Why Africa Now and why we 👀 to Latam | July 2021

July 2021

It has been a productive few months for the team at Raba!  We are excited to share that two new companies are joining the partnership, and we are in advanced stages to add two more in the coming weeks.  We have also increased our ownership in two existing Raba companies by participating in rounds for Yoco and another soon to be announced financing we are co-leading.  Our investments are examples of our core strategy, which is to partner with founders early, build mutual trust by working closely with them, and increase our ownership (both in the fund and through co-investments) where we have a deeper relationship and insights.

Market update

We are seeing a significant shift in capital allocation and interest in technology companies in Africa.  If AWS (Amazon Web Services) was the kindling that started the revolution of building technology companies in any part of the world, then COVID was the accelerant to unlock capital, where investors now diligence and fund companies over video calls irrespective of geography.  This is a once in a generation unlock for company builders, and no venture ecosystem benefits more than Africa.  In the first half of 2021, companies on the continent raised 2.1x more than the same period last year, with South Africa leading the way at ~28% of all funding.

Just a few years ago, it was unimaginable for partners at venture firms in San Francisco (where I lived and worked for a number of years) to commit significant capital to companies in Africa.  It just didn’t happen.  I remember sharing Flutterwave’s seed round presentation with a number of firms in 2016 (at the time, Flutterwave had phenomenal traction given the stage), and partners at every firm politely passed.  Their decisions were driven by constraints like investing “close to home” and the scarcity of partners motivated to invest in Africa.  Making a large investment in an African company would require twenty-five or more hours of travel one way, prescriptions, vaccinations (not for COVID) and significant time away from the home office.  It was too easy to just say no, especially since there had not been large venture-backed outcomes coming from Africa, yet.  What's changed is that companies are growing and reaching venture scale, and it is now accepted practice to diligence and commit significant capital while never meeting the founders in person.  Investing globally has moved from high friction to nearly frictionless.  And, unlike other venture ecosystems, Africa has no large multi-stage firms like Hillhouse/IDG in China, Index in Europe, and Kaszek/Monashees in LatAm, so significant funding won’t come from within, for now.

Study LatAm to see where we are going?

We have been spending time with investors, operators and founders from many of the most successful technology companies in LatAm.  Why?  The opportunity for technology companies (in particular, fintech) is structurally very similar.  South Africa and Brazil serve as examples, where both have high mobile phone penetration, banking and card penetration, and oligopolistic banking structures that are among the most profitable globally.  We at Raba and African fintech founders are benefiting from building relationships with many of the same groups that have been active in executing in LatAm.  There are shared experiences, founders and investors who have built through recessions, built in markets with high cash-based informal sector economies, earned revenue in currencies that are structurally declining, and operated in an environment of negative headlines that tend to discourage investment.  But that is changing in LatAm (see these two recent posts about LatAm interest from a16z and Sequoia).  The success of fintechs like Nubank (the largest digital bank in the world), Stone Co, PagSeguro and so many others is opening up talent, capital and attention to not only LatAm, but Africa as well.

How things can change

In October 2015, I met with one of the key members of the Berkshire Hathaway investment team (for the record, it wasn’t Warren).  We discussed technology investing, and at the time Berkshire was an IBM shareholder.  We had a conversation about Apple, technology and value investing.  I was familiar with Apple from my prior firm, Shumway Capital (a Tiger Fund), which had a large holding in the company.  It was a year later, in 2016, that Berkshire (according to their 13-F filings) became an investor in Apple.  As of the first quarter 2021, Berkshire has a $100 billion (yes with a B!) investment in Apple and owns >5% of the company.  The reason I’m sharing this story is because Berkshire, a firm so closely tied to value investing in the U.S., has been expanding into earlier stage technology investments in emerging markets like Brazil, having recently led a private company financing round of $500M into NuBank, the Brazilian-born digital bank that we cited above.  Note, this is not a first for Berkshire, as the group participated in buying IPO shares of Stone Co, another Brazilian fintech, in late 2018.

In short, we will see more attention and global capital for technology business models focused on emerging markets, where the opportunities are structurally compelling, and driven by talented, hard charging founders and software engineers.  The incumbents are traditional industry players that are just not set up for a world of data and speed and building around software and product teams at their core.  These traditional players were never set up to cater to the majority of the populations in the markets where they operate — the unbanked and underbanked in emerging markets represent a wide ocean of opportunity for fast-moving software-driven models.

So as the Omaha firm leads financing rounds for a company born in Brazil, perceptions and capital flows shift, opening up possibilities for the next frontiers.  As we continue to see strong operating metrics for similar businesses across Africa, more participants will emerge (we are waiting for you Berkshire!), and this interest and capital will fund more founders and more ambitious enterprises.

