We’ve had prior discussions on Africa’s market size (S1E5) and on Africa-focused investors’ pursuit of scale (S1E7). Both topics ultimately lead to the same place for startups: geographic expansion. What are the considerations and implications?
[02:05] – Keith Davies, former CFO of Zoona, shares cautions startups to be careful because expansion introduces a lot of the complexity for the business.
[04:35] – Operational considerations of expansion, with Wiza Jalakasi, Head of Business Development at Hover Developer Services.
[05:31] – It’s crucial to pitch to investors an expansion and growth strategy that you can actually execute on, says Paga Group CEO Tayo Oviosu.
[09:29] – A discussion with M&A advisory firm Magister Advisor’s Victor Basta, on expansion, fundraising and exits.
[13:52] – What does pan-African really mean? with The Subtext’s Osarumen Osamuyi.
[15:29] – And if there are few truly pan-African startups, perhaps there are better markets to expand to outside of Africa.
[18:07] – A reflective conversation on this topic with The Flip’s b-mic and Executive Producer, Sayo Folawiyo.
This episode features:
Osarumen Osamuyi – Founder, The Subtext
Ido Sum – Partner, TLcom Capital
Keith Davies – former CFO, Zoona
Wiza Jalakasi – Head of Global BD & Strategy, Hover
Tayo Oviosu – Group CEO, Paga
Victor Basta – Founder & Managing Partner, Magister Advisors
Sayo Folawiyo – Co-founder & CEO, Kandua
Justin Norman – Founder & Host, The Flip
Audio Production by ZVUK Studio
Episode Artwork by Chileshe Tembo – The Zig
Justin [00:14]: Last season, we explored two topics that are inextricably linked to expansion, the topic of this episode. The first is market size.
Osarumen [00:20]: One thing we’re seeing in African markets is that they are wide, but not yet as deep as they could be.
Justin [00:26]: That’s The Subtext’s Osarumen Osamuyi, from Season One, Episode Five.
Osarumen [00:30]: People might look at Nigeria and see a country with two-thirds America’s population, but with its 190 million people, Nigeria produces a GDP just shy of Boston, which has only 4.6 million people.
Justin [00:43]: The other topic was venture capital, and in particular, VC investors’ pursuit of scale.
Ido [00:49]: So, generally speaking, we’re looking for very strong teams who are after very large markets in the African context.
Justin [00:56]: That’s Ido Sum, a partner at the venture capital firm TLcom Capital, from Season One, Episode Seven.
Ido [01:02]: Or in other words, companies that are up for solving large scale African problems, typically in more than one African market – with very few exceptions, maybe in regards to Nigeria – and using technology for scale for, for the ability, and for innovation around new solutions for large size problems.
Justin [01:23]: Both the market size discussion and the venture model’s requirements that their investments achieve requisite scale raises a question – what are the implications? How does this impact how entrepreneurs on the continent look at expansion, and the strategies they seek to achieve their pan-African or global ambitions? And what are the considerations for those looking to expand beyond their home market? Let’s explore.
VO [01:52]: You’re listening to The Flip. The podcast exploring contextually relevant stories from entrepreneurs around Africa.
Justin [02:02]: Welcome back to The Flip, I’m your host Justin Norman. Let’s start our discussion on expansion with a premise – that the economics of the venture investing model compels startups in Africa to expand to new markets.
Keith [02:13]: It implies that some of the investments need to be in multiple markets because Africa is very fragmented.
Justin [02:19]: That’s Keith Davies, former CFO of Zoona – a South African fintech that built agent networks in Zambia, Malawi, and Mozambique.
Keith [02:26]: And very few of the markets by themselves are large enough to be able to create the sort of returns required in order to, kind of, become the big exit story in a particular fund. So it then almost mandates that companies – there’s a pressure to expand geographically.
Justin [02:44]: And this mandate introduces a lot of complexity into the business.
Keith [02:47]: From an entrepreneur’s perspective, your primary battle is against complexity. And complexity, in very simple terms, in my mind, is a function of two things. It’s a function of products and markets, and it’s an exponential function rather than a multiplicative function. So if you’re in one market with one product, you’re one raised to the power of one. If you’re in one market, two products, you’re one raised to the power of two. And then, unfortunately, as you add on markets, you actually add a power to the power. So let’s say your base complexity is two. Then if you go into another market, you’re going to increase that power by another power. So your complexity explodes when you go into new markets.
