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5 mega rounds so far in 2021 in Africa, and why they are changing the game
Mid-month update: what the Flutterwave, OPay and Chipper mega-rounds mean for the African fintech scene
This post was originally posted in my Forbes column here.
2021 has been a big year so far for technology – and fintech specifically – in Africa. In February, Tyme Bank raised $109m. In March, Flutterwave raised its $170m unicorn round. Last month, OPay reportedly raised $400m at a $1.5b valuation. And most recently, Chipper Cash raised $100m. Add that to TPG Rise’s $100m investment in Airtel Money at $2.65b (not a traditional technology company, but we’ll count it here).
This is a massive acceleration for the market.
Previously, only three companies had become billion-dollar technology companies: Jumia, Fawry and Interswitch. Just this year, this number has at least doubled (counting Flutterwave, Opay and Airtel, with disclosed valuations).
This has huge implications for the fintech, and broader technology market. And we just may be at an inflection point.
Zooming out to zoom back in
Looking at the progress of startup ecosystems around the world, one thing is clear: growth of large-scale billion-dollar companies is not linear. Like most things in tech it has an exponential component. And this happens when you reach some critical mass.
In China, after its first unicorn scaled in 2010, it took five years to reach its fifth and the very next year the count skyrocketed to 21. The same dynamic is manifesting itself in ecosystems around the world.
Taking the same lens to startup ecosystems around the world uncovers a similar theme. After a critical mass of three to five scaled startups, particularly achieving successful exits, there is an inflection point (depending on the size of the market, with larger markets seeming to have a slightly later point).
This is what I believe is playing out in Africa today. It took Interswitch and Fawry 17 and 13 years respectively to become unicorns (I prefer “billion-dollar camels”). Flutterwave did it in 5 years, Jumia in 4 and Opay in 3.
Why is this happening?
There are multiple potential explanations to explain this phenomenon.
Explanation 1: Success becomes the rule, not the exception
A critical mass of successful outcomes changes the game. It makes success the rule, not the exception.
I once interviewed Daniel Dines, the CEO of robotic process automation company UiPath, today worth about $40 billion and reportedly the fastest growing enterprise company of all time. It was founded in Romania. I asked him whether we’d see some more startups coming out of Romania soon. He stressed the importance of having critical mass – one outlier can be dismissed as an aberration. Having a few from a particular ecosystem demonstrates repeatability and thus increases the power and relevance of the role model.
One of the challenges in many emerging startup ecosystems is around the culture of entrepreneurship. It is not an accepted career. The safer, best bet is in areas like medicine, the law or engineering. For some regions it is to work at a conglomerate or the government. But certainly not a startup.
What’s worse, the risk of failure is higher. And failure means really failing. It means letting the whole team go. It means a permanent black mark on your entire career. And in some places, bankruptcy is still illegal. The concept of failure takes on an even deeper significance in these instances.
But having more and more successes in a market switches the narrative. It demonstrates that it is possible. It creates role models that inspire the next generation (and convinces parents or other mentor figures that it is an advisable opportunity).
And in Africa, you can’t deny it anymore.
Explanation 2: An army of talent is developed – with network effects
The power of critical mass is not just in narrative. It is also in networks. As startups scale, they become universities for innovation talent.
In the US, we are familiar with the story of the PayPal Mafia. The so-called PayPal mafia includes Elon Musk (founder of SpaceX, Tesla, SolarCity, and The Boring Company, among others), Peter Thiel (co-founder of PayPal, later Palantir), Jeremy Stoppelman (co-founder of Yelp), Reid Hoffman (PayPal’s COO, later founder of LinkedIn), Russel Simmons (PayPal’s software architect, later co-founder of Yelp) and many, many more.
The same is happening in emerging startup ecosystems. Endeavor, the global startup ecosystem builder calls this the multiplier effect. In Latin America it comes from entrepreneurs from Mercado Libre. In the Middle East, Careem, the ride-hailing business that was acquired by Uber, is spawning the Careem Mafia. In Canada, talks of the Shopify Mafia are rising. Of course, this is not just an emerging startup phenomenon – it is what keeps Silicon Valley alive. The Stripe Mafia for instance is gaining momentum.
