Part 3: What makes a successful Fintech startup in Africa?
Examining what factors and features have facilitated Fintech success in Africa.
Delineating success for an African Fintech Startup 🏹
The success of a fintech in Africa relies on its timing, location, accessibility, and market penetration. The engine that drives most of the startups towards continental success will be their accessibility to the variety of communities that entail the African nations. Additionally, we will see the surge of start-ups is in large part due to external overseas funding.
The opportunity of fintech start-ups comes predominantly from the proliferation of mobile phone access across the continent; this, also shows in it is the world's largest mobile transfer system. Namely, these are payment systems, where an electronic fund transfer can be operated using a mobile phone, a now de-facto way of conducting cashless transactions on the continent.
However, some of the less obvious aspects of a successful start-up are more subtle within this ecosystem. These include aspects of the influence of social and cultural capital; the accessibility to data and the availability of human capital and tech skills. All these play a crucial part in the accumulation and success of startups in the complex network of affairs which make up the developing African innovation economy.
Momentum and infrastructure aside, the network that African entrepreneurs can carve out is also critical. To have any success as an entrepreneur is access to insider knowledge, information, and connections. Unicorn companies- those valued over $1 billion- such as Flutterwave and Interswitch have provided just this to Africa; they have found innovative solutions from a latent formal economy throughout the continent. This success has been built on the bedrock of trust and a strong connection to a growing economic class. Ultimately this trust has helped firms to take on a variety of risks, paving the way for success which has aided financial inclusion, digital transformation, and helped African entrepreneurs develop a global presence.
Despite this, there are always obstacles to overcome for fintech companies and it is important to delineate what will shape the success or failure of a fintech in Africa. There are variable influences that do affect the climate of the fintech landscape, such as lack of funding and competition. Equally, a good product doesn’t also mean a successful product. Look at Oyapay, a highly promising start-up founded in 2017, which aimed to give access to digital transactions without even the use of a smartphone. In its first year of launch, it lacked the funding or management needed to be successful and closed its doors at the end of 2019.
Social Capital 🔗
Social and cultural capital may at first not be the thought that comes to mind when thinking about financial technology or start-ups for that matter. However, it is the first and most crucial part of any start-up success.
What is it? Initially, a sociological term coined by Bourdieu, social and cultural capital is the threads that hold together communities and the participation of people in those communities. An example of social capital is language. As such, we build a common trust through linguistic resonation. It also takes other forms, such as institutional participation, and collaboration in political activity.
The keyword here is trust. From the perspective of an African fintech start-up, participation and collaboration are integral. A fintech product penetration into the market requires a certain level of trust with consumers.
What has allowed Flutterwave successful profile was its placement in an environment which needed its solutions. It provides a merchant platform to the already existing entrepreneurial population.
This environment also comes with the particular ecosystem in which Africa finds itself. A large portion of Africa still remains within the standard of an informal economy. The informal sector, in essence, categorises the provision of goods and services not regulated or protected by the state. Effectively, activity takes place outside the guises of the state’s formal channels and mechanisms. Unlike the formal economy, the output is not included in the country’s GDP. The informal sector accounts for 80.8% of jobs in urban Africa. Strictly speaking, the large majority of the entrepreneurial population is found in the informal sector. Merchants, local taxi services and street vendors are the make-up of the African economy. Tapping into this huge informal sector not only reaps benefits for the company’s which do, but also the people who are able to scale their operations of this improved service provision; supporting their trade allowances and smoother management of finances.
Undoubtedly, a successful fintech start-up in Africa will be one that unlocks this potential through its product and gains the trust of a large community of consumers. For example, Paga, a Nigerian mobile payment app start-up looking to simplify payment systems between individuals and buyers. It has been described by Bloomberg as Africa’s next unicorn and has recently partnered with VISA. In this case, Paga has sought out innovation for people's lives through financial inclusion. One way they are doing this is by allowing people to send money solely through a payee's email address or phone number. Paga has capitalised on a prerequisite of an already ingrained form of social capital- mobile phones- and given consumers and buyers alike greater financial freedom and inclusivity. Providing a product that people want is not so much important as providing a product that people need. And these products need to align with people’s day-to-day lives; one which they can connect to and easily understand.
Role of Data 📊
Data is eating the world. As it stands, African states lag behind the rest of the world in terms of industrial data usage. Although as African nations continue to digitalise, the velocity and volume at which data is generated will only increase. This will present a significant challenge for start-ups and existing players to successfully capture and process this data for their strategic advantage.
As we have seen in Europe and North America, and to an increasing extent China and India, firms that can successfully obtain and leverage big data are the firms that are market leaders - Google, Facebook and Amazon for instance. This is no different in the Fintech industry. In fact, the largest Fintech companies in Africa, Flutterwave and Paystack, both have well-developed data, analytics teams. The importance of this is that such companies are well equipped to build customer-oriented products that are more likely to be designed with the consideration of nurturing an active and engaged consumer base.
