S1E5: 1.2 Billion And Counting - How Do Entrepreneurs Look At Africa's Market Size?

Chinedu [00:11]: The Nigerian economy is a very large economy; Nigeria as a country is quite poor, so that means you can't outspend demand.

Justin [00:19]: That's Chinedu Azodoh, who we heard from in episode two. He's the co-founder and Chief Growth Officer of the mobility company MAX.ng. We talked about market size of Africa's biggest and perhaps most compelling market, and Chinedu's sentiments on addressable market, particularly as a function of consumer purchasing behavior is something that was echoed in a conversation I had with Ben White, the co-founder and CEO of VC4A.

Ben [00:42]: There is still something there where entrepreneurs - if they want to build a successful company they can do it by really understanding where is the person that is going to pay me for my product or service and how big is that market. You can't be overly optimistic - you're always seeing potential and opportunity but it needs to be realistic and aligned with what's actually there. The really smart entrepreneurs are able to size that up accurately.

Justin [01:16]: Last episode, episode four, we talked about distribution. How companies are getting their products or services into the hands of their customers, particularly in an environment with less infrastructure than elsewhere in the world. And at the end of that episode, during the conversation with my b-mic Sayo, we began to discuss market size and the question of what would people buy. There's a famous quote from the American movie Field of Dreams - "If you build it they will come". But will they? Does that apply to entrepreneurship on the continent and the African consumer markets?

VO [01:52]: You're listening to The Flip, the podcast exploring more contextually relevant stories from entrepreneurs around Africa.

Justin [02:02]: Welcome back to The Flip, I'm your host Justin Norman.

We're intrigued by the opportunity in Africa - over a billion people on the youngest and fastest-growing continent. But market size and commercial opportunity is a lot more nuanced than that. When talking about market size in this context, using fintech as an example, we're not only talking about how many people are connected or have the ability to be connected, back to the topic of distribution, but we're also then talking about how many have the desire to be connected, how many people then have the ability to use digital products, and of those people, how many can afford to use them? And if the end-user can't afford to use them, who pays?

Last episode, we discussed mobile distribution at length with Maxime Bayen of GreenTec Capital Partners. I had assumed that mobile usage was a function primarily of availability and cost, but Maxime shared differently.

Maxime [02:45]: The answer is a little more complex than just data costs.

Justin [02:48]: So to start off our conversation on market size, let's look at some insights on mobile.

Maxime [02:52]: There was a study by GSMA earlier this year where they looked at the amount of population that today in emerging markets is covered by 3G network but that are not online, that are not using it - we're talking hundreds of millions of people worldwide that are covered by 3G or 4G but that are not using it - that are either just using 2G or not using any network at all.

Justin [03:15]: And the why - the first two answers come down to what I had assumed was the problem -

Maxime [03:18]: The first one has been the acquisition costs for smartphones and for 3G enabled mobile phones. The second point is the mobile data costs - that cannot be disregarded.

Justin [03:28]: But even as cell phone providers and telcos work to reduce these costs - and they have gone down significantly over time - there exists a third factor.

Maxime [03:35]: I want to come to a third point that I think is always forgotten because we just talk about costs - and the price elasticity is huge in these markets so yes cost is important - but on top of that you also have a significant chunk of these people that have the coverage, that could potentially afford a phone, could potentially afford data but don't see the need to go online. Why should I get a smartphone and use the internet? I don't need that. Digital literacy is still a big issue.

Justin [04:03]: And so even if distribution is solved - and it sounds like telcos are actually doing a pretty good job at reaching customers across the continent -

Maxime [04:09]: In most cases when mobile operators acquire a license to operate in a given market it comes with obligations. One of the obligations is usually population coverage. In most markets - the population coverage is above 90%. The infrastructure is already there.

Justin [04:25]: So even if distribution is being solved, even if spending power is there, considerations like digital literacy are still a barrier to consumer demand.

Maxime's insight on digital literacy is an anecdote to underscore the challenge and nuance related to the African market size conversation. It requires much further exploration.

Osarumen [04:48]: My name is Osarumen Osamuyi, I'm the author and founder of The Subtext.

Justin [04:51]: In his work with The Subtext, Osarumen is taking a bird's eye view on what's happening from an entrepreneurship and innovation perspective around the continent, so we sat down to discuss how he thinks about the market size question.

