Hi there, Justin here. Apologies that this week’s newsletter is a couple of days late. We’ve been under embargo with our friends at
But before we get into it, I want to take a moment to introduce The Flip Notes Partner Editions: our occasional sponsored deep dive of a market or sector or business model, in partnership and behind the scenes with a company whose story benefits the ecosystem. Today’s edition of TFN is a partner edition with a company whose founder I’ve learned a lot from about B2B commerce. You can read more about the process and guidelines of the partner editions here.
Today, Sokowatch has announced its $125 million Series B fundraise (all equity!), led by Tiger Global and Avenir Growth Capital, and in conjunction with its expansion to Côte d’Ivoire and Senegal, the company is rebranding to Wasoko.
In advance of this news, Wasoko’s Founder and Global CEO, Daniel Yu, and I braved Nairobi rush hour traffic (in the rain!) a few weeks back to sit down and discuss the significance of this round, their West African expansion strategy, and some lessons from scaling their B2B commerce model to six markets across the continent.
Midway through season three of The Flip podcast, we explored the B2B commerce and “digitizing informal retail” business models in Problem Solving for Fragmented Retail. It’s a model that’s having its moment in African markets. In the FMCG category we see Wasoko and MarketForce in East Africa; TradeDepot, Sabi, and Omnibiz in Nigeria; MaxAB in Egypt; Jabu in Southern Africa; Twiga Foods for fresh produce; TopupMama and Vendease for restaurants; ZUMI for essential apparel.
These models aggregate demand at the fragmented last mile and connect with supply. In some instances, these companies build out their own capex-intensive infrastructure. In others, they work with existing distributors. In nearly every instance, a digitized order history enables these platforms to offer some kind of financing.
All of these models put the small mom-and-pop retail store at the center of their operations. Not only do these retail stores play a vital role in the day-to-day lives of African consumers, but they play an important role in African economies, in terms of employment. By some estimates, upwards of 85% of employment is informal across Africa.
And if we agree with the premise that the nature of last-mile retail – small, fragmented, informal – won’t be changing anytime soon, then these MSMEs become a really important part of the growth opportunity for these markets, as well. Already, up to 65% of gross domestic product comes from informal production, and as the population continues to grow – and as formal job creation remains commensurately small – the future of work for many Africans remains informal.
So it is with this backdrop that Wasoko has raised its $125 million round.
After announcing its $14 million Series A in February 2020, the company has seen tremendous growth to garner this round: annualized revenue over $300 million, which is over 500% year-on-year growth. And the majority of their revenue comes from outside of the company’s home country of Kenya.
So while this is a story of both the macro context and steep traction, it’s also a story of a few other pervasive themes in the African tech ecosystem, which we’ll explore in turn:
- Invested Infrastructure, aka Everybody is a Fintech
- Lending and Defaults
- Expansion strategy
Sokowatch was first launched in 2016. Daniel, a software engineer, had built a SaaS product targeted at manufacturers to digitize the ordering process with its distributors and retailers. That pilot was a failure. The shops were not getting the goods they ordered on the platform because of the logistics bottlenecks.
The retailers in question were making small orders, which compounded logistics and infrastructure problems for distributors. B2B ecommerce providers aggregate essential products to reach a large enough order volume to where they can profitably deliver goods to thousands of small shops across Nairobi or Kigali or Abidjan.
Invested Infrastructure, aka Everybody is a Fintech
While Daniel set out to build an asset-light software business, to profitably aggregate and deliver relatively small order sizes of relatively low-margin goods required that the company invest in infrastructure. Wasoko manages its own last-mile delivery network and operates roughly 40 warehouses across its six markets.
While some global investors may feel less interested in the offline and capex intensive nature of African markets, it is a necessary component of Wasoko’s operating model. It is a model, Daniel believes, that global growth investors like Tiger – with a portfolio of ecommerce companies doing first-party delivery – understand.
For Wasoko, the unit economics of its delivery business needed to work from the beginning. While digital ordering and payments creates an opportunity for SME lending, the company’s core delivery model is not subsidized by its lending or ancillary revenues.
But crucially, for online ordering and delivery to work in these markets, it also had to be same-day delivery. Otherwise, it increased the likelihood that retailers would not have the cash on hand to pay for the full order they placed the day before.
So Wasoko’s invested infrastructure enables profitable same-day delivery, which improves its delivery success rate, and which then enables its Buy Now, Pay Later inventory lending experience for its customers.
One pervasive, prickly question within African tech is market size and depth. As vertical SaaS has its moment in US markets – Mindbody for fitness, Toast for restaurants, Squire for barbershops – it’s these businesses’ fintech component that has venture investors particularly excited. Fintech scales vertical SaaS, writes a16z, arguing that “with fintech, vertical markets are larger than most realize.”
While many of these African businesses need to build out infrastructure and cannot service their customers with software alone, as Daniel learned, the invested infrastructure becomes a moat and a path towards greater profitability. And with digital transaction history, the infrastructure ultimately enables these businesses to offer financial services to their customers.
For its retailers, Wasoko offers in-kind financing of inventory, rather than a separate disbursement of funds. Instead of an interest rate, it employs a differentiated pricing model, with the pay later option costing up to 2% greater, on average, than paying upfront. This also makes its “lending” Sharia-compliant.
