The Frontier Blindspot

Originally published on 8 Dec 2020

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Marc Andreessen’s “Why Software Is Eating the World” is a cornerstone essay marking tech’s most recent golden age. In the piece, Marc makes the case that “With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired.” And in the decade since, founders and investors around the world have rallied to build businesses to serve digitally connected populations. True to the prophecy, these startups have emerged leveraging standardized, scalable infrastructure to lower the cost of experimentation. A 2018 study found that startups “founded in sectors that benefited from the introduction of AWS raised much less capital in their first round of VC financing after AWS.” But how has this played out in African markets?

In 2020, Paystack, the “Stripe for Africa,” was acquired by Stripe itself. In many ways, this was a success for the startup ecosystem, especially in Nigeria, that reinforced Marc’s paradigm above. Paystack creates the infrastructure for businesses to accept digital payments in Africa and was built through a startup journey that included global startup resources, methodologies, and experiences, including a stint through Y Combinator.

Upon closer inspection however, one finds that Paystack’s journey was unique to Africa and that the team created value by solving for the gaps they experienced along the way. It is less that Paystack was identical to Stripe, but in a new geography. And more that Paystack through a combination of ingenuity, lived-in experiences, and luck, built the conditions for the Stripe model to succeed in Nigeria and Africa more broadly.

This disconnect between the conditions that drove the growth of the digital economies in high income countries and on-the-ground reality in frontier markets creates what we call the frontier blindspot. As Western markets digitized their economies, the world developed intuitions about how technology markets are structured, what successful technology companies look like, and so on. This orthodoxy affects everyone, from founders to investors, driving strategy and informing investment decisions.

One of the key drivers of this blindspot is our overestimation of digital progress. In 2011, Marc predicted 5 billion total smartphone users in the next ten years. As of 2019, we’re at about 3 to 3.5 billion smartphone users globally with sales slowing and even declining in some markets. However, beyond the disparity in smartphone penetration (a gap that will likely close at some point) there are other forces that imply that frontier markets will not mirror the development of digital economies in the global north.

• Relatively low connectivity — the GSMA estimates that mobile internet adoption in Sub-Saharan Africa in 2019 is about 26%
• Broken/non-existent infrastructure, especially around payments, credit, identity, last-mile logistics, etc.
• Limited income/small wallet sizes
• Highly fragmented value chains
• Underutilization of labor and resources

These are, of course, not new observations. But while these factors act as barriers for “proven” business models, we believe they also represent immense opportunity for those who are able to see the present clearly and forge a future that accounts for it. Founders are building incredible companies in countries where infrastructure isn’t just stagnant, but completely broken. In Rwanda and Ghana, drones are delivering blood and medical supplies to remote areas. Kenya has one of the most successful mobile payments services in the world, but it’s just the tip of the iceberg. As we mentioned in Nigeria, the “Stripe of Africa” was acquired by Stripe itself, and the fundamental building blocks of modern ecommerce and financial services are being forged. There is also an important role for industry initiatives like the Mojaloop open source payment system funded by The Gates Foundation and its partners (Google, PhonePe, Omidyar Network, Rockefeller Foundation and a handful of other charitable and private sector organizations) that aim to create interoperable payments infrastructure and reduce costs at the industry level.

The global pandemic has also reshaped consumer behavior in Africa. Despite limited digital infrastructure, commerce — formal and informal — has been forced to adapt to a contactless world. Key supply chains like those for food and FMCG are increasingly tech-enabled, where digitization must augment informal markets that are trusted, reliable, and adapted to local needs. On-demand delivery in particular has seen a large uptick in adoption in African urban centers like Nairobi, much like everywhere else. Africa’s startup ecosystems are maturing as well: M&A activity crossed $1 billion in 2020 — about at par with venture investments, according to Briter Bridges.

If the frontier blindspot means we overestimate the speed of digital progress from a Western lens while underestimating the progress brought on by the continent’s builders, then the opportunity lies in identifying founders who can effectively apply the modern startup-stack to make life better for billions of digitally-limited consumers, the fastest growing population in the world. Furthermore, this persona goes beyond the African consumer, but reflects what the average global consumer looks like around the world such as in parts of Latin America, Eastern Europe, Southeast Asia, and the more remote regions of India and China. As much as we invest in founders building for Africa, we invest in African founders building for the world.

More specifically, we believe there are several core areas that will flourish and underpin the future of digital commerce in Africa:

1. Physical Logistics including tech-enabled mobility and delivery for B2C and B2B applications. We’re excited to see advancements along the value chain, including what we’ve already seen in freight, trucking, and imports. We’re also looking for founders willing to tackle more downstream logistics challenges that tap into and expand existing distribution value chains including in last-mile package, restaurant, and grocery delivery.
2. An SME Solution Stack that aims to help smaller SMEs grow, including but not limited to new forms of social commerce. Importantly, we aren’t looking for solutions aiming to completely “disrupt” informal, offline markets but rather augment the efficiencies they create while increasing opportunities for both sellers and buyers. We are excited to work with founders who want to help smaller sellers save and make more money through tech-enabled O2O models that can reach more customers. We also want to back solutions that help sellers manage their businesses more efficiently, whether it’s removing barriers to getting started or helping with the working capital, infrastructure, and back-office functions needed to grow.
3. Hustle Economy Platforms that provide on-demand services tailored for African businesses and consumers. Importantly, we are also excited to work with founders building products and services for platform workers themselves, helping to augment the otherwise lack of benefits and stability that comes with salaried jobs. We see strong potential in models that allow people to increase incomes with flexible work.
4. Financial Building Blocks that support the digital commerce ecosystem partially created by everything we’ve already mentioned. For example, we are excited by responsible credit that removes the financial friction currently present in doing business. We are increasingly excited about advancements in low-cost, interoperable payments, and the new use cases they enable. As digital commerce evolves, we’re also looking for digital payment products that have been designed with this landscape in mind. Additionally, the continued growth of the hustle economy opens the door for financial services to serve an entirely new segment of workers.
5. Agent Network products and services that improve network management as well as help agents make more money and do their jobs more easily. We see a world where agents expand beyond mobile money and opportunities to improve agent value remain largely untapped. We look forward to working with founders who want to help build more feature-rich O2O agent networks in Africa.

Over the coming months, we plan to dig much deeper into the ideas outlined here. Undoubtedly, the entrepreneurs we partner with will surprise us with new combinations of, and exceptions to our hypotheses. As we stay in the trenches with them, building for the next billion in Africa, we will share what we learn with you. We hope you will share your thoughts and insights with us!

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