Osarumen [05:01]: One thing we're seeing in African markets is that they are wide, but not yet as deep as they could be. People might look at Nigeria and see a country with 2/3 America's population, containing rapid growth, but with its 190 million people Nigeria produces a GDP just shy of Boston, which has only 4.6 million people. While it is true that the markets are not as deep as they seem, it is also true that those numbers are not false. While it is useful to be sober and remember that the addressable market for any one service has more nuance to it than just the topline population number, it's useful to keep that number in mind as you think about what's the size of the opportunity.

Justin [05:44]: Population size isn't sufficient, and neither are metrics like household income.

Osarumen [05:47]: One thing that I have decided to do these days is to shy away from household income as a measure of economic capacity, primarily because in many African countries there's not much of a social safety net and so what you find is middle-class earners are effectively creating or funding health insurance. They're basically forming the safety net of the infrastructure on which lots of their dependents will sit. And so, you may see someone whose incomes are $4,000 a month but the percentage of that that's actually available for them to spend is much lower than that.

Justin [06:25]: So then, how does Osarumen think about market size?

Osarumen [06:28]: The way I tend to think about market size more specifically is depending on the product - what are the drivers of demand for this product or what proxies can we use to show that there is a job to be done here. I am often looking at what signals we might use to forecast demand. What are the positive offline indicators?

Justin [06:49]: We can think about this in the context of digital payments - where the transactions are currently occurring offline, in a cash-based system, and solutions are being built to digitize these transactions.

Osarumen [06:58]: If someone is currently spending X dollars on an offline service, if you study the nature of that offline service and understand how the different stakeholders in that system interact and you conclude from your research that there is a space here for technology to create some efficiency, then it makes sense to see first of all how much is being spent in that direction to solve that problem today, how much is being saved in aggregate by the service I'm trying to introduce, or how much more will this system be made more productive, and then, working backgrounds from there to understand what the size of the economic opportunity is.

Justin [07:33]: While these market sizing exercises will vary depending on the product or service, there are proxies we can use to look at spending capacity.

Osarumen [07:39]: One experiment I've been doing recently is to take a look at the digital services in each market which are very compelling - that is, things like unsecured lending. There are very few products that are as compelling as a service that's offering to give you free money. So, trying to do some estimation around to what extent can a Branch expand in Nigeria, to what extent can they scale their disbursements before the default rates begin to go up. That begins to give you a sense of what the outer boundaries of the addressable market, for any productive market for technology services.

Justin [08:14]: And another compelling digital service to look at is airtime.

Osarumen [08:17]: The logic there is, it is a compelling value proposition for me to speak to, say, my mother or my business partner or communicate on a day-to-day basis, so how much money am I spending in that direction - again measured by telco revenues in the country or specifically airtime or data revenues that telcos earn.

Justin [08:37]: And while digital literacy is a consideration, as discussed with Maxime, the reason to look at signals like airtime are because -

Osarumen [08:43]: Again, household income will give you a very broad sense of how much money there is in the system but it doesn't control for willingness to spend digitally or perception of value in any digital products or services, which is what you want to be thinking about as a technology business.

Justin [08:59]: So taking all of that in, it's incumbent upon entrepreneurs in this region to balance, as Osarumen has written, TAM today versus TAM tomorrow.

Osarumen [09:06]: Some of the entrepreneurs I have come to respect the most are those who are very clear-headed about what current conditions look like. That is, they're aware that maybe the amount of hype in the tech ecosystem in Africa has outpaced the activity itself by a bit and they're aware that while there's lots of growth in the future, the time horizon for that growth is not necessarily as is popularly expected.

Justin [09:41]: Let's now take a specific look at how entrepreneurs are approaching the market size considerations across the continent.

Benjamin [09:46]: Hi my name is Benjamin Fernandes. I work with NALA - a mobile money application that allows you to make payments, pay friends and purchase airtime across all your accounts through one app in Tanzania and Uganda.

Justin [09:58]: While it may appear that mobile money is sorted what with the ubiquity of M-Pesa in East Africa, NALA's robust user interview process identified a market for their product. And when I say robust, I mean robust -

Benjamin [10:08]: When we were doing user interviews, before we even wrote a single line of code, we'd interviewed 656 here people in Tanzania.

Justin [10:14]: And what did they learn?

