Each week during Season Two of The Flip, we’re going to publish an essay that corresponds with that week’s podcast episode. This week is Season Two, Episode Three: Finding Fit – Opportunities in the Global South, featuring Adia Sowho, formerly with Migo, Tayo Oviosu from Paga, Fahim Saleh, the founder of Gokada, and Ciku Mugambi with the IFC Disruptive Technologies and Venture Capital team.
This week’s episode was dedicated to Fahim Saleh, who was killed in New York City on July 13th, and who I had the opportunity to interview Fahim just two weeks before his death. This week, his sister also published an emotional tribute on Medium entitled Mourning my baby brother, Fahim, which I encourage everyone to read. Our heartfelt condolences go out to his family and the entire Gokada team.
In an interview I had last year with Erik Hersman, the CEO of BRCK, which builds ruggedized connectivity hardware – routers and modems – built in, and for, frontier markets. Their core product, the SupaBRCK, is “a connected rugged microserver” that includes an onboard battery and solar power connectivity, and is housed in a weather-resistant case.
During our conversation, I asked Erik about the opportunity for BRCK in markets across Africa, as well as outside of the continent, in environments where similar issues of connectivity and/and electrification exist. He responded,
It is exciting that we’re getting to a point where people are realizing that the technology innovation that’s happening here has real convertible properties across the world. There’s much more to be gained on a south-to-south transfer of knowledge and capital than there is north to south… What we are finding in Africa is that there are very lucrative markets other than what we traditionally think of where the money is, and the more that gets embraced, the more you see that wave happening across the Global South, the better it is for these economies.
If we are to agree that there is more to be gained on a south-to-south transfer of knowledge and capital, it follows that there are opportunities for African startups to seek expansion to other emerging markets outside of Africa, or seek partnerships with startups in these markets.
It’s starting to happen. This week’s podcast episode explores Paga’s expansion to Mexico and Migo’s expansion to Brazil, as their respective second markets after Nigeria. Their expansion strategies were based, in part, on market and environmental similarities. For a company like Paga, where a low margin payments business requires requisite scale and volume, Mexico offered a more attractive consumer market than did other countries in Africa.
In our end-of-episode conversion, Sayo Folawiyo, The Flip’s executive producer, posited that the “expansion calculus” – and therefore the attractiveness of Latin American markets to African startups – was grounded in two key metrics: market size and under penetration.
And in spite of the distance – both literal and figurative – of markets like Mexico and Brazil, the market size and under penetration, in a venture capital game, make it worth getting on a plane and figuring it out.
A data-driven exploration of the Global South
While of course expansion decisions are more nuanced, I was nonetheless interested in better understanding the dynamics (and opportunities) in markets across the Global South, and how they compared with major African markets.
To be sure – this is an incomplete exercise as far as expansion goes. It’s difficult to make a unilateral argument given the diversity of offerings and consumer considerations that ought to be taken into account.
However, using market size and under penetration as a proxy, I have aggregated publicly available data across several categories that we can use to compare select African markets to select markets outside of the continent.
Markets were chosen by population size, and not surprisingly, there is some degree of correlation between these markets and the level of venture activity relative to other markets in their respective regions.
I collected data for the following markets: India, Indonesia, Pakistan, Brazil, Bangladesh, Mexico, Philippines, Vietnam, and Thailand, as well as Nigeria, Ethiopia, Egypt, Tanzania, Kenya, South Africa, Uganda, Ghana, Cameroon, Côte d’Ivoire and Rwanda.
Money and Markets
First, let’s look at population and purchasing power parity (PPP).
While topline population, as we’ve argued in a past podcast episode, is an incomplete metric, it is nonetheless useful – and perhaps sobering – to compare the market size, on a per-country basis, of African countries and their peers outside of the continent.
Meanwhile, Paga was explicit in their desire to expand to a country with a high GDP, and we can clearly see Mexico’s advantage in that category relative to its peers.
Finally, I find urbanization to be a useful statistic in assessing the types of opportunities in a given country, i.e., ride-hailing in a city versus off-grid energy. And again, in the case of Mexico, we can see how high urbanization has positive implications for a company like Paga, which relies on agents for cash-in, cash-out services.