At this stage, mass adoption of data analytics and machine learning is a while off, but there are signs that the successful fintech players have been able to make good use of data. M-PESA is an excellent case in point. The Kenyan payments firm has pioneered the use of data to diagnose gaps and inefficiencies in its service offerings.
One example of the effective use of data is to graphically map product users based on a set of demographic variables. A geospatial product could display income variation across rural localities. This could enable Fintechs to segment users in a data-driven way. Indeed, outside of Fintech, there are several other use cases where this could also be a gamechanger.
Funding 💸
From our previous articles on fintech and the wider innovation economy, it is clear that funding for African fintech funds is growing at an astronomical rate. Many countries that have historically not been major players in Africa, fintech or the African investment market are starting to play increasingly more important roles including German giant Allianz and Indonesian super application service Gojek as recent investors. In the third quarter of 2021, Fintech firms have raised some $906m.
Another key factor to any start-up’s success, African or not, is funding. To understand the importance of funding and to put it into an African context, we need to first break down the terminology used.
So why is funding so important?
Fintech start-ups like any other need to scale up by bringing on-board new staff and new software, as well as other bureaucratic and marketing costs. We looked at the variations in fintech regulation in Africa in … and noted that in the Nigerian case, for example, there are substantial legislative and regulatory compliance procedures for fintech firms which are often highly expensive. This twinned with low levels of credit availability, as seen with the crowd-funding phenomenon, results in African firms being noticeably reliant on investor capital with a substantial amount of funding coming from abroad.
Seed capital only accounted for 6% of capital raised between 2014-2020
Historically speaking investors have been wary of investing in Africa due to a lack of transparency, extractive regulation, currency-related fears, higher geopolitical risk and the fragmented political and economic nature of the wider African continent. These fears still exist albeit they are not as prominent as they were 30 years ago. Their continued existence, however, has resulted in two notable patterns when it comes to fintech funding.
Firstly, one way that African fintech have mitigated the increased risk factor is through undervaluation. In fact, this can be presented as an argument as to why there are so few tech unicorns in Africa despite its growth and market size. Yet with all high-risk ventures, there can be high rewards and investors are always looking for a bargain. The undervaluing of firms and the growing market base for fintech investors can often result in high returns, especially when comparing the cost of fintech investments in developed markets like Europe and North America.
“investors like spaces that have proven value and have already attracted big investors,” - Tom Jackson co-founder Disrupt Africa
Secondly, it is very much true that success breeds success in the African fintech market. As firms like Flutterwave grow and achieve unicorn status it sends a strong message to non-African investors that the risks associated with the continent can be offset with the high returns, offering some explanation as to the market growth from $385 in 2018 to $1.35bn in 2020. However, African start-ups rarely survive beyond the Series B funding stage. As a result, returns on venture capital investments are weak—less than 3% on average across the region over five years, Yet, African governments have taken active steps to mitigate and change through policy developments like incubators. It will, however, take time to measure the success of said policies.
Without funding acquisition, the start-up will not be able to scale and bring in skilled personnel and software like developers and so it will inevitably fail. However, acquiring funding can also pose serious problems to young firms as they will have to take into account dilution of shares and a potential change in direction creating rifts between key players and potentially collapsing the firm.
Equally growth results in a requirement of consistent capital flow as scaling itself becomes expensive. A growing or established firm has to meet monthly expenditures ranging from cloud storage space, staff payrolls and office spaces meaning that securing funding once at an established size becomes increasingly critical. Of course, the funding round size at this end of the spectrum is a lot larger than the earlier seed rounds.
Human Capital 🧠
Albeit the apparent success of many fintech in the continent, there has been in tandem many a failure; start-ups either unable to secure funding or access the resources and skills required to make clear headway. Reasons for this are never clear cut as each case is unique unto itself. However, some speculation insists it is down to a lack of a provision of human resources; that despite tech innovations and bold ideas, there is limited availability on the continent of human skills for tech.
A data report by Google illustrates that across the continent there are over 690,000 developers. The top three countries are South Africa (133,000), Egypt (125,000) and Nigeria (114,536). This is naturally meagre compared to say just the state of California which has around 630,000 developers according to DAXX There is a clear concentration of where the talent is. However, insights show that a portion of that talent is moving overseas which is mainly in part to the prospect of a better salary in parts of Europe and America. As one article indicates; whilst the average salary for a software developer in Africa is $12,000-$24,000, an experienced developer in the US could earn quite easily $100,000 or more. This poses a huge problem for tech companies, as the lack of high-quality developers impedes development.
A great number of fintech companies are also needing to outsource overseas. We see now even the larger unicorns such as Jumia, claiming they do not have enough developers on home-territory.
Unsurprisingly, the reality is that the “price of exporting work to an outsourced developer in the US is much more expensive than having the development done in-house.”
