S2E8: Connecting the Dots - Japanese Corporates and African Tech

Satoshi [00:14]: Most of the Japanese companies know that they cannot just stay in Japan.

Justin [00:18]: That's Satoshi Shinada, a General Partner for Kepple Africa Ventures.

Satoshi [00:22]: And some of them are already active in Asia, but they are looking beyond Asia to expand. I think access to the African market is a very important strategy for most Japanese companies. So lots of Japanese companies are interested in how the new innovation coming out of Africa to solve the issue of Africa could potentially be actually applied to Japan.

Justin [00:47]: Kepple is a Japanese venture firm investing out of Lagos and Nairobi which, in the past year or so, has become one of the most active venture capital firms on the continent. Their level of activity and their relationship with Japanese corporations - who have demonstrated an interest in African tech through Kepple - makes this a topic worth exploring further. This season we've talked about other emerging markets across the Global South, we've talked about China. In this episode, let's talk about Japan.

VO [01:19]: You're listening to The Flip, the podcast exploring contextually relevant insights from entrepreneurs around Africa.

Justin [01:29]: Welcome back to The Flip - I'm your host Justin Norman. Kepple Africa Ventures is a Japanese-backed venture firm that was established in 2019. And in that time, they've made over 55 early-stage investments across eight African countries. So I spoke to two of their General Partners to gain some perspective on their activity on the continent.

Satoshi [01:47]: Hi, I'm Satoshi.

Rio [01:49]: I'm Rio, and I'm a partner of Kepple Africa Ventures.

Justin [01:53]: Satoshi and Rio, based in Lagos and Nairobi respectively, have been doing business on the continent for a while.

Satoshi [01:59]: I started traveling to Africa when I was an undergrad student in Tokyo. And since then I have been involved in business with Africa for the past 10 years.

Rio [02:11]: So, like Satoshi, I've been doing things related to Africa for quite some time.

Justin [02:17]: After both attending business school in the US, were ultimately brought together by a third of Kepple's partners, Japanese venture investor Takahiro Kanzaki, who had built up a successful investing track record in Japan.

Rio [02:28]: He was pretty satisfied with it and he wanted to expand that practice. So he was looking for opportunities and he spotted Africa as the next market.

Justin [02:36]: And Taka recruited Rio to set up operations in Nairobi.

Rio [02:39]: And after I did a half a year of investing, I got a lot of inquiries from outside Kenya, which I could not handle, but I saw a lot of opportunities especially in Nigeria. And then I have known Satoshi, personally, as this kind of crazy Japanese guy who has been in Africa, who went to U.S. MBA, but also he's interested in Africa. Actually, there's only a small group of people who go to U.S. business school from Japan, and if you want to find somebody in that group who is interested in Africa, there's only a few. Like there are only four people or five people that we know and then two of them were us. So we get together.

Justin [03:21]: So Satoshi joined Kepple to set up operations in Lagos. Now, to understand Kepple's strategic objectives first requires us to discuss a bit more about the macro situation in Japan.

Satoshi [03:31]: First of all, the Japanese market is aging and our economy is not growing at all. And there's so much legacy in the existing industries and the existing business. Most of the Japanese companies know that they cannot just stay in Japan and some of them are already active in Asia, but they are looking beyond Asia to expand and to find a market where they can expand their business. So I think access to the African market is a very important strategy for most of the Japanese companies.

Justin [04:06]: Japan, in many respects, is almost the complete opposite of many African countries, in terms of population growth, age of the population, and economic trends and forecasts. And so like many others, Japan is looking at the African growth story as an opportunity. However, it's worth mentioning that Japanese corporations haven't necessarily found prior success in attempting to do business on the continent.

Satoshi [04:28]: So I've seen lots of cases where Japanese companies enter the Nigerian market, but they have to pull out in a few years. And so just going into the existing industry in Africa is not an easy option for the Japanese companies. However, now they are looking at startups.

Justin [04:47]: And at the same time Japanese venture investors, in particular - perhaps with the exception of SoftBank, which is another situation altogether - are looking for markets where they can make their mark.

Satoshi [04:56]: So they're looking at Africa as a new market and the partnership with startups makes sense because there is less competition with other foreign companies. There's so much capital held by the Japanese companies and they have established lots of corporate venture capitals in Japan. Most of these corporate venture capitals are investing in Silicon Valley startups. And actually, while they have money, they don't have insider networks, they are not in the, you know, Silicon Valley community, they are still outsiders, they don't have access to the best deals in Silicon Valley. So for the Japanese companies, I think it makes more sense to allocate their money to Africa, of course they go to Southeast Asia first but, I think now they're in a transitional stage to go beyond Asia.

