S1E2: Exploring Sustainable Business Models
They say that the difference between the US and Africa is that the US has competition while Africa has complexity. And a big reason for its complexity is a lack of infrastructure.
It compels many startups to build infrastructure, invest in other market-making activities and/or to diversify earlier in their journey to make their businesses work. How are startups across the continent building sustainable businesses in this environment?
2:57 - Kasha's Joanna Bichsel
10:56 - MAX.ng's Tayo Bamiduro & Chinedu Azodoh
18:17 - BRCK's Erik Hersman
23:06 - Hello Tractor's Jehiel Oliver
32:07 - a conversation between Justin and The Flip's b-mic, Sayo Folawiyo.
Justin [00:11]: I recently heard a remark that the difference between the US and Africa is that the US has competition while Africa has complexity. And one reason for complexity certainly, can be attributed to a lack of infrastructure. Kennedy Nyabwala, CEO of the Kenyan logistics provider Bwala understands this complexity. I can imagine it's incredibly difficult to do last mile delivery when there are no street names and addresses in some areas of Nairobi.
Kennedy [00:34]: Navigation is a challenge - we don't have street addresses, we don't have building addresses - that is in the neighborhoods where the last mile drops are supposed to take place.
Justin [00:46]: For Bwala, Kennedy has attempted a variety of interesting and alternative methods to make last-mile delivery a little less complex in Kenya.
Kennedy [00:53]: I proposed this to google, to name streets in Nairobi. They have all these addresses and landmarks within the various suburbs but they do not have various streets.
Justin [01:08]: They say that entrepreneurship is that it's like jumping off a cliff and building a plane on the way down. And in Africa, if you want to do last-mile delivery - you may literally be naming the roads as you go.
In this episode of The Flip, we talk to entrepreneurs around the continent who are tasked with the challenge of profitably building the infrastructure or making the market, as a necessary activity for startup success. And key to these infrastructure building or market-making efforts is the business model - and making sure the numbers work out. These requisite investments into a startup's value chain, or a focus on many revenue streams, may appear unnecessary or unfocused to the outside world, but it may be exactly what's needed to build a sustainable business in Africa.
VO [01:57]: You're listening to The Flip, the podcast exploring more contextually relevant stories from entrepreneurs around Africa.
Justin [02:09]: Welcome back to The Flip - I'm your host Justin Norman. In today's episode, we talk about business models and sustainably building infrastructure within the model. If we start with the assumption - which is a tenet of Silicon Valley-style entrepreneurship - that it's best to start with one business vertical or revenue stream at a time, it's this strategy that best allows entrepreneurs to experiment in a focused and controlled manner, before scaling to other markets or revenue streams.
On the other hand, it seems that African businesses don't always have that luxury - due either to lack of infrastructure, market size or other issues, such as political or economic risk. So how are entrepreneurs in Africa solving problems and building sustainable businesses? And what does that look like from a strategy and business model perspective?
Joanna [02:55]: My name is Joanna Bichsel and I'm the CEO and Co-Founder of Kasha.
Justin [03:00]: Kasha is an amazing social enterprise, currently operating in Rwanda and Kenya.
Joanna [03:05]: Kasha is an ecommerce company for women's health and personal care in East Africa, and we are striving to be the largest platform for women's health and personal care in the world - specifically optimized for emerging markets.
Justin [03:18]: The company is focused on helping women gain access to health products that may be stigmatized in more traditional and conservative communities-and especially in rural markets.
Joanna [03:27]: The reason Kasha started was when you think about it there's products women need throughout their lives and related to their bodies and health is actually highly stigmatized. Women actually have a hard time getting the products they need, whether that's menstrual care, contraceptives or other things for intimate health.
Justin [03:46]: The idea for Kasha started during Joanna's time with the Bill and Melinda Gates Foundation, where the foundation would pursue a distribution model via local clinics. However, over time Joanna recognized a problem with how charities are setting their goals and determining what specific problems they should be aiming to solve.
Joanna [04:03]: So there, I focused on technology in global development. The area I worked the most on was supply chain and very often we'd be in very rural areas - whether that's Liberia or Kenya or Ethiopia, or various other areas - and it was quite common at these clinics would say we actually don't have a stock problem related to family planning. There's a huge difference between getting contraceptives as a young woman in a traditional society vs. getting a vaccine or malaria medication - it's highly stigmatized. And our goal was to ensure there's no stock outs. Really, if we solve this goal we would not actually be helping women get these really impactful products on their lives.
