Hey there! Justin here. I'm writing this week's newsletter with a song stuck in my head. Have you heard of the Stealers Wheels?
🎵 Clowns to the left of me, Jokers to the right, Here I am, stuck in the middle with you 🎵
But as you're about to read, this isn't really a good thing...
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Flutterwave recently published its 2021 year in review, and it was quite a year. Partnerships with the likes of PayPal, mobile money providers like MTN and Airtel, and banking institutions like Standard Bank. Their continued expansion initiatives pushed their country tally to over 30 markets globally. They acquired the creator platform Disha, and closed their $170 million Series C. And, they launched a few big products, including Flutterwave Market and the remittance platform Send.
I remember first learning about the smiling curve in the context of publishing. Ben Thompson used the smiling curve - "an illustration of value-adding potentials of different components of the value chain in an IT-related manufacturing industry" - to explain where value is captured amongst publishers in the era of social media aggregators.
In IT manufacturing as well as publishing on the internet, "both ends of the value chain command higher values added to the product than the middle part of the value chain."
On one hand, you have the aggregators - Google, Facebook, Twitter - and on the other you have, well, The Flip.
Value accrues to either the differentiated content creators or the aggregators. The middle is the dead zone.
In media, this makes intuitive sense when looking at publishing as a value chain. Prior to the internet - which enabled distribution of content at zero marginal costs - the publishers controlled and managed the distribution. They were radios with their frequencies or the newspapers with their printing presses and delivery routes. But today, they're largely commodified and undifferentiated.
Aggregators win horizontally, with their massive power over demand. But on the other side of the chart, content creators win vertically, because of differentiation. Thompson writes,
That writer or publication has one unique superpower: they are the only one of their kind. To use the strategic term, they are differentiated, and differentiated people – or products – can charge far more than their marginal cost.
Once you understand the smiling curve, it's hard not to apply to other sectors.
Indeed, it's been applied to venture - on one end you have Tiger Global: big checks, really fast. On the other, you have the strong brands - a16z or Sequoia - or e.g., super helpful, vertical funds like Ribbit in fintech. A proliferation of solo capitalists - and those that have launched funds on the heels of content, in particular, like The Flip Capital - is a function of differentiation. Particularly in an environment of abundant capital, if capital is commodified, it's the differentiated investors who are going to win deals.
Everything that's stuck in the middle - in media or venture or retail - is in the dead zone. You don't want to be there.
I have been thinking about the smiling curve this week in the context of African markets, in particular. On Thursday, Apple announced that in the future all of their phones will be payment terminals, where customers can make payments simply by tapping the back of the phone. What happens when every agent network point-of-sale device is just a smartphone, I wondered. "RIP Square," wrote others.
Those with the greatest distribution and war chest are most likely to win the horizontal game and capture the most value on one end of the smiling curve. And for those who can't compete on scale, strategic differentiation might require a vertical focus.
The first phase of the African tech ecosystem was largely "digitization" of marketplaces - connecting supply and demand online. But the evolution of these marketplaces looks like a depth of services within a given vertical.
The Flip's b-mic Sayo Folawiyo has been betting on the evolution and importance of vertical marketplaces way before it was en vogue, so I'll use his business, the home services platform Kandua, as an example. It's one thing to help a plumber find customers; it's another for Kandua to offer them the tools to run their small business. Beyond access to market and the acceptance of payments, that might look like SaaS tools such as dashboards and invoicing, or services like access to suppliers, or embedded finance opportunities like credit and lending.
It's a strategic bet on their ability to get a high ARPU from a few people. And as Ben Thompson argues above, "differentiated people – or products – can charge far more than their marginal cost."
Then the big question becomes, from a market size perspective, how narrow and vertical can you get? And does depth increase your market size?
It's an especially acute question from a timing perspective in the context of African markets, where there is still a lot of infrastructure to be built and where the biggest success stories to date have been largely the payments infrastructure companies. As infrastructure compounds, verticals will become more important, as it simultaneously becomes cheaper for vertical platforms to build while leveraging everyone else's infrastructure.
And if we agree that the world is unquestionably moving towards unbundling and differentiation, for African markets it shouldn't be a question of if but when.