Justin [05:49]: And the role that Japanese corporates, in particular, play in funding venture capital and early-stage startups is perhaps a unique opportunity for startups on the continent.

Satoshi [05:58]: If you look at the startups in Africa, they are usually, you know, struggling to find global partnership. Most of the startups are looking for something beyond just money. So I think there is a great fit for the Japanese companies, and actually, that is what Japanese companies are looking for in Africa.

Justin [06:17]: And so part of the work for Kepple becomes investing in and working with African startups and connecting them to Japanese companies who are explicitly looking for innovations and partnerships from emerging markets.

Rio [06:26]: We can understand what Japanese companies want. We can just translate what's happening on the ground here in Africa, and then pass it down to Japanese companies. And also we are committed to growing companies that are ready to partner with Japanese companies. With us investing in them and also helping them grow together with us, we believe that we can take them to the stage where they are ready to partner with Japanese companies, and from there they can accelerate their growth.

Justin [06:55]: This, I would say, is distinctly different from Chinese investors - who we heard from two episodes ago - who are looking to bring Chinese business and innovation to Africa. Japanese investors and companies, on the other hand, are interested in taking innovations from Africa back to Japan and other markets in which these companies are operating.

Satoshi [07:12]: I spoke about how the Japanese companies failed to enter African markets with their products in the past. If Japanese companies developed the product or service by themselves, it tends to be like over-spec, overpriced. But if they make a partnership with the startups from Africa who can develop the product or service that are relevant to the African consumers, then it's a good partnership for the Japanese companies.

Justin [07:43]: And here's an example of a partnership born out of Kepple bridging the gap between Japanese corporates and startups in Africa.

Rio [07:49]: So there's one company called PayGo Energy that we invested in. And they got investment from a Japanese company called Saisan together with us. So we participated together with this company called Saisan.

Justin [07:59]: PayGo Energy is a startup based in Kenya, that has developed a smart meter liquid petroleum gas cylinder to enable consumers in Kenya to use LPG gas on a pay-as-you-go basis. And Saisan is one of Japan's largest LPG distributors in the country and throughout Southeast Asia.

Rio [08:14]: And the reason why they invested in PayGo is actually to collaborate with them and in bringing back technology, PayGo's technology, to reinforce their business operations. They want to streamline and enhance the productivity of the operations of LPG distribution.

Justin [08:32]: It's a really great case study of an African startup - building a localized solution for African consumers - whose technology has application and opportunity far outside of African markets and including for big corporates in developed markets.

Rio [08:44]: So what's interesting is that as a group, this company has more than that 1 billion revenue every year. And they had been profitable for like forever. It's a very lucrative business in Japan. Even with that company, the technology that PayGo has developed is like super, super innovative, and it's super useful. And they want to test it so that they can be ahead of the competition with other LPG distributors. Like, a developed country like Japan has never seen such a solution, and actually they're way behind PayGo. So it's super great to see that an African company is developing such an innovative solution, that it can be applied to different countries.

Justin [09:39]: So, let's explore this example of the PayGo Energy and Saisan partnership a bit further.

Nick [09:43]: My name is Nick Quintong. I am the CEO and one of the co-founders at PayGo Energy. And our primary focus is to expand the addressable market for LPG - that's cooking gas.

Justin [09:56]: It's the nature of both the hardware and the software solutions that enable PayGo Energy to access a new market - and that perhaps is what makes their technology attractive to a corporate like Saisan, as well.

Nick [10:06]: Our technology is a hardware and a software solution. On the hardware side, it's a smart meter that can attach to any gas cylinder and turn into a pay-as-you-go device. So rather than having to buy gas by the cylinder in large volumes, you can now buy gas in small amounts, which is more affordable for the mass market in Sub-Saharan Africa and other, similar markets. The second part of our solution is software, which is taking a lot of the unique information that we're getting now from the household and from that meter to make the supply chain a lot more efficient, to ultimately reduce the cost of gas, and improve the service that the customers receive.

Justin [10:42]: The technology is ultimately enabling PayGo and LPG distributors to better understand their customers and improve their logistics and operations.

Nick [10:49]: And so now that we know who the customer is, and we have generally a more sticky relationship with that customer, obviously the cost of acquisition goes down with a higher retention. Because we now have information coming from the household around the consumption, around the fuel level in the cylinder, we can get much more efficient with the number of cylinders that are out there in the market. The way that is experienced by the gas company is a significantly lower working capital cost, and also it reduces their general logistics and maintenance costs. There's just less metal moving through the supply chain.