Next up, a view of the banked, and the utilization of their accounts.
In spite of Mexico’s sizeable GDP and population, its banked population is comparable to that of Nigeria.
No deposit and no withdrawal in the past year assess the utilization of an account amongst those who have an account. For example, India’s banked population is quite high – 80% – however, their utilization is quite low – over 50% have not deposited or withdrawn in the past year.
That’s not necessarily a bad thing though. In taking a phased approach to getting consumers to register accounts and complete KYC information, India is well-positioned to grow the utilization percentage through targeted interventions.
On the other hand, perhaps no account usage is an opportunity, in demonstrating where there are gaps. While Mexico’s banked population is relatively low, might Paga’s offering also be more attractive and useful to those who have accounts but are not currently active? In fact, Mexico’s underutilization is higher than most of the African countries included in this assessment.
Connectivity, Internet Usage and Electrification
Much like bank accounts and mobile money, it’s instructive when looking at connectivity to not only assess penetration, but also utilization.
Let’s start with Internet and social media penetration.
These numbers not only show the appetite (or lack thereof) for digital products and services, but they also raise a question – why is usage low and how can these numbers?
I previously wrote about the so-called usage gap, which is highest in South Asia than any other region in the world. While 33% of the population is connected, 55% of the connected population does not use the Internet. In contrast, those percentages in Sub-Saharan Africa are 24% and 46%, respectively.
The GSMA has a Mobile Connectivity Index, that assesses the usage gap across four key enablers of Internet adoption – infrastructure, affordability, consumer readiness, and content and services – and the index itself scores each country with an average across all four dimensions.
The index is meant to demonstrate that mobile connectivity is not only an infrastructure or a coverage or a price issue, but also a relevancy and/or digital literacy issue.
Several markets, including many in Africa, lag behind in the content and services category, which indicates that (perceived) relevancy and/or digital literacy are problems that have a greater impact on low utilization than infrastructure, coverage, or even price.
It is especially interesting to see such a high usage gap in South Asia, where data costs are some of the lowest in the world.
I am also interested in electrification as a sign of activity, and as another indicator of prospective usage of digital products. African markets are quite far behind in this category.
If we take these three charts together, we can see that Mexico has relatively high Internet and social media penetration, high electrification, and a high GSMA connectivity index score, meaning they are fairly well placed to bridge the gap amongst those connected but who do not use the Internet.
This, to me, indicates a positive opportunity for digital products. And when taken along with high population and GDP, and low percentage of banked population, we can see how it makes an attractive market for Paga.
The opportunity to look outward
My interest in this data is severalfold. First, I personally don’t know much about these markets, but if African growth-stage companies are going to start looking at these markets with increasing frequency, I think everyone in the ecosystem ought to know the “competition”.
Though who can blame Paga or Migo from looking at Latin America? If all else is equal – and the work to expand to any given market is the same no matter where it is in the world – wouldn’t you go for the biggest TAM?
Perhaps this underscores how crucial it is for trade regulation and initiatives to create less fragmentation across Africa’s markets.
Another reason I am interested in this data is in seeking what can be learned from those who have been there and done that.
In a recent conversation I had with Cikü Mugambi, a venture investor with the IFC, she told me about the benefit to the IFC in making global investments across Africa, Latin America and Asia. In her case, there are many case studies from companies outside of Africa – who may be further along in their journey – from which certain lessons can be applied to African startups who are on the same journey.
But we don’t need to be VCs to seek out these lessons.
I was particularly struck by Brazil’s 100% electrification, both total and rural. For context – Brazil is gigantic. It is the fifth-largest country by area. It’s five times bigger than the biggest African country (Algeria), and it is eight times bigger than Nigeria. Brazil also has a population over 200 million, and while 87% of that population is urban, in absolute numbers their rural population of 27 million is bigger than Cameroon and Côte d’Ivoire.
So how did Brazil electrify the entire country? A quick Google search gives us a paper entitled Rural electrification of the Brazilian Amazon – Achievements and lessons.
And to be sure, the lessons go in both directions. African markets are far and away leading in mobile financial services. This, to me, raises another question – what other innovations coming from Africa have “convertible properties across the world”?
Let’s find out.