Benjamin [10:15]: We identified three key things. 1 - even though there is a growth in smartphones not everyone has access to an active data connection. Number 2 - Africa is multi-sim. GSMA says your average African has 1.96 sim cards. Therefore, if your sim card is your bank account that means multiple accounts. Which leads to my third point, which is there's mass fragmentation across all of these accounts because if you are trying to keep track or record of your transactions via keeping one or two SMS' here and there and having to manually write and figure out OK what's your true spending, it becomes really difficult.

Justin [10:48]: These user interviews formed the basis of NALA's product.

Benjamin [10:51]: I had a thesis that there might be a unique opportunity to build one interface that allows you to access all of your accounts through one service and makes those transactions, but the important part was can we make it happen without Internet.

Justin [11:03]: And making it happen without Internet - using zero-rating - is crucial for NALA to be able to expand their addressable market. I presume it has positive impact from a digital literacy perspective, as well.

Benjamin [11:13]: I remember I was in Misungwi, it's near Mwanza about 2 hours south, and Mwanza's the northwestern region of Tanzania, and this lady I was talking to said her first phone was a smartphone because her son who lives in Dar es Salaam had purchased for her a phone. And her son sends her money and she always gets nervous about dialing through the USSD menu to go withdraw cash, and she said on NALA I can do that with two steps, and this helps me because I feel safer using a product like this, I know I'm less prone to make a mistake. And that was amazing to me to see that an improved user interface on an existing service that's been there for a long time and simplifying it to that extent has helped somebody like that.

Justin [12:11]: Sticking with payments, let's look at another African market, but one very different to Tanzania.

Katlego [12:15]: The question is, what is the relevant payment method at this point in time?

Justin [12:20]: That's Katlego Maphai, who we heard from last episode, the Co-founder & CEO of South African fintech Yoco. This question - what is the relevant payment method - is a crucial one for Yoco, who provides credit card readers, point of sale and merchant services software to small businesses throughout South Africa.

Katlego [12:34]: In the context of South Africa, where you had a really high card penetration - so like 75-80% of adult consumers have a card. It's really the primary wallet in this country, a lot of that has to do with the fact that social grants are issued on pre-paid MasterCard cards.

Justin [12:50]: So when looking at the South African market opportunity, on the consumer side, we have very high card penetration.

Katlego [12:54]: But on the merchant side, when we started off a couple of years ago, we found that only 250,000 out of 5 million businesses were accepting card payments.

Justin [13:03]: Instantly, we see an opportunity in this misalignment - only 5% of small businesses in South Africa had card readers, yet 75-80% of adult consumers have a credit card.

Katlego [13:11]: 75% of the 44,000 businesses that we've onboarded across the country are accepting card payments with us for the first time. These are the folks who we target - we're targeting non-consumption.

Justin [13:22]: Yoco is targeting non-consumption - and by understanding their prospective customers' considerations and designing a product and user experience for these customers, they've thus far created a nice business out of targeting this delta between cardholders and businesses accepting card payments. But Yoco is also built for the South African context, and with a significantly lower card penetration elsewhere on the continent, it has implications on how the company looks at expansion.

Katlego [13:44]: We're being very first principles about this - we want to be in a position where we're able to take our existing business model and target the same core customer in another market, wherever that may be.

Justin [13:56]: So for Yoco, that may mean expansion to other emerging markets outside of the continent. But for now, they remain solely in South Africa, presumably because of the market opportunity that exists here and because of their patience and diligence in selecting markets in which to expand. Since my interview with Katlego, they have also launched Yoco Capital, a product to provide working capital to their existing set of merchants, which allows them to further capture the South African market opportunity through expansion not geographically but through product and revenue streams.

The notion of being selective about expansion markets is something that was echoed by Jehiel Oliver, the CEO of Hello Tractor, who we heard from in episode two.

Jehiel [14:36]: There's just some fundamental things about the business that have to translate or else you just don't go into the market - cause you just can't build a brand new company every time you go into a new country.

Justin [14:47]: And similarly to Yoco, Hello Tractor is targeting non-consumption.

Jehiel [14:50]: The technology is what makes it a product, but building out a market requires so much more than just lines of code.