Justin [04:44]: So Joanna went out to try to help solve this problem.
Joanna [04:47]: I actually tried to look for a job where someone was doing this - I'm like, someone's gotta do this - and it didn't exist, which was insane. And when the business model came together, I was like "how does this not exist" and that's basically how it started. Kasha was really brought about by really looking at that challenge and thinking there's actually an opportunity here to flip this upside down and make this really driven with an experience that is optimized for women.
Justin [05:15]: Now, Joanna brought up pretty early in our conversation the importance of business model, which is guided in part by past experiences and her view on commercial business versus non-profit.
Joanna [05:25]: I feel very strongly about that - I did spend a few years working at a donor and I've seen non-profits literally be forced to change their entire strategy because the donor changed their strategy - and you know, I'm too stubborn for this kind of stuff. And so, from the beginning, I was never going to start a non-profit. It's just not my way of operating, I suppose. There's a difference between NGOs where you're giving products away for free, but I also very much believe in the value of business and the data there. If someone's spending the little money they have to buy something of value and they keep coming back, you're providing something of value and I think that's really important.
Justin [06:04]: For Joanna and Kasha - it all started with business model, which is of especial importance for a business that's primarily focused on selling products for bottom of the pyramid consumers.
Joanna [06:15]: In general, social businesses do not have straightforward business models. You have to be creative if you're selling products to some of the poorest people in the world. For us, when you think about it, we are ecommerce, and we're selling products that have to be competitively priced. This will not work if we are more expensive than what people can get in stores in the traditional way.
Justin [06:38]: And on top of low margins, making matters more complicated, some of the poorest people in the world are also very hard to reach. Which means different customer acquisition strategies and customer experiences, depending on who they're selling to.
Joanna [06:51]: One of the things that's unique about Kasha is we do serve women of all socioeconomic levels, in urban and rural areas. So the way people order, the way we market, they way we deliver is different depending on what customer segment type you fall into. It's really about meeting our customers where they're at. In rural areas, and Rwanda especially, ecommerce is very new. We quickly became the largest ecommerce company by volume of orders there, and that means you actually have to teach people about ecommerce, which slows you down, but - you can't just set up a Shopify site in an apartment and ta-da, ecommerce is booming. There's a lot of offline, as well as online activities that you do.
We also have a Kasha agent network around the country. These are women that live in the commnunities, some of them are community health workers, and they are the face of Kasha. They help build trust, and help people feel comfortable ordering online, and knowing that no one will see what they're ordering. So, there are a variety of ways, depending on the customer segment, that we've really tried to optimize for the experience.
Justin [07:59]: So, how does Joanna look at Kasha's business, and how do they make the business model work in this environment?
Joanna [08:04]: Unit economics is a key metric for us. Every time we deliver an order, we do not want to be losing money - because as we scale, we scale losing money if we are at negative unit economics. So for us, it's always the focus, especially when we enter into new regions to get to positive unit economics. And on the very very low income and rural segments, the goal there is always to achieve positive unit economics - even with that, you're not going to get massively high margins there, they are pretty slim margins, but that was why our model was set up, so that we serve both middle income and low income - actually 60% of our consumer revenue comes from middle-income consumers, while the volume of orders - 80% of actual orders come from low-income.
Social businesses have more of a complex business model and for us we're always having to look at the distribution of where the revenue is coming from, so that for the company as a whole we are profitable, and that each business unit is making money and breaking even, but not all of them are going to necessarily pay for our engineers and our data scientists.
Justin [09:17]: And unlike many ecommerce companies, Kasha also earns B2B revenue.
Joanna [09:20]: So, from the beginning we realized that we actually are building a platform of the most influential consumers on the continent - women drive 80% of consumer purchases, they own the household, they are the primary decisionmakers when it comes to family health. Women are a target consumer for many pharma, FMCG, beauty companies that are looking to enter the market. And so for us we are a platform where we have both B2B revenue in addition to our ecommerce, the B2C revenue. And while low-income consumers and rural may be low margin, you find that a lot of manufacturers are more interested in reaching them because they're kind of unreachable for them otherwise - so we can still monetize that capability.
