Africa’s Digital Market

Africa boasts a robust mobile infrastructure that contributes to the innovation and sophistication of its digital market, exemplified by advancements such as mobile money.

Jesper Drescher

Executive Chairman of Mdundo

Africa is comprised of 54 countries with diverse markets. To succeed in these markets, segmentation is crucial. Leveraging high mobile penetration can provide ample opportunities. When attempting to motivate and recruit, recognizing filial obligation is important. Jesper Drescher, chairman of Mdundo and author of ‘Digital Africa: Investing in Africa’s Most Untapped Source,’ shares key insights into doing business in Africa, including common misconceptions.

Introduction

My name is Jesper Drescher, and I invest in digital businesses across Sub-Saharan Africa. I started investing in Africa in 2013, first in East Africa and then in South and West Africa. I mainly focus on East Africa, but I’m also involved in a few European ventures.

Background

I spent a decade building several management consulting companies in Scandinavia. After selling my last one to KPMG, I travelled to Australia with my family, returned, acquired and turned around a couple of businesses, and then decided to explore emerging markets. Europe and the US were flat, and I had extensive experience travelling across Africa, which fascinated me.

Investing in Africa

Investing in digital businesses in Africa appealed to me because though many things are not working in Africa, specific areas like the mobile infrastructure are pretty good. My idea is to invest in business models that leverage the mobile infrastructure. So, I started screening many businesses, doing my analysis and due diligence on the continent, the different mobile penetrations and adoption rates, and what existed within the space.

I couldn’t quite decide on something specific to invest in until I came across a Danish fellow who had gone to Kenya to set up an accelerator known as 88 mph. I flew down to visit his team, and they sounded like they were onto something big, so I invested in that accelerator and the funds behind it. We also did something similar in South Africa and a joint venture in Lagos. I began visiting the continent frequently, making direct investments, founding a business from scratch in 2016, and becoming a frequent flyer.

Growing My Business in Africa

My portfolio consists of around 40 to 50 investments in sub-Saharan Africa. All of them use mobile technology for digital business. I am directly involved in the entertainment and e-commerce industries.

On the indirect portfolio investment side, the performance mirrors what is obtainable in the US or Europe, with some needing to improve. Still, the ones that take off sometimes outperform the market by about 30x. And so, as with these early-stage investments anywhere in the world, the key is to let the losers go rather than continue investing in them and just back the stars.

Directly, I am chairman of three different businesses operating in Africa. One is an e-commerce business called Sky Garden. Like Shopify for Africa, Sky Garden is building a SaaS model for small and medium enterprises across Africa. We have good traction and have just closed a Series A with Aavishkaar Venture Capital funds and a German fund, Finance in Motion.

The other one is another e-commerce company called BeautyClick. BeautyClick is a B2C e-commerce business focusing on the beauty Segment running out of Kenya. Questions have been asked about why I chose to work with cosmetics, skincare, and hair products in Africa, and I always explain that the idea started back in 2010 in the United States when Amazon bought diapers.com. It was noticed at the time that Amazon, which typically outcompetes everyone, chose to purchase diapers.com, and they did this because diapers.com had excelled in a massive vertical area. We had this situation in mind when we started BeautyClick.

What happened was that Jumia, which started in 2012 and is now Africa’s biggest e-commerce company, had invested around a billion US dollars into Africa’s e-commerce market, money which, in my view, was used to educate the African population about e-commerce. Not fair, but they did do a lot of the groundwork. Based on Jumia’s presence and other reasons, I decided in 2016 that now was a good time to engage the African e-commerce market. But we didn’t want to go head-to-head with Jumia because they have deep pockets, so we settled on a vast vertical area after some analysis, which became the beauty market.

Mdundo

I’m chairman of a music company called Mdundo.com, listed on the NASDAQ in Copenhagen sometime in September last year. Mdundo started within 88mph in Nairobi in 2013 and focused on Kenya for the first couple of years, moving on to the rest of East Africa and expanding to West Africa two years back. Today, Nigeria is the largest user market for Mdundo, and by the next time we communicate our numbers to the public, we will have about 9 million unique monthly active users.

The idea around Mdundo.com is like Spotify or Apple Music for Africa, the difference being on the content side. African artists are organized differently from those in the Western part of the world. They are much more independent and do not work with labels. If you want to compete with Spotify today and get Universal, Sony, and Warner on board, you will have captured 80 to 85% of the music you need. But the artiste landscape is different in Africa, and we’ve built a business that works directly with them, acquiring music, and now handling 120,000 artists directly as of today that focuses on the African mass market, where the consumer has less data to spare because data is still quite expensive across the continent. The devices they are using have limited storage, and they are listening to much local African music. These three areas are essential.

We focus on local and hyperlocal music in our core markets as a critical differentiator and a service requiring less data use. We are using a time download service in cooperation with Telcos in Tanzania and Nigeria, where the consumer can buy internet bundle services and access Mdundo music. As part of that bundle, we create specific DJ mixes with local and hyper-local music for that audience.

My latest investment is a FinTech company that has gotten off to an excellent start as well, called PawaPay.

Africa’s E-commerce Market

There is a perception out there that last-mile distribution is a significant barrier to e-commerce across Africa. This is inaccurate. In some specific markets, maybe it is, but I’ll say e-commerce hasn’t matured in those specific markets yet. If you look at a country like Kenya, last Mile distribution is not an issue. At BeautyClick and Sky Garden, we deliver everywhere in Kenya in 24 hours.