Justin [14:58]: One way to capture opportunity in this environment is through, to borrow a term from Harvard's Clayton Christensen - market-creating innovation - or innovations that allow consumers to gain access to a product or service that was previously unaffordable or unattainable to them. Hello Tractor is a market-creating innovation - an innovative business model that makes something that was previously not affordable affordable. It allows farmers in rural Nigeria and a few other countries around the continent gain access to tractors on a rental basis through Hello Tractor's double-sided marketplace and technology facilitating the transaction between manufacturers and those that distribute to the farmers at the last mile.

Jehiel [15:30]: On the farmers side, we distribute through people who aggregate farmers - this could be outgrowers, input companies, fertilizer companies selling to farmers, but it could also just be these rural young people. And it's done actually not to 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 [15:56]: Back to the question of who will pay for your product - Hello Tractor has been able to prove out a business model by only capturing revenue on the supply side of the marketplace. And this too is crucial - they identified a market where there was a need, and demand, if farmers could not only access these products but at a reasonable price point. And that's where the technology comes into play to provide a layer of transparency and reduce associated risks of operating in this market.

Jehiel [16:17]: It's all about asset tracking, immobilization, fuel measurement, maximizing utilization by connecting to the farmers more efficiently, analytics, as well as tools for the banks financing the tractors.

Justin [16:31]: And as technology continues to facilitate transactions -

Jehiel [16:34]: Presumably it will reduce the transaction costs between, ultimately, tractor owner and farmer with that better transparency.

Justin [16:41]: And in terms of understanding farmer demand for Hello Tractor we can look, as Osarumen has argued, at the drivers of demand on the job to be done.

Jehiel [16:48]: The tractor service costs 75 dollars for land prep, 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.

Justin [17:01]: So Hello Tractor is cheaper and obviously more efficient.

Jehiel [17:04]: If you get one person working a hectare - 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. 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.

Justin [17:26]: And in an environment like Nigeria, farmland abounds -

Jehiel [17:29]: There was such a shortage of the laborers. I mean, there's so much land, that if we knock it out the park and bring on as many tractors as we can handle, there still won't be enough tractors in the market to cultivate the land that Nigeria has.

Justin [17:50]: As always, my b-mic Sayo and I sat down to reflect on this episode, and it was clear that there are interesting sub-topics intertwined with the market size conversation that ought to be further explored in future episodes. The first topic is digital literacy, which was briefly discussed with Maxime. And the second topic is expansion. Let's start with digital literacy.

Sayo [18:08]: I would have loved to understand it more. What does it really mean when we talk about digital literacy? What is the market size of digitally literate people? What role do things like USSD and feature phones, dumb phones have to play in the conversation around market size? Mobile money is always an interesting one. And I really like the point around - about lending - lending being the lowest common denominator of what people do. I think that's a really interesting point because what level of literacy do you need to get to to take out a loan, right? And a lot of these guys are USSD enabled. I imagine that's the bar, right?

Justin [18:53]: So if you can take out a consumer loan on Branch, you're digitally literate.

Sayo [18:59]: You would have thought, right? If you can buy mobile money and pay for stuff with mobile money.

Justin [19:04]: So the whole thing with NALA is they're providing a better user experience and Benji talks about all the stories of these grannies in rural Tanzania who never used mobile money because it was too complicated with USSD but now that they have an app that's much simpler to use and much more user-friendly they are using mobile money now.

Sayo [19:27]: Yeah so it would be cool to understand how many grannies there are.

Justin [19:29]: This actually goes to the topic of non-consumption, right? In the case of Yoco, they are targeting people who never had a credit card before. In the case of NALA, they're not targeting people who have never used mobile money before. That is probably a small portion of their users, but all that they're doing is getting people to go from transacting through a USSD interface to then transacting on NALA - so they are targeting mobile money consumers and non-consumers.

Sayo [20:02]: 100 percent and I'm sure their business model is sound. I think the question for me is when we talk about digital literacy and the overarching question of how big is the market really, what are we talking about? And I think the GSMA guys will probably have done a lot of work around that.

Justin [20:21]: He does say that digital literacy is a big issue but what I like better is just that he's talking about the fact that even if there's coverage, even if people have money, even if they have the ability to afford data and cell phones, some people are just choosing not to. So actually, is that a digital literacy issue or is that just a consumer behavior issue? Or are those two things mutually exclusive?

Sayo [20:45]: That's a really important question. I don't know the answer. He seemed to say it with a fair amount of authority. It sounded like research, not like -

Justin [20:55]: Not my conjecture.