Justin [11:22]: And in doing so, the cost savings are then passed down to the customer.

Nick [11:25]: And that will ultimately lead to lower unit costs for customers. What the technology is providing is actually a way to reduce the cost to deliver that LPG over time. Gas companies want to reduce their prices because they know it will expand, you know, the addressable market for LPG, but they're kind of hamstrung by how inefficient that supply chain is. So I think in the future, there is an opportunity to really use the information coming from the household to drive some big efficiencies in a supply chain that really hasn't had very much innovation over the last 50 years. And that will ultimately lead to lower unit costs for customers.

Justin [12:02]: And in a commodity business, PayGo has seen a huge amount of retention.

Nick [12:06]: We have well over 90% retention of our customers. I think the average for the industry could be maybe 20%, maybe even less, right? So huge improvement on retention, a huge shift from the status quo.

Justin [12:20]: In exploring the partnership between Saisan and PayGo, and the former's investment in the latter, to start there were a certain set of market conditions that aligned Saisan with the opportunity PayGo's technology gave them to better serve their current customers.

Nick [12:32]: One of the first things to note is that not every market, you know, is right for piped gas. And so kind of rapidly growing urban centers, it's really difficult to put in pipe gas and then also, you know, dangerous to put in pipe gas infrastructure. And some areas it's just, you know, just because of the geography, right? So in Japan, there's a significant amount of households that are on propane or butane cylinders because it's kind of mountainous, rocky areas or rural areas. This makes a lot more sense to do cylinders, which is why, you know, our technology makes sense. The same thing you're seeing in markets in Southeast Asia and even more mature markets like Japan.

Justin [13:11]: And for Saisan and PayGo, they share a similar vision for the opportunities for PayGo's technology.

Nick [13:15]: With Saisan, we've got a great partner because I think we have a shared vision for where this technology can go. The first thing that they got excited about was still our core smart meter technology and what it means for expanding the addressable market for LPG, which is unlocking all these households that are buying, you know, dirty fuels, and moving them over to gas. The second area is around the IoT aspect, which is, while we have information not just flowing from the household, but also at different points in the supply chain, how do we put that all together to create this virtual pipeline where we're being really efficient about getting gas to and from the household. And this will lead to new service models that weren't possible at the household level, new business models we can do in more of a post-pay system or more gas-as-a-service rather than, right now it's quite transactional. So there's a lot of opportunities, they think, longer-term that makes sense beyond just the initial one. And again, this obviously can go back to mature markets, like in Japan, which is driving efficiencies to a part of the population, or to other markets like Bangladesh, Vietnam.

Justin [14:18]: And so far, what's made the partnership work is the shared responsibilities between each party.

Nick [14:22]: I think with Saisan it's, the division of labor is quite clear. They've got deep domain expertise in moving fuel from the port down to the household, but they really defer to us on the technology side. We've worked really well together on using their local knowledge around market prices or on how the margin moves on the supply chain. I think that division of labor piece is key.

Justin [14:47]: As always, The Flip’s executive producer and b-mic Sayo Folawiyo and I sat down to have a discussion on this week's episode. And in particular, we were really interested in this case study and its implications for the opportunity to better connect markets as was done here by Kepple Africa Ventures. Take a listen.

Justin [15:04]: I think my takeaway, in particular, is while it's obviously difficult to have a unilateral discussion about what the view of Japanese investors is broadly, and obviously it's going to vary on an investor by investor or deal by deal basis. But I think the biggest takeaway for me, in particular, is just broadening the opportunity set and this PayGo deal while, you know, I don't know if it's the exception or the rule or whatever it is, but it's a Japanese corporate explicitly saying we're looking to Africa for innovation because it applies to our core business. And there's an interesting thought experiment about like, where else is there sort of latent opportunity like this and, you know, might this episode spark something? I don't know. I mean, obviously everything is, again, on a case by case basis, but I think it's a story worth sharing.

Sayo [16:03]: One hundred percent. I think it's super interesting. And I think this is a wonderful case study on the opportunities that exist around that. And I guess one way that you might look at it, or what might be worth talking about is if you’re an operator right now in a fairly early stage, or late-stage, whatever stage, how would you go about teasing that out? So how do you work backwards, you know, to see that opportunity?