Justin [10:19]: Kasha has proven out a sustainable model that - regardless of their distribution of revenues - allows them to accomplish their goal of getting stigmatized products into the hands of rural and low-income women in East Africa. Kasha's model effectively addresses a market size challenge - because of the slim margins of selling to rural and low-income women, they're tasked with selling to easier to reach and higher-margin customer segments, as well as to monetize manufacturer relationships. And Kasha - in building out an agent network is also building infrastructure which as we'll see, is the other area of focus for African startups to determine how to make the model work for their business.
Tayo [10:55]: Imagine London or New York City without the underground, without the subway, without the ferries and with 70% of the streets being unpaved or poorly paved. And then you have about 20 million people within 1000 square kilometers of land trying to get around on a daily basis to conduct their business. It's an absolute nightmare.
Justin [11:20]: That's Adetayo Bamiduro, the Co-Founder and CEO of Nigerian transportation company max.ng, which provides ride-hailing and last-mile delivery using motorcycle taxis, known in West Africa as Okadas. I spoke with Tayo and fellow Co-Founder, Max's Chief Growth Officer Chinedu Azodoh, about the level of complexity they need to overcome, and the subsequent investments they need to make, to not only build a sustainable business, but to disrupt and improve the difficult transportation situation in Africa's largest city, Lagos.
Tayo [11:51]: The public transport system is fragmented, it's poorly organized, it's very informal, it's very rough. The vehicles are old - a lot of the vehicles are 20-30 years old. Add to that the fact that Lagos has about 1 million cars on the road, so it's traffic jams all the time, it's just so hard to move around. Add to that again the fact that you have close to about half a million informal motorcycle taxi drivers, who haven't gone through any formal training, who don't wear helmets, it's just a complete and total madhouse. That's the context we're talking about here.
Justin [12:27]: But where many see chaos, Tayo and Chinedu see opportunity.
Tayo [12:31]: What Max has done is to bring a little bit of sanity using technology, using training, using mobile payments to organize an industry and make it safer, more accessible and more affordable for commuters.
Justin [12:45]: And how has Max begun to bring the sanity to Lagos?
Tayo [12:48]: We launched a delivery service about 3-4 years ago now, and then we pivoted to a pure mobility platform that does ride-hailing and last-mile delivery
Justin [12:59]: Here, we immediately see a diversion from the typical, Silicon Valley method of entrepreneurship - rather than focus on one vertical at a time, the Max founders opted to spread their services out horizontally, and focus more broadly on providing services to solve for general mobility challenges in Lagos.
Tayo [13:14]: MAX is building a technology infrastructure and financial services to bring Africa's mobility industry online. They way we are doing that is we are providing asset-backed vehicle financing to drivers, we provide them driver training, we've built an ehailing platform that connects drivers to commuters on demand, we're also providing other services like insurance and identity management and licensing to drivers. So it's a bunch of really important things we're doing because the basic infrastructure needed for mobility doesn't exist in most parts of Africa today. The industry is still very informal and fragmented. That explains why you have high accident rates for example in the two-wheel mobility space. So what Max has done is to build a couple of very critical supporting infrastructure to make transportation safe, affordable and accessible in Sub-Saharan Africa. Some of the things we've done for example are we've built a transparent dynamic safety scoring system for drivers, driver academy that focuses on bringing onboard high-quality drivers, we've implemented an infrastructure/innovative approach that combines ride-hailing with financial services and mobile commerce. And we're executing with a strong partnership driven approach - so we're working very closely with financial institutions, with governments and also with vehicle manufacturers and payments companies to create all the elements needed to provide an app-based two and three-wheel mobility service.
Justin [14:43]: Ride-hailing, last-mile delivery, financing, mobile payments, insurance, driver training and safety. That's like 6 or 7 innovations and businesses in one! What do Max's investors think about all of these verticals they've gotten into?
Chinedu [14:54]: There was a lot of explanation that had to be done to explain why we needed to sell health insurance to drivers, why we needed to not just do motorcycles, why we needed to do these inefficient things to provide support and all these other things.
Justin [15:04]: That's Chinedu.
Chinedu [15:05]: We've gotten to a point now where they just get it. They trust that we're making the right decisions for the company because they see the numbers, but initially it was a lot of no it doesn't make sense, don't do that, or in America we didn't do it this way. I think there's been some learning and some exchange of knowledge and I think that's the best thing about having investors that believe in you as founders and as leaders of the organization - they believe in your ability to make the best decisions and are willing to give time to see how things work out. We're very lucky in that sense.