And as a result, access to BNPL doubles its customers’ average order value and in turn grows their customers’ lifetime value while the company’s acquisition costs remain the same.
Lending and Defaults
Last week, friend of The Flip Samora Kariuki published his exploration of B2B vendor lending in the Frontier Fintech newsletter. Can it scale? He writes,
For B2B digital vendor finance to scale in the continent, a number of things need to happen;
1. Off-line data needs to be embedded onto the platforms. This data can only be collected by sales agents and is by nature non-scaleable. Such data could include how well the shelves are stocked throughout the week and whether specific suppliers have stopped supplying that specific retail location;
2. Digital vendors have to be the exclusive vendors for a large chunk of the retail basket to ensure that there’s sufficient leverage for repayment;
3. Digital vendors have to scale sufficiently so as to enable additional margin to be available to the retailers thus driving up the capability to repay.
To Samora’s first point, this is where the offline acquisition model of these tech platforms plays a role. And where Wasoko’s owned infrastructure can be advantageous.
As for exclusivity or leverage for repayment, while Wasoko doesn’t maintain exclusive relationships with its average retail customer, they do see an increase in same-store purchases, which signifies a growth in their share of wallet. And its ongoing relationship with customers, who need to restock on a regular basis, ties the in-kind financing to an intrinsically repeatable behavior, leading to a comparably low default rate compared to other SME lending products.
And as for scale, this is where Wasoko’s vertical expansion comes into play.
While Wasoko’s vertical expansion started with the delivery and warehouse infrastructure, moving upstream was an obvious opportunity for the company, from both a growth and profitability perspective. Not only are margins on FMCG products low, but product availability is a challenge in the markets in question, as well.
In the aforementioned podcast episode, Daniel shared one current constraint on the business,
If we talk about what’s holding us back the most right now, in general as a business when it comes to our growth, it’s actually on the manufacturer side… You order 10,000 boxes of soap and they’ll deliver us only 6,000.
As part of this round, Wasoko is piloting private-label goods with contract manufacturers. In markets with product availability challenges, and therefore less brand loyalty, the hypothesis is that a reliable, always-in-stock brand could garner stronger consumer preferences in the markets in question.
As its invested infrastructure pays dividends; as other, comparable B2B commerce companies take a similar approach to adjacent verticals; and, as financial services facilitates the growth of its retailers, we’re finally getting a clearer picture of the unrelenting market size questions asked of individual African markets.
Generally, the answer to the market size question, in the pan-African context, has included Nigeria in some shape or form. But for Wasoko, they’re focused elsewhere, for now.
From its home base in Nairobi, the company has expanded horizontally, to Mombasa, Eldoret and Nakuru in Kenya; Dar es Salaam, Arusha, and Mwanza in Tanzania; Kampala, Uganda; Kigali, Rwanda; Abidjan, Côte d’Ivoire; and, Dakar, Senegal.
The question is always why not Nigeria? And for those, like Wasoko, choosing to grow to alternative markets, the answer is generally some combination of: Nigeria is a difficult place to do business, in general, and for startups to expand to relatively early in their life cycle, in particular; and, one can build sizable pan-African businesses by aggregating smaller markets.
Some growth-stage companies, Wasoko included, are choosing to wait to tackle Nigeria until they are truly ready from an operational perspective. Meanwhile, with its current markets, Wasoko benefits from regional integration in the East African Community bloc, as well as amongst the Francophone West African countries that share a common currency and legal practices across the CFA and OHADA zones.
Back in season two of The Flip podcast, we explored the topic of geographic expansion. In it, we heard an anecdote from The Subtext’s Osarumen Osamuyi, who at the time was working for Africa’s Talking.
…we’re in 17, 18 markets. I can tell you that the home market is still generating a significant portion of revenue, and this is true across many of the companies with which I’m familiar.
As aforementioned, the majority of Wasoko’s $300 million-plus annualized revenue comes from outside of Kenya. This revenue breakdown is, to date, atypical of African startups with a pan-African footprint.
To what extent may Wasoko’s path to growth – or MFS Africa’s expansion into Nigeria only after building a 30-plus country footprint, or Wave’s route to market through Senegal, Côte d’Ivoire, and Uganda – influence the expansion strategies of the next wave of startups?
The big picture
A few weeks ago, I had coffee with an angel investor who was asking my perspective on an early-stage startup building in the agent network space. This investor was interested in the business, but expressed concern about the degree to which global investors would be attracted to a startup working in an analog and offline capacity. Global investors love the zero marginal cost nature of software companies, which create their exponential growth potential.
But the fact is, the macro perspective and nature of African markets means that its growth potential is, to a large degree, in bringing digitization and technology to these market segments. And to do that often requires analog and/or physical infrastructure. (So too do businesses like ghost kitchens or on-demand grocery delivery, by the way.)
For the growth and development objectives of African markets to be realized, these businesses – as operationally difficult and capex-intensive as they are – need to win.
I am personally excited about $125 million equity rounds, in businesses like Wasoko, from investors like Tiger Global and Avenir, because I hope it demonstrates that there is sizable capital out there for African growth-stage companies who had to build the physical infrastructure to capture an opportunity in a wide market segment. And for companies that may be bucking traditional wisdom – from a capital allocation perspective, or from an expansion perspective – in doing so.
And from an ecosystem perspective, the more representative examples of revenue growth and fundraising of this nature, the better.