Justin [03:27]: It’s a function of the differences between markets and the fragmentation of the continent, in general.
Keith [03:32]: Recognizing that within Africa, like from one market to the next, they are completely different. The tax regimes are different. The regulations are different. The cultures are often very different and things just don’t automatically translate from one market to another.
Justin [03:48]: This complexity is both highly leverageable and also an existential risk.
Keith [03:52]: Some companies are able to tame that complexity and actually create a huge moat around their business because they have been able to tame that complexity and in doing so will have put the systems and processes in place that can manage it. So those businesses are, I think, very powerful. However, a lot of the other businesses on the way through, they cannot tame that complexity. And what may be a very good business in one market ends up collapsing as it tries to go into multiple markets. And I’ve seen this time and again. So, you know, I’m always sort of very nervous for companies when they start looking at moving into other markets because I think it’s a very dangerous time for any business to go into a new market.
Justin [04:33]: So with that being said, how should entrepreneurs approach expansion?
Wiza [04:36]: I think like startups have to be flexible in their core value prop, but aligned very closely with the status quo of the structures of the countries that they’re going to.
Justin [04:44]: That’s Wiza Jalakasi, the head of global business development and strategy at Hover.
Wiza [04:48]: And sometimes that means that you hire differently in these markets. So in one country, for example, you have like one salesperson and one support person. And maybe in the other country you’ve got like ten support people, five compliance people, and no salesperson. And I think people struggle to wrap their heads around that because they want to take this linear format and scale it across these very different markets. And that just does not work at all. Like, I’m speaking from experience, please do not try it. Get into every market and set up the appropriate structures.
Justin [05:31]: In spite of the complexity, we are still seeing many startups expanding – both successfully and unsuccessfully. It comes down to the ability to execute.
Tayo [05:38]: If you raise money on a specific strategy that you want to make sure that you’re able to execute on that strategy.
Justin [05:44]: That’s Tayo Oviosu, CEO of Nigerian fintech Paga. Tayo, much like Keith, believes in taking a discerning and patient approach to expansion.
Tayo [05:52]: When I talk to entrepreneurs – and this week I had a meeting with somebody who was thinking about expanding to a new market, a much younger company. Especially in Nigeria, where a lot of people are like, ‘Oh, I see Paga saying they’re doing this, Migo’s doing that, Paystack’s doing that, this person is doing that,’ you know? There becomes a pressure of, oh, I should also go to another market. And I said, ‘Look, you need to block all that out, because every new thing you add to your business is yet another, you know, major dimension of complication to your daily execution’. Again, everybody in a slightly different situation, but I think people should, it’s not something that people should rush to.
Justin [06:34]: Paga is an interesting example – they launched commercially in Nigeria in 2012, and are planning to expand into their next market this year, after 8 years of operation solely in Nigeria. On one hand, it’s a function of the amount of opportunity in Nigeria alone.
Tayo [06:48]: Paga is a mobile payments company that is focused on solving two problems: digitizing cash and cash transactions, and delivering access to financial services to the mass markets in emerging markets. You know, we’re going to continue investing very heavily in Nigeria and scaling our business here. We see tremendous opportunity. We think we’ve done the 2%. There’s still 98% to do here in Nigeria. I think because Nigeria is such a big market that people, you know, you don’t have to tell people that we’re going anywhere. I think if we just said we’re just in Nigeria, I think people would be fine with that.
Justin [07:26]: On the other hand, their decision to expand now is a function of the opportunity they see in markets outside of Nigeria.
Tayo [07:31]: But one thing that’s also clear to us when we think about the two problems we’re solving and what we’ve built here is that these opportunities in other large countries will not be there five years from now. And if we have the privilege to be able to work in multiple markets, then why not?
Justin [07:51]: And what gives Paga the privilege, in Tayo’s view, to work in multiple markets and execute on their strategy is the strength of the team and what they’ve built in Nigeria.
Tayo [07:58]: I think we, with the team we now have in Nigeria, we have the privilege to do it. I don’t think we could have done it before, you know? I think we now have a strong leadership team that is able to run the business and focus a lot more and allow a select subset of us to help build a new market, a new operation. It almost feels like starting again from, at some level, but what’s different this time is that we already have a platform, we already have the product, we already have everything. And so the starting again is the partnerships and the execution side of it. And so I think that actually gives us an advantage.
