S2E4: From Idea to Exit - A Startup Fundraising Journey

Chidinma [00:13]: I think the biggest thing is like, the exits are coming.

Justin [00:18]: That's Chidinma Iwueke, a Partner at the pre-seed venture firm Microtraction.

Chidinma [00:22]: They are coming. So let's not sleep on Africa, this space is changing rapidly. Now is actually the time to start looking more closely into this market and maybe taking a leap of faith or a chance.

Justin [00:37]: I agree with the sentiment. But it's not just that exits are coming - they're already here. Here's Andreata Muforo with VC firm TLcom Capital.

Andreata [00:46]: So the first thing that I'll say is they actually have been some Africa tech exits, and us, as TLcom, we have exited two companies. It's true that they are not, there have not been many exits, but I think probably more are coming because it's a nascent ecosystem.

Justin [01:03]: Let's talk about exits. One of the most consistent things I've heard from the ecosystem is that we need to see more exits - exits are what compel certain people to pursue entrepreneurship, that compel certain investors to invest in the VC asset class in Africa, and perhaps most importantly, allow for exited entrepreneurs to inject smart capital into the ecosystem. Amidst all of this, I'd like to reverse engineer. What does the pathway to exits look like? How do we get there? How do these considerations for a later stage company impact how early-stage companies should think about valuations and fundraising?

In this episode of The Flip, we speak to investors at every level of the funding value chain, from angel investment and pre-seed all the way to M&A and exit

VO [01:51]: You’re listening to The Flip, the podcast exploring contextually relevant stories from entrepreneurs around Africa.

Justin [02:00]: Welcome back to The Flip, I'm your host Justin Norman. This episode, we're going to go on a venture-backed startup journey - from inception to exit.

So here we are, we've got this great startup idea, we test it out, develop an MVP, get some users and now we need our first little bit of money. So we track down some angel investors. At the very beginning, venture investing is pretty subjective.

Zach [02:19]: I'll say it's almost entirely an art and it has very little science to it.

Justin [02:23]: That's Zachariah George, angel investor, Chief Investment Officer of Startupbootcamp Africa, and most recently, a General Partner of seed-stage fund Launch Africa.

Zach [02:32]: As a personal investor in startups all across Africa, the one thing I would say is venture investing at the early stage, especially pre-Series A, is 80% of the gut and feel of the entrepreneurs and the team versus your actual numbers.

Justin [02:49]: At this early stage, it's intangible and subjective considerations related to the founders and their view on the opportunity before them.

Zach [02:56]: I would any day back a passionate entrepreneur and a jockey over the horse, to use a sporting analogy. It's more a personal connection with the founders and understanding why they are doing something and how well they look at their market than an actual series of numbers.

Justin [03:12]: At this point in a startup's journey, any metrics merely form the basis of the hypotheses the startups test early on.

Zach [03:18]: The only thing true about financial models for startups, the only thing true about models, is that they aren't wrong. To this day, there is not a single startup that I've seen whose financial model, projected financial model, that was sent four or five years ago has come to within a 5% margin of error from where they are today.

Justin [03:42]: For that reason, some investors at this stage have fixed investment terms and valuations.

Chidinma [03:46]: The reason we have fixed terms is just simply for visibility.

Justin [03:51]: That's Chidinma again with Microtraction, who we just heard from in the opener. Microtraction is often the first check for founders, and at the stage in which they are investing, they don't want to waste time haggling over valuations and numbers that don't mean much yet.

Chidinma [04:03]: We don't want to have to spend a lot of time negotiating with founders, so it's nice for them to know exactly what they're getting when they come to us. It just eliminates a lot of that.

Justin [04:12]: For Microtraction, who primarily invests in Nigeria, their standard deal, at the time of this recording, is $25,000 for a 7% equity stake in the company. These early-stage terms may vary by fund and market. The Silicon Valley accelerator Y Combinator, for example, invests $125,000 for a 7% equity stake.

In these cases, this money is intended for super early startups to test their hypotheses, launch a product, and get feedback from their users. As the company grows and continues to approach product-market fit, then we're onto the seed and then Series A fundraising stages.

Justin [04:56]: So here we are at the seed stage. It's time to really fine-tune our business model before we're ready to grow and scale. So we get a meeting with a VC.

