year-old digital artist sells digital pieces created in a day for tens of thousands of dollars.  Below is a screenshot of a recent work sold for $47,061.  The digital art represents one form of an NFT (non-fungible token), which is something that is unique and can’t be replaced.  Digital art transactions are recorded in a digital ledger (the blockchain) that presents a transparent history of provenance (who owned the art, when was it first printed, etc.).

An important feature of this digital model is that the artist will continue to participate in the economics of any future secondary transactions (generally at 10 to 20% of the value). This fundamentally transforms a longstanding paradigm in the creative economy, in which creators see only a small fraction of the profits from their work, while distributors take the lion’s share.  The average musician today receives 12-20% of revenues (Source: Citi, 2018).

This example is meant to show the incredible power of the creator economy, which will be one of the important drivers for African’s future.  Globally, over 50 million people make a living in the creator economy and this number will swell over the coming decade.  These types of fully digital transactions deliver on the promise of internet scale platforms.  We are seeing collectives drive investment and support for projects at an unprecedented scale.  Ideas are being willed into existence by the masses, whether it’s through a Reddit forum that fueled a collective investment in Gamestop or a meme-inspired crypto coin called Dogecoin (is up over 57X in 2021 alone!).  Today, someone sitting in Lagos could have the same access to the power of these platforms as someone sitting in San Francisco. This has profound implications for creators, investors and founders.

Incredible opportunities for creators, in Africa and globally

The 2020 African Youth Survey — based on 4,200 face-to-face interviews of 18- to 24-year-olds — found that over 82% of respondents believed their life would be better in the coming years. and 4 out of 5 indicated they would follow an entrepreneurial path. This part from the survey nails the point: “in a sharp change from the past, most of the youth interviewed no longer looked to government jobs for careers and security but were much keener to go into business on their own behalf.”  When you marry the flattening of opportunities brought about by the new digital economy, with the collective energy, talent, and belief in their future that young Africans have, incredible things can, and will, happen.

So, where does this go?

The creator and the availability of microservices (platforms for discovery, distribution and payment) and creator tools (phones, internet connections, free software) will drive large transfers of value to emerging markets.  It’s precisely the lack of “normal” jobs that will power this opportunity.  Young people will not wait for industrialization (which was the path to prosperity in other regions).  This creator movement will be digital-led and will launch a movement into much more creative and gratifying careers.  Creators and founders like Osinachis or Iyin Aboyeji (founder of Flutterwave and Andela) are providing visible examples of young African builders who define the zeitgeist of an era.  This movement will be among the most powerful force multipliers for people in emerging economies and Africa in particular over the coming decade.  At Raba, we’re deeply inspired by the boundless economic opportunities that this technology creates.  Wasn’t this the original promise of the internet — true democratization of information and opportunity?

Amazon.com is expanding in Cape Town by setting up their African headquarters.  While we don’t know the actual number of new jobs (easily in the thousands), we are very excited by this development.  Twitter also recently announced their first African presence in Ghana.  We’ve officially learned about other large tech players focused on setting up their physical presence in the African continent and believe Cape Town will continue to attract more attention and capital.  Stay tuned.

Founder dinner at Kloof Street House (one of the Raba team’s go-to spots)

While taking necessary precautions, we are continuing to find ways to meet in-person and build our community in Cape Town.  We recently hosted a founders dinner with the goal of fostering relationships in our community, especially after an extended period of isolation.  We plan to host more of these events, COVID permitting.

Photo below from our dinner which included the founders from Aerobotics, Carry1st, Cloudline, CRSP dsgn, FairMoney, Stitch, Klang Games, Lori, and Sweep South.