With limited availability on the continent, we are seeing the African tech diaspora innovating to make a change. One such case we see in Monrovia, Liberia, where a group of software engineers look to make a Silicon Valley-type innovation hub to bring young and entrepreneurial tech minds together. With an apt name- Tech Village Africa; it is ideas like this that will help transform and gear the next generation towards technical education and networking.
More, with widespan access to technology, such as broadband and computers, we will slowly see a rise in people taking their own incentive for self-taught courses in software development. As Quartz writes, more than half the software talent coming out of Africa is self-taught or pay for online schooling. There is a clear desire for people to learn. One company, Andala based in Lagos, starting up seven years ago, formed a business model where they trained up local entry-level developers to globally competitive standards.
Apart from the innovation of human capital and skills, the success for a fintech startup will also lie in its scalability: having the availability of human capital for the high industry demand. One report from the World Bank in their Future of Work in Africa shows for this to happen would require clear policy supporting people in building foundational skills. The report also shows there is a direct correlation between “digital skills and, the availability of infrastructures, such as the internet, mobile voice telephony, and electricity”. In the years to come, we will see a larger integration of tech and broadband access, such as Google’s subsea cable, Equiano, spanning the continent, from Portugal to South Africa. There will be no instant solution, yet. Tackling rural poverty and challenging healthcare developments across the continent will also play a crucial part. Although we also see university institutions levelling up to a higher-tech standard. For example, the University of Cape Town has recently introduced one the first of its kind, a specialised fintech degree. This is unsurprising seeing the largest number of software developers are based in South Africa at about 130K.
Market penetration 🎯
Looking ahead, what does the future of successful startups hold in the continent? One major factor- which is a prerequisite for any prosperous startup or long-term fintech business- is their product penetration in the market. What this really means is how much the product is being used by the estimated size of the market there is available. The success of a product penetrating the market is based on how much that product resonates with the wide consumer base. What this can also mean is unexplored markets. For example, of the major fintech powerhouses, Nigeria is still largely unbanked at 40% of the population.
Opay, a Nigerian based company, only three years old, has emerged to become the fastest-growing unicorn in Africa ever having been valued only recently at $2 billion. The company as a template for others certainly holds value. Especially since, in the first year of the pandemic, they accomplished their most successful year to date, growing their total gross transaction value by 4.5 times. What made Opay so successful was very much in the nature of their product’s availability to the dormant market. At their conference in Lagos, Opay’s Country Manager, Iniabasi Akpan revealed, ‘Our agents serve a population that is far from bank branches and ATMs, often in the outskirts of cities, suburban areas, or rural areas. Their growth was in the main part due to working with smaller merchants, entrepreneurs and businesses, alongside their expansion. Evidently, what this goes to show is that fintech companies need to focus on what their consumers need, and how best to help them. What Opay has done in this instance, is, instead of the consumer coming to them, they went out their way to directly supply the consumer.
This goes to show, most importantly, that with Opay and other fintech start-ups, success comes developing and collaborating partnerships in the broader ecosystem. Developing connections and relationships in different spheres is what makes a product inclusive and available. Flutterwave, for example, in a similar hue, over the course of lockdown, looked to protect their 300,000 merchants from becoming insolvent by introducing an online store platform, enabling online sales.
Similarly, in Ghana, as the pandemic became an increasing threat, the largest domestic retail banks began to shut ATM points. The banks quickly scrambled to get ‘online services’ up and running but the inadequacy of these solutions was plain to see. On the contrary, mobile payment firms such as MTN, Airtel Tigo and Vodafone, which already had an established consumer base ramped up their services by enabling payment for goods on key eCommerce platforms such as Jumia Ghana, Kikuu, Tonaton, and Zoobashop.
The success for start-ups will be found in building connections with communities and building opportunities where there is a desire to innovate and succeed. One thing to look out for will be the impact of the African Continental Free Trade Agreement (AfCFTA) said to advance intra-Africa trade up to 54 per cent and the combined GDP of the continent to $44 billion. What the trade agreement will help unify the distribution of products across the continent. At the heart of this, one article shows is paytech. Across the 55 nations, there will need to be an implementation of an efficient payment network. This certainly holds potential for any future fintech companies and startups looking to expand; especially with the prospect of the trade agreement producing a homogenised system.
Final Thoughts… ⚡⚡⚡
While a successful start-up in Africa may vary from city to city, and country to country there are certain factors that are mutual. The requirement of funding to scale, and the subsequent maintenance costs has proven a barrier in the past but the success of the market has resulted in an increase in investment. Heightened investment has been met by heightened demand too. The pandemic has only proven that digital channels need to be in place to meet demand in some urban areas across Africa. Yet, the lack of human capital continues to be a limitation for many firms struggling from the continued lack of skilled workers, in this case, experienced software and business developers.