Justin [15:33]: I think a crucial thing that Chinedu just mentioned and that I hope isn't overlooked, is that their investors trust them to make the right decisions, amongst other reasons, because they see the numbers. In other words - Max is building a business and gaining traction across all of these verticals and creating impact at all levels of their value chain, in a viable and sustainable way.
Chinedu [15:50]: If you try to build sustainably, it might make sense to come with a sensible amount of money, have that money to tap into but initially be lean - lean in the sense that we're going to take an approach of testing things and trying to figure out what works and then when you figure out what actually works then you can spend a lot of money scaling that. If you don't figure out what works and then just start to scale, you will finish spending the money and will not have achieved the level of scale you are looking for.
Justin [16:14]: And if we think back to the quote on competition versus complexity, we can see how it's most beneficial for Max to take this sustainable approach.
Tayo [16:21]: The real competition is the complexity, the problem itself. What we're seeing is that ultimately the biggest competition or the biggest threat to success or survival is actually figuring out how to operate as efficiently as possible internally, rather than being obsessed with what other players are doing in the market. Ultimately, in a market like ours, first mover is not necessarily an advantage, it's more about who provides the most value to customers - whoever figures out how to do that ultimately will win.
Justin [16:55]: And the impact of investing in infrastructure and sustainable growth?
Chinedu [16:58]: When you think about what the impact of this stuff is - on average people spend 5-6 hours a day in traffic. That's one-quarter of your life during the week sitting in the vehicle trying to get from one point to another. For the record, you're traveling less than 30 kilometers per average on most days. That's a lot of time for 30 kilometers. What we've been able to do with our platform is essentially crush that down from 6 hours to 30-45 minutes each way, which essentially means under 2 hours. For the drivers, prior to the market the drivers made on average about 30 thousand Naira a month, which is maybe 70 dollars. We've been able to increase that 4 to 5 times to date. The average accident rate for motorcycle taxis - the average death from motorcycle taxi accidents in Nigeria is one person dies on average every 16-20 minutes. On our platform our accident rate is less than 0.1 percent and we have zero deaths on our platform.
Justin [18:00]: So there's market size and infrastructure challenges - what about modeling for risk? That too, may cause African entrepreneurs to pursue multiple revenue streams or verticals simultaneously, and Erik Hersman, the Kenyan CEO of BRCK and a founding partner of the venture capital firm Savannah Fund, he has a name for that -
Erik [18:16]: What you're speaking to is something that's well known across Africa which is we're parallel entrepreneurs, which means that there's always like 3 things happening at one time - not just one business. And that's due to risk mitigation - so there's economic, political some other type of business risk, you can mitigate that by having multiple streams of revenue as an entrepreneur or even as a business person.
Justin [18:39]: BRCK is a Nairobi based Internet and connectivity company whose initial question was - why are we using hardware devices in Africa that are designed for the U.S. and Europe, when the infrastructure is completely different.
Erik [18:50]: I'll start with a little bit of history - BRCK started as a hardware company trying to build the best routers and modems - the most ruggedized ones for the frontier markets. It was pretty quick after that we build and started shipping the first one that we realized maybe we're solving the wrong problem, and we shouldn't be trying to just build the best product for internet connectivity, but we should be trying to get people online. That's actually what the real goal is. Now BRCK uses its hardware - leverages its hardware - to provide solutions to get people online. So, Moja is the brand of the product that is out there in the public, and Moja is a wifi hotspot that is public spaces - so buses and barbershops and youth centers and marketplaces that anybody can jump on for free, and then what we do is how we monetize that is we sell either content caching, digital engagement, some type of computation service on the platform to businesses and then a by-product of that is free public wifi.
Justin [19:54]: All of this is made possible by technology called the SupaBRCK.
Erik [19:58]: The SupaBRCK is basically the foundation layer for all we do, which is a highly ruggedized data center that we also use for our connectivity but it's got computation and its got storage up to 5 terabytes and its got power and connectivity. The Moja platform uses the SupaBRCK inside of transportation and fixed locations. Even some of the new R&D stuff that we've been working on in our labs around IOT, so our PicoBRCK, speaks to the SupaBRCK over long-range and so we kind of use that as the base foundation for a lot of the services that we sell.
