1 March 2017

Africa: Scale, Scale, Scale - the Mantra African Start-Ups Need to Chant Every Day to Achieve a Sustained Breakthrough

A large number of countries in Sub-Saharan Africa now have some form of start-up ecosystem. A smaller number of countries have investors willing to put money into start-ups. But what all too many of these countries lack is a cadre of start-ups that have achieved scale. Russell Southwood looks at what scale means for African start-ups and what they have to overcome to achieve it.

Make no mistake about it, the early signs that there are markets of scale in some countries for B2C apps already exists. There are examples from a range of interviews I have conducted with African start-ups over the last year or two.

Kenyan mobile music platform Mdundo has over 1 million users based on an advertising model (http://www.smartmonkeytv.com/channel/newsletters/ad_supported_music_platform_mdundo_gets_1_million_users_and_has_expanded_ac). Indian restaurant finder app Zomato has got 750,000 users in South Africa (https://www.youtube.com/watch?v=_38-Srk1KGM). Jumia has something over a million users in Nigeria. Kenya edtech start-up Eneza has 2 million users. These sort of numbers are a starting point and not a final resting place but they demonstrate that scale is possible.

Perhaps the most startling thing about scale is now the speed with which it can be achieved. Uber got itself 100,000 users in six months in Kenya (https://www.youtube.com/watch?v=asW1-nIVbSU), a much shorter runway to take off than earlier pioneers like Jumia found possible.

African behaviors are changing and each new success will create more critical mass for others. Uber's success opens the way for competitors like Little to make their mark. Once you're ordering a cab on your phone, what will be next?

There are also the B2B start-ups whose aim is not to get hundreds of thousands or millions of users but to get a significant share of niche business sectors. Success can be measured in the number of key customers within a niche. For example, the Ghanaian start-up Ben Ben is selling a Blockchain based land registry system to financial institutions and Governments, not to the end users of the system.

Numbers matter whether they are B2C or B2B end-users. Many African start-ups tend to exaggerate their user numbers hoping that what they wish for will come true. They are then stuck with a large number that they can't go up or down from. It's surprising how many user numbers remain the same.

The second problem is it's not just a question of who downloaded the app but whether they are active users. Many start-ups can generate app download numbers, far fewer are capable of converting them into active users. The service offered has to be something essential, not just something that's "nice to have".

Also I talk to African start-ups who tell me that their user numbers are "commercially confidential". Numbers like this cannot be confidential because they are one of the few ways you can judge whether there is a business in there struggling to get out. What "commercially confidential:" means is that your numbers are too small for you to get "bragging rights".

So what are the key barriers that prevent African start-ups breaking through to scale? One of the most common difficulties is the size of country markets in Sub-Saharan Africa, with certain notable exceptions like Nigeria and South Africa. If you can't get sufficient users to create a business in one country, you need to have a strategy to roll-out across several markets.

The difficulty here is two-fold. Firstly, many start-up founders are young and inexperienced in their industry and do not have the experience of working across several countries. Many Kenyan start-ups talk about rolling out across the border to East African neighbours but the number who actually achieve it is still quite small.

Secondly, this kind of roll-out requires investment at a level that is only available to those with some kind of track record and, you guessed it, some evidence in terms of existing user numbers that the product or service "has legs".

The next big barrier is the shape of the legacy market created and imposed by the mobile operators. The existing cost to any start-up of carrier billing makes it extremely hard to make sense of basing your business model on using this channel.

For those selling content (like music, film and TV), the revenue splits (80/20 to the operator to 50/50 on rare occasions) simply raise the bar against start-ups. Furthermore for those mobile operator who dabble in start-ups (Safaricom's Spark fund) or run their own services, all your market information is visible to them to help them destroy you, sorry, compete with you.

But Uber's smartphone as the channel strategy (which is not the only strategy open to a start-up) means it avoids all this legacy nonsense. And of the start-ups with numbers quoted at the beginning, only Zomato has more desktop than mobile users.

When you talk to mobile operators, the more honest will admit all these things that disadvantage start-ups has to change but that changing it is a very slow process. They'd all prefer that another operator made these changes and they just had to follow. However, one criticism the mobile operators make of start-ups has some truth: they nearly all lack marketing resources and assume that the mobile operators heft will bring them success.

When you talk to African start-ups about how they will make themselves known to their customers, too many talk confidently about social media. You need numbers to get investment to be able to reach more users.

It's all about creating a virtuous cycle where getting user numbers triggers investment, investment helps get more user numbers and open new markets, which in turn enables you to get more investment.

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