Andreata [05:03]: My name is Andreata Muforo and I'm a partner at TLcom Capital.

Justin [05:07]: TLcom Capital is an early-stage fund investing across the African continent. And while they do invest across different stages of business, certain opportunities in recent memory have compelled them to invest earlier, at the seed stage.

Andreata [05:18]: In terms of stage, you know, in our strategy we actually are early to growth stage, so we can actually do seed investments. So the initial investments that we made were in slightly later stage companies and now if you look at our portfolio now, we've actually made some seed investments.

Justin [05:36]: And at this stage, the check sizes get even bigger.

Andreata [05:38]: So in terms of amounts we invest, the minimum check size we'd write is $500,000 and can go as high as $9 million when we're doing follow on investments. But I think when we think about the portfolio, we're looking to invest between $5 to 6 million over the life of an investment.

Justin [05:55]: This is where valuation starts to come into play - the size of the checks and the amount of equity a VC firm like TLcom receives becomes more negotiable - and dependent upon the business, the sector, the market, and more.

Andreata [06:05]: When we think about valuation, a good chunk of the work is thinking about what this business will look like a couple of years into the future.

Justin [06:14]: That's because, at this stage, a high growth startup is typically not profitable, and instead is spending money upfront to build a product that has high growth or even exponential return potential. So more traditional ways to value a company do not yet apply.

Andreata [06:25]: You can't necessarily multiply the revenue now or the EBITDA now, also because sometimes there is no revenue and sometimes there is no, most times, there is no EBITDA.

Justin [06:36]: Even now, it's still a bit of an art and a science.

Andreata [06:38]: The process we say is precisely wrong but vaguely right. So let's say, for example, we're assessing a business say in the agri space, and then a couple of years time down the road, let's say in, you know, say five years, revenues will be $50 million. And then it's at that point that we try to assess what is the valuation then.

Justin [06:59]: This is where Andreata will start to compare the projected value of this hypothetical company with that of other similar companies in African markets or elsewhere in the world.

Andreata [07:06]: Then we look at what are comparable companies for such a business. What do similar businesses in this market or in other markets get valued at? And what multiples are they getting valued at? So say in this particular case, similar type businesses are bought at 4x, four times revenue, o then it's 50 times 4, so it's 200 million. So we're saying this business a couple of years down the line will be worth $200 million.

Justin [07:34]: And here is where investor return expectations are taken into consideration.

Andreata [07:37]: Then you look at what stage is this business. And the stage is important because then it then translates to the investor's return expectations. So say, for example, it's a Series A type of investment, so typically Series A types of investments we're looking at at least 10x return for our investment. So in this case, now you take the 200 million, you divide by 10. So then you get 20 million. So 20 million is your post-money now, then you subtract however much you're raising. So say they're raising $4 million. Then then the pre-money will be 16 million. So this is the mathematical kind of way to think about it.

Justin [08:19]: There are, of course, lots of other variables and considerations, and as such, risk-return ratios are adjusted accordingly.

Andreata [08:26]: So depending on the stage of the business and the sector that it's in, and then what you project the growth will be is what determines what your, what the valuation you would ascribe to the business today. So if the company was a Series B, the return expectation is lower because then this is a company that's slightly more mature.

Justin [08:47]: Before we continue on, it's worth pausing to mention that this exercise and how an investment fits into their overall portfolio strategy is going to vary on a fund by fund basis.

Ciku [08:55]: Oftentimes you hear, you know, people naming a company and talking about how overvalued it is.

Justin [09:02]: That's Ciku Mugambi, an investor with the IFC's venture capital unit, known as the disruptive technologies and funds team.

Ciku [09:08]: So, I feel like it's one topic that we will never have a common ground and we will never have agreement. And the reason for this is also just because of different investors motivations behind doing different deals depending on what your expectation is. When you get into a company, when you're adding a company into your portfolio, whether you're a financial investor or whether you're in a strategic investor, that incentive or that motive will often determine the price that you're willing to pay for a particular company.

Justin [09:42]: That being said, the process for Ciku involves looking at comparables too.