Justin [20:32]: Up to this point, all BRCK's products have been consumer-facing, but as a parallel entrepreneurs, Erik and the BRCK team are looking at other ways to leverage and monetize their technology.
Erik [20:41]: We're open to the idea of having our SupaBRCK be sold as an enterprise product - we've been using it ourselves, we haven't been selling it. And so now we're thinking OK well, we've gotten to a point where it's hardened up, it's really useful that we can sell enterprise versions of this to bulk buyers.
Justin [20:56]: And from a strategy and decisionmaking process, I suspect the deliberation the BRCK leadership team is going through is similar to the scenarios other parallel entrepreneurs are facing across the continent, as well.
Erik [21:07]: What I think you see with the enterprise side is us doing exactly that - we're saying OK, our core focus is building out the Moja platform and building the user base on that. We're at half a million monthly active unique users today and we want to push that to 2 million by the end of the year, fantastic. We'll monetize that, we'll be gross margin positive by Q1 next year, should be all good. However, is there a point where we should - and this is the strategic problems that you focus on in leadership in these companies, is saying OK is it too much of a focus problem if we take something that's already built and we firewall a team that works on the enterprise version of this but with software, or is that taking away too many resources from the core, and some type of distractive element. We're actually not fully decided on this yet, but we're considering having that available as part of a - we're reorganizing some of how we do our business right now, and if we can reorganize that in a way that we feel like it won't disrupt the core part of the business, then we'll do it. But it is absolutely about what you're saying in terms of having multiple streams of revenue, and that you're iterating on and making sure you have more possibilities in the business.
Justin [22:25]: Here's a crucial challenge - how do you determine the best strategy? BRCK - after iteration and experimentation is getting their core business firing on all cylinders, but now do they pull resources away from their core business in order to pursue alternative revenue streams? There's no right or wrong answer, but these are questions that entrepreneurs on the continent may be tasked with trying to answer on a regular basis. What do you do, and how do you make the numbers work? Sometimes, it may just take continued experimentation and iteration, and doing less than you originally intended, something that Jehiel Oliver, CEO and Founder of Hello Tractor, has experienced. Hello Tractor is a technology platform that farmers can use to rent tractors and that fleet owners to manage their assets' location, fuel measurement, utilization and more.
Jehiel [23:09]: It's really more of a CRM platform. We provide a tool to manage farmers and connect those farmers to tractor owners that are also using technology to manage their fleet. Our product is really B2B - it's technology infrastructure to support service delivery in a marketplace that's wide open
Justin [23:27]: Born and raised in a city the U.S., I was also really interested in how Jehiel is learning to solve for local problems in rural Nigeria.
Jehiel [23:34]: For me going into Nigeria, my antenna was already up because I'm thinking "wow I'm really ignorant to everything going on here" and so it allowed me to make changes pretty quickly based on the assumption that I knew nothing and should be there to learn first, innovate second. Part of it too was naivete, because you see the opportunity you know the challenges academically, but you don't fully appreciate the depth of those challenges til you get there.
Justin [24:05]: From Hello Tractor's origins in 2013 to present day, they've come a long way - through a series of innovations and pivots - from initially selling IOT smart tractors to the software product they have currently, that allows them to create impact profitably, and at scale.
Jehiel [24:19]: Our initial product was a tractor with the technology. We took a design that was already in the market, did some small modifications, and then added our technology. We turned this low horsepower single axel tractor into what we were calling a smart tractor. The technology is kind of what makes it a product, but building out a product takes so much more than just lines of code, but that's the product that you can sell into the marketplace once you put in that market building effort - so that was the role we decided to play, so we pivoted away from selling tractors in the beginning of 2018 to focus on just the technology, and the business really skyrocketed from there.
Justin [25:04]: Today, through a network of third-party dealers and distributors, Hello Tractor can provide Nigerian farmers with tractors at greater scale.