Team update:

We are pleased to announce that Cordel Robbin-Cokker joins Raba as the firm’s first venture partner.  Cordel has been a close friend of the partnership and an important part of the African and Cape Town technology ecosystem.  Cordel is the CEO and co-founder of Carry1st, a Cape Town-based mobile games publisher and payments company.  Prior to Carry1st, he was part of the founding team of Caryle’s Africa-focused fund, a $700M fund that invested across the continent.  He started his career in investment banking at Morgan Stanley in London, and completed his undergraduate degree at Stanford.  We are excited to welcome Cordel in this role and introduce him to many of you in the near future.

As mentioned on our fintech CEO call, starting this August, Nina Chen will be based in the Bay Area as she begins her first year at the Stanford Graduate School of Business.  We are proud of Nina, who was awarded the Knight-Hennessy Scholarship (which is a big deal! — awarded to fewer than 1% of accepted Stanford applicants).  We are excited to continue to build our network in the Bay Area and at Stanford, initiatives Nina will help lead.

In this Raba update, we’ve written up a list of observations and ideas we believe have a reasonable probability of happening.  It’s not meant to be a list of predictions!

The BIG picture on why now? (These are not meant to be predictions!)

• AWS was the original unlock that allowed developers to build capital-efficient, fast growth companies from anywhere in the world, with relatively small funding. Flutterwave’s pre-seed in 2016 was less than $250K; it would have been nearly impossible to have started to build Flutterwave with that amount of capital 10 years prior.
• Early success of companies like Paystack, Flutterwave and Yoco in key fintech domains of online and merchant payments not only power digitization of other businesses, but they also encourage capital investment in analogous companies given successes in other emerging markets — like Stone, PagSeguro and Nubank.
• Given the nature of fintech infrastructure, where at-scale winners take all or most of the opportunity, we will see significant M&A, especially in highly regulated areas, where licensing is time-consuming, and the buy-vs.-build decision skews toward buy. 
• Technology founders in Africa are today’s and tomorrow’s role models. Entrepreneurs on the continent admire what Iyin and GB at Flutterwave built, and what Kat, Carl and Lungi at Yoco and many others are building. This drives the flywheel of company building. The power of seeing and believing is incredible. 
• Africa will have more software developers than the U.S. by 2030. There are currently one million developers in Africa vs. 4.5M in the U.S. To keep track of developments, we track GitHub repositories that break out the number of git (code) repositories by region. 
• Young people in Africa and emerging markets will take to the internet creator economy because of access and income potential, where creators earn 2-3x the minimum wage; earning $300 USD or more per month is a big deal in almost all frontier markets. 
• Companies can hire talent anywhere, meaning the best talent can stay close to family and work for global companies. This has significant ramifications for talent ecosystems in Africa, with expanded access to world class companies. 
• To the previous point, venture-backed companies will feel competitive pressures (from global companies hiring locally) to attract and retain the best possible talent locally. This is already happening.
• ESG investing is the future. Capital will flow to companies that integrate ESG as part of their operating systems, and technology companies focused on improving lives in the most challenging market segments will benefit. 
• A strong African consumer is good for Africa and good for you. Global investment firms and governments are increasingly crafting long-term strategies, as the opportunity is too big to ignore.
• The internet economy (and internet creator-led work) will drive huge value creation, and metrics like GDP will continue to under-represent size and growth and become less relevant, especially in Africa.
• People don’t believe you can make $300 per month playing video games, and what looks like just a fun game becomes a real income-generation source. This is currently happening all over the world. 
• Africa will not follow the path of industrialization via manufacturing. Robotics and machinery will power the factories of the future, not people, and this is a good thing. People can focus on meaningful work, and build. 
• Gen Z is a generation of collaborators. Their perspective is “abundance” minded rather than “zero sum,” and they will work toward solving hard, inequity problems globally. As younger people inherit and build more wealth, tackling global problems will be a key focus.
• Following its investment in NuBank in Brazil, Berkshire Hathaway will make other later stage technology investments, including in Africa (and quietly become a leading global tech investor). 
• We will see a $50B technology company born out of Africa (not Naspers) that competes with global leaders in other markets.

Other news and musings…

As many of you know, I’m passionate about cycling and believe competing in sports and fitness builds strong habits and endurance, and translates directly to professional life.  This is a story of Nicholas Dlamini, who grew up in a Cape Town township and became the first Black South African cyclist to participate in the Tour de France — an incredible accomplishment for anyone who cycles and/or follows cycling.  We look forward to going out for a ride in Cape Town when Nicholas is back later this year.  Link to an article on Nicholas and his work in South African townships here.