Ciku [09:45]: I consider what other comparable companies are not just in Africa, but across other emerging markets. And one privilege that we have is that we have access to like lots and lots of data. And so we're able to actually benchmark a lot of business models that we find here in Sub-Saharan Africa, across our wider portfolio in other emerging markets. And then at the same time, we take into consideration what visibility we have on the growth prospects of this company and how that's likely to pan out, say in 12 months, 18 months, or by the time the company will be doing its next round or even potentially exiting, if that's what the next step is for this company.

Justin [10:30]: And like Andreata, Ciku is projecting the exit opportunity for a prospective investment.

Ciku [10:34]: So based on that, we then come up with an estimate of what we feel we can exit at then, and therefore what we feel we should be paying for that company now. And then how does that compare with other comparable companies or other comparable transactions in the same sector, in the same sort of market. And that kind of gives you like a sense check of whether we feel like we're doing, we feel like we're making the right investment decision or not.

Justin [10:59]: So clearly things are getting a bit more objective as we move through the fundraising process. And given the role that prospective exits play in valuing companies at this stage, where do venture investors see the exits coming from? Before we answer that, first, a caveat.

Ciku [11:11]: I sometimes think that this is where we kind of penalize ourselves, by saying, “Oh, there are no exit opportunities in Africa.” We're still a very, very, very young ecosystem.

Justin [11:23]: It's worth mentioning that for early-stage investors, an exit often means being bought out by follow on investors.

Ciku [11:27]: Oftentimes the investors that are coming in at that stage are growth stage, institutional investors. And some of them actually try and clean out the cap table by buying out some of those earlier angel investors. So exits are happening, just under the radar. Definitely exit considerations are something that's top of mind, but it may not necessarily be an exit in the sense of, you know, a company listing on an exchange. It could also be an exit opportunity through follow on round of funding where somebody else, either a PE fund a strategic buyer, can come in and buy us out.

Justin [12:06]: Beyond that, where else will the exit opportunities come from?

Ciku [12:09]: For venture investing that pathway is typically follow on funding or follow on rounds. So we need to be able to have a view on how attractive this company will be to an investor in 12 months, 18 months, 24 months.

Justin [12:27]: Andreata and TLcom share a similar sentiment.

Andreata [12:29]: For us, there are probably three likely exit options for the businesses we're investing in. So the first one, which is where a very small subset of companies will follow this path is the IPO path. Then the second one, which I think is the most likely for a larger percentage of the businesses we invest in is, you know, trade sales and strategic buyers that will come in and acquire these businesses. This can be anywhere from, you know, large ecommerce players or software businesses that can look at some of our software business services, software companies. And then the third way is private equity funds.

Justin [13:16]: So here we are at the later stages, looking to talk to growth stage and private equity investors. And to be sure, on the continent we have seen some private equity investors make traditional PE investments in tech companies - that is, majority stakes in companies - but we've also seen them take a minority stake to come in to inject growth capital as part of a later stage venture funding round.

Fope [13:33]: I was looking at it in the payment space.

Justin [13:35]: That's Fope Adelowo, Senior Vice President with the pan-African private equity firm Helios Investment Partners

Fope [13:40]: I think in fintech over the last five years, I believe, the sort of dollars per head into fintech alone is something like 50 cents per head, right? Versus in, I don’t know, let's take the UK, for example, where it was something like over $200 per head. So I think what that says is actually, you know, there are emerging ideas, but the pools of capital aren't there yet.

Justin [14:09]: And as a result, PE firms like Helios are investing a little bit earlier in the funding value chain.

Fope [14:13]: Which creates this weird sort of role where, you know, even for a PE fund, if you're looking at investments within this space, you are actually looking at sometimes these earlier stage investments because of the sort of limited access to capital or limited pools of capital. Some of these investments are still not the same size as we would in the rest of our portfolio, but I think if you are investing for growth in the future, you definitely have to take a look at them.

Justin [14:37]: Private equity's participation earlier in the value chain - at least in Helios' perspective - is also an outcome of early-stage valuations.