Jehiel [25:11]: We're in a double-sided marketplace, on the tractor side - we distribute through OEMs like John Deere and their dealers, which is John Deere's customer, and then on the farmer side, we distribute through people who aggregate farmers, and this could be outgrowers, input companies, fertilizer companies who are selling to farmers, or even just rural young people, and some of our best partners on the demand side are exactly just that. They're entrepreneurs, they see an opportunity they say look I've got 500 farmers in my community willing and able to pay for input and I'm willing to get my hands dirty and we can open up a product offering to make sure they get the tractor services and build them out to other inputs as well. When you generate those bookings, you can generate that booking from those 50 farmers that you know that need the same tractor service at the same time in the same vicinity, the booking comes in at economies of scale, our technology will match that booking with the nearest tractor that's available using our technology - with the applicable implement, because tractors can do so many things, and when that pairing occurs the tractor owner pays that entrepreneur a commission and we don't touch it.
And it's done not to actually drive any revenue on our side directly, but we obviously need as many farmers on the platform to be relevant for the tractor side of the marketplace, which is where we make our money.
Justin [26:38]: With Hello Tractor making a market, they are not only putting more tractors in the hands of farmers, but creating financial opportunities for entrepreneurial-minded distributors throughout the country. And this is a vital point that for Hello Tractor - similar to Max - allows them to create greater impact at scale. However, unlike Max, Hello Tractor pivoted to become strictly a technology company - because they had to make the numbers and the model work. Jehiel determined that to create the most impact at scale it was actually most beneficial for them not to go all the way down to the farmers, who are ultimately direct users of the tractors.
Jehiel [27:10]: When we first started we had this SMS booking platform and it took less than 2 months of the product in the market to realize - all this stuff about SMS, that's academic and development aid stuff, it don't work - you need to build an app. The app doesn't have to scale across 80 million people but you do need maybe 1000 people that are power users of that application, aggregating demand on behalf of the 1000 farmers in their community, and so you get that multiplier effect.
Justin [27:41]: From a funding perspective, they've received grants that can help build out their distributor network -
Jehiel [27:46]: We've received grants, which is generally a passthrough - Ziggi, he is looking at building out a booking organization in South Africa - he's like, I got 10,000 farmers, these 10,000 farmers represent around a half a million dollars in booking commissions every year. But he needs to put some infrastructure in place to actually capture that opportunity. How do you get the capital to inject into Ziggi's business to get him up and going? What Hello Tractor would do is we would go out, we would use our partnerships with these development organizations, get a grant as a passthrough. We would help them get the grant it would come in under Hello Tractor and then it would flow directly through to Ziggi as a subgrantee to execute on these certain things.
Justin [28:31]: For Hello Tractor, they've made the strategic decision not to build the infrastructure, which would be a business model risk. Rather, they're raising money accordingly, and passing those funds onto those in the value chain whose responsibility it becomes to build up the demand side of their marketplace. Ultimately however, it hasn't always been an easy conversation when seeking donor-funded grants.
Jehiel [28:51]: I think we've been hurt because we don't go all the way down to the last mile. A lot of the people - I mentioned how we would raise money for our partners - and a lot of people will say, well you're making money with John Deere - we'll that's business. You guys give grants, so we're going to take those grants and give it to somebody who's working at that last mile. And they'll be like but we're giving a grant for you so we want you to work at the last mile, and I'm like that's not possible - we're in multiple markets, how could we possibly do that level of work, that level of engagement in all these different markets. The cost of customer acquisition is so expensive at that last mile level - it's best done by somebody who is already there.
Justin [29:27]: And Jehiel had to be incredibly mindful of the impact on local relationships, as well.
Jehiel [29:33]: Exactly - could you imagine if we did that at any meaningful scale, our partners would be so skeptical of ever doing business with us.
Justin [29:39]: As they scale, Hello Tractor's model dictates that they shouldn't go all the way down to the last mile. Yet invariably, Hello Tractor is building infrastructure - and creating impact - whether or not they go all the way down to the last mile. And as for their impact?
Jehiel [29:52]: If you get one person working a hectare manually - the average plot size in Nigeria is about 1.1 hectares - if it's one individual working that plot, it takes about a month to prepare the land for the season. You're literally bent over with a hoe going row by row digging up that concrete - and it's hard as concrete that soil. And the unfortunate reality is most farmers start that work when the rains begin, so you miss about 30 days and every day you plant late in a rain-fed system is losing a point in yield, so you've already lost 30% of your harvest just by planting late because you're doing it manually. A tractor knocks that same work out - 1 hectare will be done in an hour. It's crazy - so 30 days of work gets reduced down to an hour, so you get the yield that you would have lost from manual production, but then also it's cheaper - that manual labor it costs about 5 bucks a day, that's the rural wage rate in Nigeria, so that's 150 dollars for the month. The tractor service costs 75 dollars for land prep - so you save 50% on your land prep costs. You save, you yield more, you plant more efficiently, and you don't have to do as much work.