And in Africa, we are seeing the mafias emerge. One of them is from Jumia which has already started a number of new businesses.
A powerful thing happens with network effects. When there is one scaled company you don’t get critical mass. But with many, the impact is not linear. There are exponential connections between people, that catalyzes into relationships like mentorship, founding teams and angel investments (worth noting that there is also some progress on diversity, but more work needs to be done and in many startup ecosystems it is an even thornier issue).
And that’s what’s happening today.
Explanation 3: It de-risks the ecosystem
Startups are risky for all parties concerned – founders, employees and investors. But having a critical mass of startups helps to de-risk it.
We’ve already covered the role of breakouts in changing culture and showing what’s possible, motivating founders and legitimizing the career. But it does so much more.
It de-risks the startup path for employees too. In emerging startup ecosystems, it is riskier for talent – engineers, data scientists, product managers, operations, etc - as there are fewer back-up options if a particular company doesn’t succeed. But as critical mass is achieved, the whole ecosystem is de-risked for talent because there are many alternative options. As Amanda Lannert, CEO of JellyVision, explained it to me when discussing Chicago, “The Chicago ecosystem is rapidly changing because we’ve had many recent success stories. Potential recruits considering moving to Chicago have to make the calculus about what happens if things don’t work out. If there are many successful technology companies, the risk is lower. And so, a rising tide rises all boats.”
For a founder in Africa, if things don’t work out, there are more and more established companies that can hire (or acquihire your business).
Building startups becomes de-risked as well. For many founders in emerging startup ecosystems: they have to build the full stack – a range of enabling infrastructure just to offer their core product. But as more and more startups get built, layers of the stack are developed which serves everyone.
This is what happened in Silicon Valley in fintech. It used to take years to launch a neobank. But today with Banking-as-a-service enablers, it can be done in months, with a fraction of the resources.
As the critical mass of players scale, the needs or the key pain points of the ecosystem become clearly established. But so does the potential customer base – the total addressable market – becomes enlarged. And this creates room for enablers, which makes it easier to scale the next company.
Lastly, a critical mass of startups in a sector de-risks it for venture capitalists and helps open the floodgates.
Venture capitalists are risk takers. But they take controlled risks: does the product work? Is it the right team? Will operations scale? But two questions every venture investor always asks themselves is who will provide follow-on funding and ultimately what is the path to exit? If there are few examples of follow-on rounds, and even less of successful exits, a venture investor will be reticent. But with more and more success stories, this point is de-risked. And that opens checkbooks.
That’s what partially happened in fintech. When I started investing in fintech, the whole sector was a sideshow. Only a few dedicated firms specialized in it. There were few examples beyond PayPal which demonstrated significant financial exits.
But these days, fintech has gone mainstream. Seemingly every fund covers it. One of the reasons is that there are now success stories around the world of leading multi-billion-dollar fintechs. Often, they are among the first and the biggest unicorns with the largest outcomes.
That’s why critical mass de-risks startups for talent, operations and venture capitalists. Or perhaps, said another way, it offers a better risk-adjusted return.
And Africa’s risk return is seemingly changing, and that’s a good thing.
What this all means for Africa
Venture capital across Africa is on the rise: in 2015, there was less than $300m total across the continent. In 2019, before the pandemic, it reached $2b across 250 rounds, and is predicted to reach 2.5-2.8b this year. Because the region has so many key challenges left unsolved, this leaves a big opportunity for entrepreneurs and technology to create meaningful solutions.
The ongoing success of Chipper, Flutterwave, Airtel Money, Tymebank and Opay changes things. Each story alone is a piece. But the bigger story is that they are happening together.
A rising tide raises all boats.
And in this case, the rising tide creates role models for the sector, trains the next generation of founders and de-risks the whole ecosystem.
And to perhaps stretch the analogy, it will create a tsunami of innovation in the years to come.