Justin [08:40]: For Tayo and Paga, in particular, their ability to be patient is also, in part, a function of their investors and the strategy that they bought into.
Tayo [08:48]: We’ve never faced the pressure. None of our investors are pushing us to do what we’re doing. When I looked to bring in investors I also thought about that because if you, as an investor, are not excited about the same purpose that the team is putting forward, then I don’t want you as my investor because I think we’re going to have issues down the line. You know, it’s not about just the money, right? We have to be aligned around the purpose because we may disagree on many things in between, but if we’re aligned on purpose, and we’re aligned on that, then at least we’ll figure things out.
Justin [09:29]: While Tayo and Paga may not face the pressure from investors, the role expansion plays in fundraising and the path to exit for venture-backed companies can’t be overlooked entirely.
Victor [09:38]: My name is Victor Basta. I’m the founder of Magister Advisors.
Justin [09:42]: Magister Advisors is an M&A advisory firm that’s worked with several African companies on their growth-stage rounds.
Victor [09:48]: We’ve done several of the largest growth equity rounds that have been done on the continent. So it started with Cellulant, which was the largest growth equity round that had actually ever been done in Africa up to that point, which was mid-2018. And then we worked with Twiga when they raised money from Goldman Sachs. It was Goldman’s first-ever investment in Kenya. Cloud Factory, which raised $5 million, which has 3,000 people in Nairobi and 3,000 in Nepal.
Justin [10:12]: In this line of work, Victor and his team advise growth-stage CEOs on the preparatory work needed to position their company to raise larger rounds – a $25 million-plus Series C, for example, and ultimately for an exit. And while exits are few and far between in the nascent African tech ecosystem, we can reasonably expect to see more companies in time exiting through M&A or through a sale to a strategic buyer.
Victor [10:34]: What does good look like to be attractive to a strategic buyer? And so a couple of points on that – one is that buyers still in a lot of sectors, they will pay up to “buy Africa”. We all know that there’s really not such a thing. But for example, in payments, there’s a huge premium to be able to buy one that delivers Africa multiple markets. Off-grid solar the same thing, agriculture the same thing. Now, there are limits because there’s hardly any company that’s truly Pan-African and the cost of doing that at a relatively small scale is sometimes prohibitive. So what is good enough? But my point being that if you have $30 million of revenue in one of these markets in Africa, it becomes more valuable to have 20 in one geography and 5 and two others than it does to have 28 in one geography and 2 in another.
Justin [11:30]: But that’s not to say attractive growth-stage companies are merely dipping their toes into new markets.
Victor [11:35]: There are issues around managing and, you know, how profitable geographic expansion is. And we get that question all the time. But pilots, if you’re a Kenyan based company, a pilot in Uganda doesn’t cut it. You kind of need to have a business there.
Justin [11:48]: So perhaps exit considerations are behind an East African company, for example, choosing to expand to West Africa, especially given our understanding of how difficult it has been for outside companies to make it Nigeria.
Victor [12:00]: Of course the holy grail is being able to cover two points of the triangle – you know, East, West, and South. So if you can cover two points of the triangle, strategic value begins to multiply. Again, because whether you’re talking about a Total or a PayPal or Square or whatever, you’re talking about somebody who wants to be able to say ‘We did one acquisition, we’re going to build around it’.
Justin [12:28]: But even with this being said, Victor understands the operational risk a young company is making when mapping international expansion.
Victor [12:35]: The risk is always, you go for a certain kind of profile to be attractive in three years’ time to a strategic buyer and you end up screwing up the economics in the business or management bandwidth gets overstretched.
Justin [12:46]: And so part of the fundraising game is balancing these competing objectives long enough to get across the finish line.
Victor [12:51]: There’s an equation that somebody taught me years ago. Very complicated equation. It’s called perception minus reality equals value. Now, the point about that equation perception is not spin, but you can amplify your capability, credibility to be Pan-African without quite having done it. And there are plenty of examples of African companies that have raised more money than they “deserve” to raise at their stage of development because they got on people’s radar screens. They were well known, and people buy and pay more for companies that they feel they know. And so a big part of exit preparation is how do you build that kind of engagement with buyers in a scenario where you’re just building a relationship rather than your for sale.
Justin [13:41]: So expansion is hard, yet opportunities abound. And for those who can execute, their decision to launch in new markets can go a long way to building a really strong business – and one that is attractive for buyers. But it raises a question – who on the continent has gotten it right so far? What does it really mean to be a pan-African company? And are there actually any?