Justin [31:16]: Each week, my b mic Sayo and I sit down to discuss what we learned from the insights shared by entrepreneurs around the continent. On the topic of business models, it appears to be without question that entrepreneurs in Africa are solving for more complex problems, and the result is that there is a necessity to invest in infrastructure or pursue multiple revenue streams or business verticals or geographies at the same time. We're essentially talking about two key business metrics here - Total Addressable Market and Customer Acquisition Costs. And I think it's important to understand the context - both in terms of where you're doing business and the stage of your business - which has implications for the strategy and decisions that businesses in Africa make and the impact the decisions have on these key metrics. And while this may be harder or complex, it may also leave companies much better off in the long run, having built a moat and created a business that's much harder to compete with. That's what Sayo and I were super interested in discussing further. Take a listen...
Sayo [32:11]: When I think about the necessity of differing business models I think about two things: number one, market size. Question of if there is a not big enough market size for what you want to do, it almost necessitates being in multiple markets, or having multiple revenue streams.
The second thing I think about is If there is not the value chain or infrastructure for you to reach the market, then you have to create those infrastructure pieces along the value chain and then you need to monetize across that, because you can't just do it off your own - that's how a value chain works, most people own a particular part of the value chain and then over time they integrate into different parts of it and they do that - you don't do it until you have the market in one part of it. If I'm a furniture store, unless I have a market that's buying my chairs, it makes no sense for me to vertically integrate into producing chairs. So that's often how it goes. But what we find on the continent is just to get people to buy my chairs, I need to also make the chairs. Then you need to be savvy in how the making of the chairs has a business model - so maybe you're making chairs that you sell to all the furniture stores, to your competitors as well.
My feeling is that the question we want to answer is in Silicon Valley the vibe is that like focus on one thing, get awesome at it, then you can pivot and move around - and that's a common practice, but the question we want to explore here is when is that not necessarily true? I think it's those two things.
Justin [34:03]: So I guess what we're really just talking about is margins. In the US to acquire a customer is probably more expensive - simultaneously they're selling products for more money - but it's a different kind of upfront expense here where rather than having to pay a $20 customer acquisition cost with Facebook ads, they're having to build out an agent network. So it looks a little bit different but it may actually kind of be the same.
Sayo [34:31]: 100 percent, it's the same in terms of the framework; my question is just about what is the difference in margin - and then what is the scale you need to cover your fixed costs? What is the scale on that unit economics margin that you need to cover your fixed costs. And often, that maths becomes challenging.
Justin [34:53]: And when talking about scale that opens up questions about the ease of scaling - in the US, more homogenous & single regulation; versus scaling to a comparable market size across Africa.
Sayo [35:08]: And that's why diversification in product stream or revenue stream is about diversification - the core of the question we're asking about specific to the continent is 1) does that point come earlier in the journey & 2) despite the increased risk, is there a necessity for diverse revenue streams just to make the math work.
Justin [35:35]: I suppose my hypothesis is that it does come earlier in the journey.
Sayo [35:40]: Mhm, same.
Justin [35:42]: And so invariably the question becomes, does that then make it harder because you're having to do all of these things much sooner in the journey when you're still proving the concept out?
Sayo [35:53]: Yeah, 100% and Erik said it really nicely - how do you justify moving resources from your core thing that's working, you've reached product-market fit, how do you justify moving resources away from that and into another thing before you've fully realized the upside of your core thing? And I think that's the most difficult decisions that entrepreneurs have to make on a daily basis on the continent. As opposed to 5 years down the line.
Justin [36:20]: If you're a US-based ecommerce company at a certain point you've sold to everyone there is to sell to - is that the natural point in which they then say alright maybe we should go find another market?
Sayo [36:32]: Yeah, mhm.
Justin [36:33]: Whereas, I don't think that that expiration happens here. And so you're faced with these really - it's not like the answer presents itself. And you're faced with these really difficult strategic decisions around - it's not a question of whether or not you should scale, it's a question of how from a strategic perspective. Right?
Sayo [36:51]: Yup, definitely.