Justin [16:33]: If anything, it just underscores the value of the bridges that a firm like Kepple is building, right? I’d have to imagine that a Saisan investment does not get done without Kepple connecting the dots. And then perhaps that's the question, like, how ought we foster more or dot connectors between these seemingly disparate markets where, you know, like I said, latent opportunity may exist?

Sayo [17:02]: Yeah, I feel you. I guess what I'm trying to get out of all, the distinction that I might make is connecting the dots seems like the easiest part of it. It's like being in a, even the dots being visible for someone to be able to connect. Do you understand the difference? It's not important because they can connect the dots. It's important because they have the visibility, they've created a conversation.

Justin [17:31]: Yeah, it's important because they know what the dots are on both sides of the relationship.

Sayo [17:36]: Exactly. So I like that. I also like this case study as positioning, from a positioning perspective. I think very often, the positioning of the continent is either charity or this next billion consumer thing. I think this opens the door for a different kind of positioning, which is around innovation.

Justin [17:56]: So one other thing I think that's an interesting question in this context is like, so there's still a lot of work to be done it sounded like, from Kepple’s point of view, just in educating the Japanese ecosystem. And it's almost the same question that I've been asking sort of hypothetically for such a long time is like, how do you convert intrigue into investment? And handholding and market entry, it's a difficult thing to do at scale, especially when there's a scarcity of those who are able to see the dots like we've been talking about. But perhaps it just goes to show how slow and long of a journey we're on, in this context to talk about capturing interest.

Sayo [18:40]: Yeah, one hundred percent. Where would you say there’s an example of these kinds of relationships? Actually, to be honest, like I'm trying to think of where you see this phenomenon happening a lot. So this phenomenon of exporting innovation. If you think about it, innovation export is the business of China and America, right? We can agree on that, right? And then that then begs the question, is it a realistic endeavor to want to compete on that level? And, you know, I don't think the answer is no, and I think there's a question around what those innovations might be and then trying to pinpoint those, and move people towards those. We forgot to talk about Israel, by the way. Israel from an innovation export perspective is quite serious.

Justin [19:30]: It's an interesting thing about competing on innovation, right? I mean, obviously no one is going to compete with the US or China on technological innovation export, but that's not to say that there's, I guess I'm not as interested in that question because I'm more interested in like, are there gaps that various African innovators may actually end up being well-positioned to fill. So when we talk about Israel, the country, the innovation is sort of, in many ways, built out of certain necessities specific to Israel itself. You know, things like agritech innovations, just because Israel is in a desert, right, and they've had to innovate around water security and around food security and things like that. And so they're well-positioned because of the nature of their specific individual circumstances than to export. And so back to your question that we talked about in, I think, yeah in the Global South episode, where you asked what Africa's comparative advantage was. There's an interesting point about the nature of certain types of businesses, you know, to the point of Israel, well-positioned to solve problems elsewhere.

Sayo [20:44]: Yeah, exactly.

Justin [20:45]: I think immediately we think of better organizing and digitizing fragmented and analog industries. And I'm thinking about a company like Flexport, right? And I wrote about this recently, the whole like African schlep thing. So Stripe was a schlep and Flexport was a schlep and these are huge, huge companies, successfully built companies, in a very developed market, still nonetheless better organizing and better digitizing fragmented environments, right? You know, maybe that's an interesting lens with which to look at this.

Sayo [21:17]: It's the only lense mate. And look, and I think, a very prominent US VC once, in a little session that we had with them, was kind of talking about investing to learn, to seek - what do the Silicon Valley guys like saying? - to pattern match. And we talk about it a lot, the competitive advantage of looking at everyone else, as well as seeing our context. There's a lot of how you do that and the cool thing about these kinds of case studies is that, you know, these guys saw what no one else could see because they were putting their money to learning, and seeing value in learning from ecosystems that are unlike theirs or that they didn't have prejudices about. And I guarantee you, a lot of winners when we look back, probably in a few decades’ time, they’re going to be the people that paid attention.

Justin [22:11]: Yeah, well said. I really liked that.

VO [22:17]: That's it for this week's episode of The Flip. Next week, we have a special episode, co-produced with Osarumen Osamuyi - Founder and Author of The Subtext and one of the foremost analysts and writers in our tech ecosystem. So please do hit subscribe on your favorite podcast app to get that episode straight to your feed. We also have a lot to say over on social media - you can follow us @theflipafrica, as do we on our newsletter - we publish a weekly essay every Sunday, and you can subscribe on our website theflip.africa. Thanks as always for listening, and we'll see you next week.