Sayo [20:57]: Yeah, that's what it sounded like, but I'd like to understand the extent of that issue.

Justin [21:02]: By the way, I may not be able to answer all of these things in this episode, but I think that that's fine because it sets up - should there be a digital literacy episode? Yes.

Justin [21:23]: The most interesting talking point that I've heard about OPay, for example, is the fact that they are doing a huge job on behalf of other fintechs by going into all of these other markets and spending a lot of money to change customer behavior or create more of an interaction with mobile money and with agent networks and whatever else they are doing. And that the benefit to the ecosystem is that they're doing the customer education on everyone else's behalf.

Sayo [21:58]: Yeah, I feel like we've had this discussion, it's the same thing we've been talking about around these kind of distribution costs - so it's cool to have people doing it, I always say this, I'd prefer if only one person was doing it and that was their business. It's rare that the same person who makes roads makes cars. And I think if you want to make good roads you should just focus on building roads and if we all just collaborated a bit more and talked to eachother a bit more there'd be less people all building roads. So when you get an OPay yeah I think it helps.

Justin [22:34]: And whether they're good at multiple things or only good at roads, like there could be fintechs who are well-positioned to just ride - you know how like when the ambulance comes through and then everyone parts and then there's the one car that follows the ambulance.

Sayo [22:48]: In Nigeria that looks slightly different but I feel you.

Justin [22:50]: So maybe there's an opportunity - if OPay is spending to create the depth to widen the addressable market in Nigeria, whether or not they succeed, they could succeed at their fintech thing but that doesn't mean there's not a whole host of other products and services that can be sold on the back of them educating the market and building the roads. And that's exciting actually.

In the context of OPay, and these big companies doing the work on behalf of the ecosystem. So there's things about Andela had to pivot, they raised a lot of money and then fired a bunch of people. Jumia just shut down 3 countries in the span of 2 weeks. So in that context - did they get market size wrong?

Sayo [23:40]: I think, and this is actually my general view on this expansion question - I think the allure of the 1.3 billion population in addition to the nature of the blitzscaling, lean startup, methods of building technology companies especially - leads to a little bit of a fallacy, and my feeling is that - having seen a lot of decks and met a lot of founders and been in this for a little while, you can raise money off that 1.3 billion story, and then you have a lot of money. And then you also think that or your mode of building is one of fast iteration, move fast break things, work it out when you get there. And my feeling is that a lot of people won't get there because it's not really real. And we're not being realistic about it. The amount of expansion raises that I've seen versus the amount of expanded companies is ridiculous. It's so difficult to actually create or replicate businesses across the continent and you certainly are not going to do it just thinking that it looks like doing it where you came from.

Justin [25:18]: That's a great point, it's a question - and this is something Osarumen and I talked about but that didn't make it into this episode, but maybe should, or at least we can speak to it - is it's a question of - Andela obviously had to pitch the pan-African narrative in order to raise that $100m and they had to say we're in Egypt and Rwanda and Ghana and Nigeria. So they have 1000 developers across 4 countries, which is a nicer narrative than 1000 developers in Nigeria. So they had to. It's the game. And I guess it's a question of - and maybe this is a question for the VC episode - is the game then a detriment in that respect?

Sayo [26:00]: I think if you raise enough money you can probably get there. So maybe I'll add another corollary which is 1.3 billion-plus lean startup, blitzscaling approach plus general low amounts of capital available to you equals you know... But guys like Andela, I'll back them, and they have a fuckload of money get this wrong literally 10 times

Justin [26:27]: The other thing that Osarumen said - he works for Africa's Talking. They're in 17 countries, the majority of their revenue still is from one single country, their home country. So they've expanded, and he said something to the effect of you can never replicate, you know?

Sayo [26:44]: Yeah, and that to me is one of the most important parts of this market size question - that expansion question.

Justin [26:50]: Yeah, and expansion is going to be a separate episode altogether. It has to be.

VO [26:54]: Episodes on digital literacy and expansion, coming in 2020.

Thanks, as always, for listening to The Flip. Please don't forget to follow us on social media at The Flip Africa, where we're sharing bite-sized insights from our interviewees that don't always make it into the show. You can also stay up to date by subscribing to our newsletter on our website theflip.africa. Next week, we dive into the topic of venture capital on the continent. We'll see you then.