Justin [36:55]: Amazon is in the business of building infrastructure - they're a logistics company even more than they are an ecommerce company now. Perhaps the conversation is actually not even that it's a necessity, and if we're saying necessity that in my view implies necessary evil, but it's opportunity, in particular, to build out a really competitive moat around your business. If you're building this infrastructure and if you can do it profitably and sustainably, then you're building a business that's hard to compete with and that's built to last.
Sayo [37:27]: Yup, 100 percent. And Amazon is actually a phenomenal example because they did those two things I was talking about. Number 1, they had a massive market and built infrastructure to support an existing market & integrated both vertically and horizontally; but secondly they also built infrastructure that was profitable outside of their customer piece - because they started saying hey any ecommercy or small business that wants to sell their stuff, they built the marketplace, right? You can come here and have the infrastructure to sell stuff without having to build a logistics part of your business. Right? So they did both. And I think that's the challenge for us on the continent is if you're going to build the infrastructure, is there a market or is there people that will want to use your infrastructure that will make it profitable for you to build that? Or preferably both.
Sayo [38:24]: We raise something interesting, the example where you go out and build agent network and the agents are not exclusive to you, so someone else can piggyback on that, even a competitor. You've built out the infrastructure for someone else. So I do think there's a question around the kind of infrastructure you build, how you fund that kind of infrastructure, and also how you make it operate as a moat.
Justin [38:49]: So it's not just about building the infrastructure it's about protecting the infrastructure.
Sayo [38:53]: Yeah, or not. I mean, you can make the call that hey we need this infrastructure to exist, we have a better value proposition at the point of sale than anyone else so we'll take the hit. It's so important just to understand the maths.
Justin [39:06]: One thing that Max said that was interesting as well was there's no way they're going to take 100% market share. Right? So again, maybe it's a question on what the numbers say, but it sounded to me like they understood that there may be others who benefit from the infrastructure that they're building, and they're OK with it. They also view - I mean, I think competition in particular in these sorts of new businesses - it's validating for them, it makes it easier the fact that there's competitors means that there's latent demand and it brings more exposure to all of them.
Sayo [39:43]: Yeah, for sure.
Justin [39:44]: The other infrastructure thing I was going to talk about is Hello Tractor. To the point about does the math work out? They do all these things to build up the demand side of farmers, but that's not commercialized in any way.
Sayo [39:57]: Why do they do it?
Justin [39:58]: Because they need demand on there to extract as much value out of the relationship for the benefit of their actual customers - the manufacturers.
Sayo [40:06]: Ok, so that's the maths.
Justin [40:08]: But it's interesting - they tap into existing hustlers - so it's almost the inverse.
Sayo [40:13]: Ideal.
Justin [40:14]: So I don't know how much they've actually had to build their own infrastructure. Or if they just leveraged existing relationships. Probably a combination of both - I'm sure they've building and they've got training and they definitely have to teach them how to sell on their behalf. But it's interesting, he explicitly said as well that the way that they scale is by leveraging this existing infrastructure - they can't be the one that goes down to the last mile because it's not profitable and it's not feasible. And it's interesting, they get a lot of grants but they treat them as passthrough grants. So if there was somebody in their agent network that needed to build out some sort of infrastructure to support their business, they would get the grant as a passthrough. And some of the donors, they're like what do you mean we give you this grant we want you to be the one that goes down and touches last-mile, but he says no that's not possible and it's actually not beneficial to our business. It just doesn't make sense from a numbers perspective.
Sayo [41:09]: I love that, and that's such a good example of if the maths doesn't work, then fund it accordingly. That's such a great way of thinking about it. Ok, let's pass the grant on to the people who are actually going to build the infrastructure - we're not taking a business model risk on something that does not make sense to us.
Justin [41:27]: And no amount of grants or funding is going to make those numbers work - it's not a question about more money or access to capital, it's a question about being very selective and strategic in the money they take.
Sayo [41:39]: That's smart I like that.
Justin [41:40]: Which is perhaps antithetical to the general narrative about the access to the funds.
V_O [41:49]: Thanks listening to this episode of The Flip. You can subscribe on your favorite podcast app and follow us on social media @TheFlipAfrica. You can also join our newsletter by going on our website theflip.africa, Tweet us, DM us, email us. We'd love to hear your feedback on the show. We'll see you next time._