Fope [14:44]: Back to this concept of the sort of dynamic of how capital is flowing within the space, so while you have a growing local VC community, what do you see is actually historically some of the startups, the tech companies that have done well have gotten VC funding outside of Africa or from sources outside of Africa. So that creates a cycle of, you know, a sort of increased valuation expectation, which means that if you are coming in at a later round, you know, you kind of have to be comfortable with these valuations. Then it forces you to start to think, actually, should you be looking at earlier stage investments to fulfill and manage actually for the risks that you would typically think about in any investment?

Justin [15:29]: For Fope, in particular, as a private equity investor looking at earlier stage tech investments, the valuation question has both positive and negative implications.

Fope [15:37]: I think the negative impact is obviously if the valuation, you know, as an investor, there's a certain amount of return you're expecting, and you will sort of have a view of how you think the business can evolve. There can be a mismatch into how you think about how the business would evolve. And therefore this creates a mismatch around what you as an investor think are likely returns.

Justin [15:55]: But then on the positive side...

Fope [15:56]: I think on the positive side, let's say you're looking at energy access, for example, and you're saying, well, actually, if I was looking at anything broadly in the power space, it would, you know, pay these sorts of multiples. But because it’s a technology business I'm paying a bit more and actually you can carve out a growth path for that company that is interesting. Then I think within bounds, within certain bounds, you'd be willing to pay up and by pay up I mean pay up versus what you might normally pay for any other business within that space.

Justin [16:22]: So while investors may be willing to pay up for technology or tech-enabled companies, it's also important to view through the lens of a private equity firm, that is constructing their portfolio differently than a traditional venture investor.

Fope [16:32]: I think with a VC fund, it is sort of the model that you do, I don't know, a hundred investments and you hope that at least 10, you know, do well. Whereas you don't have that sort of model in the PE world. You want each of your investments to not return a zero, right? Whereas in the VC world, you can actually afford to have some zeros in your portfolio.

Justin [16:49]: This has implications for the process by which a PE investor makes investment decisions.

Fope [16:53]: The amount of diligence that you may do as a PE firm may be different, but that goes back to the initial point I made about how you think about the overall portfolio and how you risk manage for each investment versus how you risk manage on the overall portfolio.

Justin [17:04]: That being said, Fope is otherwise looking at individual investments in a similar way to venture investors.

Fope [17:08]: I think when you look at each individual investment, look, yes. maybe the metrics you look at ultimately may be different, but the principle behind every investment is going to be, you know, can I pay a good price for this investment to grow and achieve the returns that I want or that I'm targeting? And how do you determine what that growth can be? So some of those basic things apply both ways, whether you're a PE investor or a VC fund.

Justin [17:32]: Though one other difference is venture investors' view of PE funds as prospective acquirers.

Fope [17:36]: Increasingly we are seeing partnerships, not just on the exit for VC fund, but actually even on the entry into a company, and primarily in a way, maybe as a fund or as a founder, it's your way of hedging the eventual exit by bringing in a PE fund early with the view that actually, maybe that PE fund could increase their equity stake over time, or at least be in a position to drive a much bigger exit to more parties, as you typically would have in any PE process versus a VC process.

Justin [18:06]: And to that point, PE funds are charting their exit paths for a given investment as well.

Fope [18:10]: Exit conversation is always such an interesting one because I think as an asset class, and by as a class I mean PE, I think we are sort of learning, you know, what these look like, right? The sort of exit options are fairly standard. Now, the way you go after each option, I think, is where the creativity and the work applies. But it's going to be an international listing or it's going to be a local listing. It's going to be a strategic sale. You could sort of try and realize your investment through other things like a dividend recap, for example.

Justin [18:50]: But a few things, in Fope's view, are a bit different in the context of Africa and emerging markets, more broadly.

Fope [18:55]: Where the work comes in is, I think, just understanding timing of the market and understanding actually in a way, which sectors are sort of high profile. So by timing, what I mean by that is, you know, for any African company looking to come to market, especially if you look at it from an international listing perspective, I think generally you have to come to a market where there's investor appetite for EM or Africa. You see increasing appetite from strategics to either expand because obviously in their markets growth is slowing down or they’re in businesses where the network effects actually just make more sense.

Justin [19:36]: So all the while we've been speaking to investors who write increasingly larger check sizes, and to some degree, their due diligence and investment criteria becomes significantly more onerous, the fundraising process becomes significantly longer and the amount of prospective investors we can pitch to begins to become more selective. This is where someone like Victor Basta of Magister Advisors, who we heard from in episode two this season, this is where he and his firm play a role.