There are three main issues you need to pay much attention to in the market; one is around trust. If you buy something on Amazon, you put in your credit card and order it, but it’s different in many African countries; people don’t trust that they will get the goods they are ordering, so payment on delivery is a big thing. For instance, in Kenya, M-PESA facilitates mobile money on delivery payments.The cost factor is another thing. For example, having the customer pay for deliveries could be an issue.

And then there’s segmentation. Sometimes investors entering the market tend to view Africa as a country. It is not a country; it is a continent with 54 countries with lots of differences, and it’s essential to be realistic about the specific market you are entering and its details. And with the customer segmentation, the top of the pyramid, if that’s your target customer segment in terms of buying parameters, looks probably a lot like the top of the pyramid in the US, Canada, or Europe, moving down the pyramid to the mass market. However, the characteristics of the consumer, the willingness and ability to pay and the buying habits are very different. But overall, COVID is a friend to e-commerce, and when we get out on the other side. Specific African countries will probably leapfrog three to five years when discussing e-commerce penetration.

Africa is Unique

Africa is full of opportunities. But again, when discussing uniqueness, it’s unfair to view Africa as a single market. We need to drill down to a specific country or market. Unique to all the markets where we operate in Africa is that they are full of opportunities. It’s early-stage yet, and there’s much development and many opportunities. As I said, mobile penetration is high, and business models that leverage them provide many opportunities. Again, it is essential to build trust, simplicity, and accessibility to move ahead.

It is imperative to build trust, simplicity, and accessibility to move ahead.

Challenges

Moving physical goods across African borders is very hard, and businesses built around this model will encounter some difficulties. Yes, there are free trade zones across Africa, but moving goods across borders is still challenging.

From an entrepreneur and investor perspective, finding the right founders and people to invest in is always hard. This is especially so if you are coming from the outside because you need to understand the culture and find out what’s okay to do and where. In my case, I’ve had my share of learning about the continent from travelling and doing business there. I can increasingly lean on the networks developed over the years to assess people differently and develop incentive structures.

Cash is King

Investors from Europe and the US come with the mindset of warrants and other deferred incentives, and in the beginning, I had the same mindset. Still, I learned quickly that you couldn’t pay your brothers and sisters’ school fees with warrants, so cash is cash, and cash is king, and it wins over a ticket maturing about three or four years down the alley.

Many young people in Africa, especially the firstborns, have welfare obligations to their parents and sibling, and their ability to help their family is a significant factor when choosing between the uncertainties of entrepreneurship or the predictable income from working at a multinational. There are few Silicon Valley millionaire role models in the area, so moving down the former path might not be culturally acceptable. That’s something to understand when trying to motivate and recruit people. So, while the eagerness to try something new is there, there’s something around obligations. The employees might be coming with that, and you must be realistic about it. I describe a lot of this in my new book, digital Africa.

My Book, Digital Africa

The book is about investing in Africa’s most untapped source, which I believe is the whole digital space. I’m a firm believer that Africa is going to take off and grow quickly. It needs much more digitalization because that’s the only way to create trust and transparency.

If you look back 30 years to China and Sub-Saharan Africa, both had a GDP of $350 billion; today, the GDP of China is eight times bigger than the GDP across Sub-Saharan Africa. So, I believe an opportunity was missed here, but there’s now an excellent chance to get the development going.

In the book, I describe what needs to be done and some focus areas for stakeholders to consider and be aware of when investing in Africa. One of the clear recommendations I make in the book is around what I call ‘let them in.

Immigration can be challenging for a foreigner who comes to Africa to start a business. In Kenya, getting a work permit can take much work, making it more expensive for foreigners to do business in the continent because you have to pay higher corporate taxes. Anyone who’s tried to start a digital venture knows that in the beginning, you don’t make much cash; it’s a J-curve needing much investment. So, it would be best if you incentivized people.

If you compare the innovative societies around the world that have been successful, Singapore, Israel, UAE, and even China, it’s all built on immigration. Israel opened up for Soviet Union engineers. Singapore made it very attractive to come there. China made many programs to get ex-pats from the States, etc. So, countries opened their societies and invested a lot in getting competencies.

Another recommendation is for international societies like the Foreign Direct Investment Funds, where there’s much inflow to the African continent. These funds need to be directed much more into digitalization. Most of it is currently going into traditional infrastructure, financial, and healthcare sectors, which are also important. Still, things will take off if you move 5 to 10 percent of that inflow into digitalization. It’s key.

More Recommendations

For any foreign investor or company that wants to move into Africa for the first time, I’d say there are a few things to do. First, speak to people who have done it before. Many people nowadays are invested in the continent in many different areas and have many things to share myself included, who are very happy doing consulting work as well. So, use other people’s experiences.

Secondly, be realistic. As I mentioned earlier, Africa is not a country. It’s a continent with 54 countries, and there is a massive difference in doing business in Congo, Kenya, Morocco, etc.

Thirdly, and equally important, is to put much effort into your customer segmentation. This applies whether you are a foreign company moving in or a foreign investor assessing a business model. Be realistic when you see the high numbers because the demographics are lovely, the middle class is growing, and this is where the market will be. Still, there are significant differences when you do segmentation. What the different segments can and are willing to consume is also important.

 

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