Osarumen [14:00]: There’s definitely a need for a healthy dose of realism about like, to what extent you’re able to generate revenue in or make progress in other markets outside home base.
Justin [14:09]: That’s Osarumen again, who we heard from in the opener.
Osarumen [14:12]: Some of the entrepreneurs I’ve come to respect the most are those who are very clear-headed about what the 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.
Justin [14:31]: This sentiment comes from Osarumen’s first-hand experience.
Osarumen [14:34]: I currently work at Africa’s Talking and 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.
Justin [14:48]: But let’s not confuse pragmatism for pessimism.
Osarumen [14:51]: If entrepreneurs are thinking about the markets as systematically as they should – that is, identifying the countries where, again, the conditions are right for the things that you have to offer – those may not necessarily be the countries that are close to you or where there’s a geographical proximity. So it shouldn’t necessarily follow that building a Kenyan business, you need to expand to Uganda immediately afterward or building a business in Nigeria you need to expand to Ghana. But some of the entrepreneurs that I’ve come to respect the most here are taking a more first-principles approach to the market.
Justin [15:26]: And perhaps increasingly that’ll mean expanding outside of Africa. Here’s Tayo again…
Tayo [15:31]: So Mexico is the next market we’re launching. We’re very driven by what we call a massive transformative purpose, which is that we want to make it simple for a billion people to access and use money. And as we thought about that, we asked ourselves, ‘Okay, how do we achieve that 1 billion number?’ And what became very clear to us is that we’re in a business that really requires scale, right, and that requires being in a large country – large in terms of population, large in terms of GDP.
Justin [16:01]: And it’s worth mentioning that Paga’s ability to choose Mexico as its next expansion market is, in part, due to Tayo’s vision for Paga and its mission.
Tayo [16:09]: I mean, imagine if my story and what we’re doing, we said, ‘We’re building across Africa’, we wouldn’t have just had this initial conversation we had right now, right? About Mexico or any other country. It’s actually an easier story for me to tell and I think I could tell it very credibly, that we are going to be the PayPal for Africa. I could tell that story very credibly and everybody would buy it. But again, that’s not us. It’s just not real.
Justin [16:32]: So perhaps we ought to see more African startups – if the conditions fit – setting their sights on global expansion and not just limited to expansion across Africa.
Osarumen [16:41]: So I don’t necessarily think about this as everybody who starts a tech business here needs to think about “the continent”. Good businesses are good businesses, and good founders are good founders. Good capital allocators are good capital allocators, and they will find what maximizes value for the business.
Justin [17:00]: At the same time, again, perhaps it also serves us well to keep a healthy dose of realism and pragmatism.
Osarumen [17:05]: I also recognize why we’re having this conversation. It is, in many cases, structurally challenging for African founded companies to go thrive elsewhere. Like, even if we take something as straightforward as access to capital, the world currently has not yet seen Africa as, or African markets, as lucrative investment vehicles or investment opportunities. And so, you know, would say, a fund based in Silicon Valley rather bet on a Latin American founder, a Southeast Asia founder or African founder? I leave that to decide, you know, based on what’s already happened.
Justin [17:57]: As always, my b-mic Sayo and I sat down to discuss our thoughts on this episode – and in particular, the inextricable link between fundraising and expansion. Have a listen.
Sayo [18:07]: I think premature expansion is a massive, vicious cycle because what happens is you go ask your, whoever you’re asking for money, and you say, ‘We’re gonna be in three countries by X’ and then you go do that. And then you realize that, oh shit, well, now I’ve spent all this money trying to make this work and then I’ve changed my focus. I’ve moved away from focusing on my home market. Maybe competitors have started coming in, maybe I’ve just stopped paying attention to the key parts of my unit economics or whatever it is, and now I’m running out of money. And I need to be able to go and tell the next group of people, or the same people, about my expansion plans. I’ve either got to like double down or reel it all the way back in and either way, it’s just kind of this vicious cycle that happens. So I think that, you know, waiting and then taking your time with that kind of decision is smart to me. And then I think it’s also really important to know your product and know your market. So some products can in a lot of markets go deep. It’s not like, you know, there’s not that many, which I think we always have to be honest about when we talk about our markets. But a lot can, and you know, you just have to pick the right products that can do that in the right environments. So, yeah, I don’t think that it’s true that Nigeria is the only market where you can build something for the market and stay there. It’s just about what products you’re building, and what exists to help that product thrive.