Victor Basta [19:58]: 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 work with Twiga when they raised money from Goldman Sachs. It was Goldman's first-ever investment in Kenya. Cloud Factory, which raised 65 million, which has 3000 people in Nairobi and 3000 in Nepal.

Justin [20:23]: In working with growth-stage startups, the core of Victor's work is in preparation - working backwards from a prospective exit to determine what these companies and their CEOs need to do to get themselves across the finish line.

Victor Basta [20:33]: So working backwards from an exit is I would say exercising a new set of muscles for a lot of CEOs. The exit market for tech-enabled businesses in Africa is largely unproven. And those exits that have, there are few IPOs that are fairly few and far between, some M&A deals, but a lot of them have traded to financial sponsors doing acquisitions. And preparing a company for strategic exit to sell to a large corporate for strategic prices is a very different exercise.

Justin [21:00]: And before we get into the details, let's lay out the likely options.

Victor Basta [21:03]: In Europe, as a starting point, less than 10% of successful exits are IPOs. In Africa, it's near zero. So preparing for an IPO is a great discipline, but everybody understands that's a fairly remote likelihood. So then you're talking about a deal where you get liquidity. So in developed markets today, private equity is about 60% of those deals. So any company that's looking at a cash exit has to assume that a private equity exit is some reasonably high proportion likelihood. Maybe it's not 60% in Africa, but it's reasonably high. So you may or not get the highest price that way, but probably the highest certainty. Then in terms of strategics, you really looking then by segment, by segment.

Justin [21:51]: While it's a bit tough to talk about strategic buyers unilaterally, given how considerations vary segment by segment, as Victor says, there are a few broad strokes we can use to paint the picture.

Victor Basta [22:00]: There's a very sharp divide between how venture investors value companies and how strategics value companies. And so, you know, your mindset as a CEO is, well, some version of that is how a strategic is going to value it. That's not the case at all. All they care about is can they get a business unit big enough to move the needle for them? And if I, as a strategic buyer, can't see my way to building a big enough business unit, then it's not really interesting. So that change in mindset between how has CEO sold valuation to investors and how she or he needs to sell it, if you will, in quotation marks, to a strategic buyer is fundamentally 180 degrees different.

Justin [22:44]: So part of the work becomes helping strategic buyers see the vision.

Victor Basta [22:47]: So therefore the work that needs to go into a strategic deal is helping strategics think about and frame the narrative of what does this look like three or five years after acquisition. Which means helping strategics think about amplifying their own business.

Justin [23:06]: And this is, to a degree, where the nature of technology as the enabling component of a business, especially at scale, also comes into play.

Victor Basta [23:13]: In reality, the vast majority of African growth companies that we work with and talk to, they're more enabled than tech. The idea is being able to have enough technology underpinning to a business and have executed enough that you can get a tech multiple against the core tech stack, but it's not because it's IP value. If you've got a really good quality tech stack that you're driving the business off of, what that translates to in three or five years’ time is higher margins because you have a much greater degree of efficiency. And remember, a discounted cashflow over five years that a strategic does is based on cash generated.

Justin [23:51]: Another important consideration in this conversation is where - geographically speaking - strategic investors are coming from.

Victor Basta [23:57]: Assume it's not going to be a local buyer.

Justin [23:59]: This is, in part, due to the valuations of growth-stage companies.

Victor Basta [24:03]: The company has become too big and, frankly, raised money at too high valuations that it becomes impossible for a local buyer, regional buyer really, to buy them. Plus the way they value businesses is they have a deep understanding of all the problems or risks associated with scaling businesses. And they've been at it for 50 years. You know, through that lens, they simply cannot value five years from now. What do we do with them?

Justin [24:31]: This, in Victor's view, is both a good thing and a bad thing.

