💬 In this issue:

  • Market-creating startups: Driving transactions versus revenue tapping. 
  • Why African startups don’t always need to expand: Lessons from PiggyVest co-founder, Odunayo Eweniyi.
  • Fintech disruption: Getting it right is a lot harder than it looks.
Welcome to African Pre-seed Newsletter for March. If you weren’t paying attention, we’re almost at the end of Q1 2024–yes, I know, time flies.
It’s been one of those months I’ve found great content everywhere. Interviews of founders sharing real advice and not tired soundbites, VCs talking about the difficulties of matching investor expectations with the reality of the market and some blunt but needed advice for everyone out there building a fintech startup. 
It got me thinking about sharing some of the most interesting ideas from those articles. That’s more fun than simply recommending them to you. - Olumuyiwa (Writer & Contributor, African Pre-seed Podcast).  

🚀 Market-creating startups: driving transactions versus revenue tapping 

Wake anyone up these days, and they’ll tell you about how most products and services in Africa are competing for wallet share with essential things like food. For good measure, they might also throw in that chart showing how only a small percentage of people in major African cities can afford to spend $10 daily. 

“A majority of business models that exist today are targeted at existing consumption,” an essay from the Christensen Institute says, pointing out how metrics about the size of the middle class, disposable income and the total addressable market are the theme of conversations when models target existing consumption patterns. 

In Africa, beyond targeting existing consumption, a lot of startups focus on digitising existing processes. These “asset-light” and tech-driven models, which basically copied global models, were supposed to be slam dunk winners, but many of them have struggled. 

These models didn’t work because “in Africa, it’s more important to create transactions than to get revenue share by tapping into existing transaction flows with tech solutions,” says Satoshi Shinada. 

Shinada believes the big winners will be market creators. And if you were looking for a definition, he goes on to provide one:

“Market creators refer to those creating economic opportunities for people based on the changing dynamics of the overall African economy, for instance, increasing GDP.”

Read the article that inspired these thoughts here. 

đŸŒ± Is there an argument for staying small?

While we’re still on the subject of models that target existing consumption, one way to get around the problem of a small addressable market in your home country is to expand into secondary markets. The thinking is straightforward: an aggregate of small addressable markets can create one big business anyway. 

But the reality is often disappointing. Between 2020 and 2022, ZIRP saw VC dollars flow into Africa at an amazing pace. Some of these VCs with very little experience of the African market loved the idea of startups that could expand and establish themselves across the continent.

So e-commerce startups like Jumia spread themselves thin, establishing themselves in 14 countries. Others expanded more cautiously to Ghana and Kenya. While some fanfare often greeted these expansions, there was silence whenever these startups beat a retreat back to their home countries. Benoit Delestre, managing partner at Saviu Ventures, has spoken about some of the nuances of expansion on the African Pre-seed Podcast. 

Here’s Odun Eweniyi on how she thinks about expanding: “Besides the similarities in macroeconomics, you’ll realise that products aren’t necessarily replicable in African countries. For instance, product adoption is slower in countries like Ghana, and scaling a digital savings product in Kenya will be a huge challenge.”

Read her interview here.

📈 Fintech is a lot harder than it looks 

“Don't start a fintech unless you understand finance and how to maintain a core banking service,” argues Joseph Benson-Aruna in a week when the struggles of some fintech startups in Nigeria hit the news. 

Many fintech founders set out to disrupt traditional banking and payments and have often unbundled some parts of banking as their focus. The argument goes like this: traditional banks are complacent and have lost customer obsession or don’t provide real value to their retail customers. 

To be fair, some of the financial technology bets have seen impressive levels of success, but we’ve also seen some struggles. Digital lenders have learned expensive lessons on why banks aren’t in a hurry to serve sub-prime borrowers, and neobanks know first-hand that without extensive funding, deciding not to charge fees is pretty difficult and wins you fickle customers anyway. Navigating and avoiding fraud will also take up much of your time.

So before you quit your day job to build that beautiful fintech, it’s worth understanding fintech costs and why this space is much harder than it looks. 

đŸ”«  Parting shot

What's on your mind? Drop us a note via connect@africanpreseed.com to let us know. Or, tag us on socials using #africanpreseedpodcast, #APSnewsletter or #APSVibeCheck.

That's it for now. See you next month! 😉