Justin [19:55]: What do you think about the topic of complexity and what Keith was talking about? Related to what you just said, like the complexity that’s introduced by introducing new products versus the complexity that’s introduced by expanding to a different market. I was just curious what you think about that in terms of like, is it fair to say that in all cases it’s, maybe operationally less intensive to introduce a new product in the market, in your home market versus taking the same product outside of the market? Especially if you’re in a regulated sector where you have to deal with all of that kind of stuff, just to get a product off the ground in a new market.
Sayo [20:37]: I think that’s fair. My general hypothesis around that, from a personal point of view – I don’t know if it’s right, I don’t have enough experience to say so – is as much as possible, you want to build out the full stack of your product lines in one market. I think that it then gives you the requisite practice, the requisite muscles and agility to be able to – and also the requisite stack – to be able to expand in ways that make sense.
Justin [21:12]: And I think actually like so much else, this ends up sort of defaulting to a conversation on fundraising. But it really underscores to me just how important patient capital actually is. There’s almost like a catch-22 where you need to – we’ve talked about this before – like pitch the pan-African narrative, right, in order to win deals. But then once you win deals, being compelled to expand because you pitched this pan-African narrative is sort of antithetical to like what ought to happen from an operational perspective.
Sayo [21:46]: Yeah and it’s the thing that happens to, even to me often, you know, like maybe nine out of 10, in 10 out of 10 really, conversations you I have with a potential funder will be the question of, you know, ‘Is this something that scales across the continent?’ And, you know, for better or for worse it’s yet to be known. I’m always very honest about my answer to that question, which is I’m building out a full stack in one market and then I take it to other markets if it makes sense. And people don’t really want to hear that.
Justin [22:23]: Yeah. I mean, do you think that you lose interest?
Sayo [22:25]: Yeah, yeah, 100 percent. And I say that with a fair amount of evidence of emails and no’s.
Justin [22:34]: Yeah a lot of people say no to you.
Sayo [22:37]: Yeah they do, and to be honest, it comes back to what you said -I hope what it does do is align myself with the right partners who are, you know, a little bit more nuanced in their understanding of the markets and patient. And, you know, trust or respect realism. Like, I don’t know, there’s a whole hype world of things that I am generally bad at anyways.
Justin [23:08]: What did you think about Victor saying like the perception minus reality is what, like that formula that he talked about. I mean, his perspective was really interesting as well.
Sayo [23:18]: I loved it. I really, those were, you know, strong learnings for me in the episode. The value of perception. And, you know, you could kind of switch up perception with potential in that equation because I think that’s more what it was speaking to. But, you know, inside of that potential is a lot of perception and a lot of storytelling.
Justin [23:39]: Maybe this is where we sort of tease future episodes, but the whole sort of valuation and pathway to exit topic is definitely something that we were going to explore more, right? And then the other thing on narrative – we didn’t get into in this episode, the decisions behind why Mexico for Paga – but like one of the things that was the most interesting is talking to Tayo, talking about how he positioned Paga to not just be a pan-African fintech, but you know, a global fintech trying to solve emerging market problems and how that narrative maybe it was a harder story to sell, but then is also what enables them to make the decision to go to Mexico versus, you know, Kenya, for example.
Sayo [24:24]: Yeah, I really enjoyed that. Again like that’s the thing that rings true for me, right? It’s just having a comfortable story that works for you, your product and your markets, and then communicating that as clearly as optimistically as possible while grounded in a strong sense of realism, so that the partners that you’re bringing along the journey know what they’re getting into and you don’t kill yourself trying to do something you don’t even really believe in. And at the expense of the thing you do really believe in it.
Justin [24:57]: And then hopefully after a lot of no’s, eventually you find somebody who buys what you’re selling.
Sayo [25:01]: That’s the game.
VO [25:08]: Thanks as always for listening to this episode of The Flip. As we just mentioned, our next two episodes will expand on this topic a bit further. Next week, we’ll hear from Paga again alongside others on the connection and relationship between African startups and non-western markets outside of the continent. And the following week we’ll explore valuations and exits.
Be sure to hit subscribe on your favorite podcast app to get those episodes straight to your phone. You can also join the newsletter for updates, as well as a weekly essay sent every Sunday, on our website – theflip.africa, and follow us on social media @theflipafrica. Thanks again for listening, and we’ll see you next week.