Victor Basta [24:34]: They have a lot of cash on their balance sheets. They're relatively high margin. They've generated a lot of cash. And they're not yet at the stage, many of them of doing share buybacks, etc. By the way, if they were, it wouldn't matter because that means they have no better use of their cash. That's one point. Second is that cash has zero interest on it. So buying profitability, buying for forward profitability, they can pay more now than almost at any time in recent history, maybe history in total. The third thing is post-COVID, their growth rates likely slow down. And so buyers buy growth in many cases. And when you put the secular overlay, where Africa will be in five or ten years, almost inevitably, inexorably, etc., you can buy growth in Africa more clearly, with a developed, built company than maybe in many other markets. The biggest negative is buyers become less adventurous. And Africa, for many, is still a quote adventure.

Justin [25:35]: And as Victor just alluded to, the dynamics of investor preference and risk tolerance has also shifted in light of COVID-19 related uncertainty.

Victor Basta [25:42]: One thing that has certainly happened in the last few months, is that the value of liquidity to shareholders has gone up dramatically. With a lot of uncertainty means that there's greater uncertainty about raising larger amounts of money and that encourages, or maybe it requires, companies who have gotten to a certain scale to start thinking about dual track.

Justin [26:02]: Dual track is a pathway that Victor increasingly believes has merits for African tech companies who have achieved a certain scale.

Victor Basta [26:07]: Dual track is thinking about doing M&A, i.e., selling the business in parallel with raising a larger round. It's not because people are throwing in the towel. It's just that the value of liquidity has gone up a lot. And the assessment about future risk has also gone up. And so prudent shareholders, whether they're running the company or investing in it, have a different calculus than they would have had a year or year and a half ago.

Justin [26:29]: All of that's to say, that with a level of diligence and preparation, growth-stage companies have options. And while there's plenty of uncertainty, perhaps it's only a matter of time.

Victor Basta [26:37]: So when you're talking about exercising the muscles, it's one thing to do preparation. It's the other thing to have a clear idea of what you're preparing for. And that picture is usually fuzzy, by definition, for a lot of African CEOs. And I'll say it's exactly the same thing when I came to Europe 25 plus years ago, and we were working with technology companies, it was exactly the same fuzziness. The market hadn't been proven. What do you do? Different geography, same uncertainty.

Justin [27:09]: My b-mic Sayo and I often talk about how so-called Silicon Valley thought leaders, having made a lot of money through exits and in becoming thought leaders are quote, unquote blogging like they exited. And we joke sometimes about how we're podding like we exited, even though we haven't. But here we are, in our hypothetical startup journey, having exited, and it's time to reflect - to finally pod like we exited. Hypothetically speaking, of course. Take a listen.

Sayo [27:31]: A question that we must continue to ask, or a point of view that we must continue to reckon with and try and get to the bottom of, is really understanding how the phasing is going to look for there to be multiple, multiple exits. So hundred percent the big guys, the guys that we talk about a lot, I feel quite strongly that there are some exits coming. I think what becomes interesting or what we're talking about when we're talking about it from an ecosystem point of view is, if you think about the Silicon Valley hype machine, it was almost like this kind of conveyor belting of, idea, seed, Series A, Series B, Series C, exit, public. And you know, that conveyor belt situation, I haven't quite understood or felt like I have a strong hypothesis around what's going to be pulling everybody through in a more continuous basis.

Justin [28:42]: So there's something to be said, you know, to your point about the conveyor belt of exits in Silicon Valley is like, a disproportionate amount of exits come from Google buying the company. I mean, there's obviously an open question about like, who are going to be the acquirers in the African tech ecosystem, you know, who's going to be the Google, right? Like, there is nobody who can replicate that sort of behavior and to some extent then it becomes open question of like, as we see Google, you know, Google just announced that they're putting $1 billion or $10 billion into investing in India. These big companies are looking outside of the U S and into other emerging markets. And then invariably at some point, Africa is just going to be the next market. But when time the timing points interesting.

Sayo [29:28]: Yeah, super interesting. I think that question of like, who are people exiting to, who and when rather, I think that's super interesting. Especially because, you know, there's also no public markets kind of culture to speak of.

Justin [29:41]: Yeah, there there's something else that's interesting talking about like corporate involvement and in particular MTN's investment in Jumia.

Sayo [29:48]: I don't understand the corporate world to be honest and I don't understand how they make decisions. Like what's the strategy, and who's developing it, and who is executing it, and who is monitoring its success? I'm looking at it from inside of the bubble where I'm like, “Come on guys, you need to have a strong strat. You need to be giving access to market to these kinds of next innovators that are coming through your pipeline. You should be looking to buy them and create environments for them to succeed because they're going to be the next things, and you don't want to be Blockbuster.” But you know, they're probably like, “Yeah, it's cute.”

Justin [30:28]: Maybe there's something to be said also about like, back to the Silicon Valley ecosystem of Google and Facebook, these big acquirers have this tech and R&D ethos. You know, like the nature of how they look at M&A activity and acquiring tech is completely different. And how they incorporate tech into their existing business is completely different.

Sayo [30:52]: So I had this conversation actually with a mentor of mine and, he was just like, “Yeah, the mass market is cute, but there's so much under penetration that I only need to hit the top 3 to 5% of customers by value and I have a very, very incredible business. And the rest of it is just kind of like, pure 80-20 kind of stuff.” The marginal benefits of getting further down into that market size, it's just not worth it.

Justin [31:27]: Yeah, but is it going to be that way forever?

Sayo [31:28]: No, no, no, but, it's like the Mexico thing.

Justin [31:31]: Yeah, so they're, they're just doing the maths.

Sayo [31:33]: I'm actually just kind of down for everybody to do the maths. Do the maths that works for you. I think it's always the right thing. It's just I would like to understand a bit more about that maths so that I can tell a story and understand how other stories may fit into that maths in a way that we might not know with what we have and they might not know with what they have. It's like a communication problem to me rather than a right or wrong problem.

Justin [31:58]: Yeah, I think there's also, from a timing perspective, how disrupted have these companies been in the history of their existence? I don't know that they've really been disrupted that much relative to like, you know, incumbents in the US, right? This fear of technology putting them out of business is not that real yet.

Sayo [32:21]: Oh, no, no, no, it's not at all. And maybe we need them like we need exits. You need a couple of people knocked off their perch. But I also just don't think it's, I honestly, generally, don't see that coming anytime soon.

Justin [32:32]: And so that's part of the problem is that there's the incentive, in spite of like our belief that they need to, you know, what's it called? Like the Schumpeter, self-destruction, it may not be a real thing because there's no outside pressure. And if there's no outside pressure, there's no inside pressure. And maybe that's the point is like their R&D spend or their willingness to participate as an acquirer or as a corporate VC is like them doing something because they feel they ought to be doing it for the benefit of the ecosystem. But it's not necessarily, it's still like a cutesy thing for their business, you know, because they really don't need to disrupt themselves yet. This is corroborated by the whole idea about mobile money. Like mobile money wasn't an innovation for them to disrupt themselves. Mobile money was an innovation for them to reduce their distribution costs.

Sayo [33:23]: Yeah, but that's what I mean, right? It's like, what other costs can we help you reduce? It's a communication piece to me. I think the disruption thing is like a last resort. It's a weird thing to say, but I think the disruption thing is like, I think we have the potential to be smarter than everyone else, and I think the disruption thing is a huge waste of energy and money. And I think we need to be more conservative about our energy and money given the environments that we are in. And I think that means that we should be trying to collaborate quicker, earlier. And that to me requires a level of communication that, you know, I have yet to see.

Justin [34:08]: Yeah. So I guess what you're saying is being smarter means thinking about how to leverage each other's strengths before there's like this fear-based disruptive conversation that comes into it.

Sayo [34:20]: Exactly. Honestly, what can I help you with? Just tell me!

Justin [34:24]: Yeah. And there's an interesting point as well about like, you know, this is the problem with the ecosystem is that we're all just talking to each other, right? And so how do we get more corporates to listen to The Flip? Maybe that's the question.

Sayo [34:36]: Again, and let's get them on The Flip, and let's get them to tell the truth.

VO [34:47]: That's it for this week's episode of The Flip. Next week, we bring to you an inside look at a recent African fintech exit, an especially exciting episode to follow up on this week's discussion. So be sure to hit subscribe on your favorite podcast app. You can also get updates straight to your email by subscribing to our newsletter on our website, theflip.africa, or updates straight to your social feeds by following us @theflipafrica. Thanks as always for listening and we'll see you next week.