On high Valuations in African tech: Technology Creates Value
Update: September 2022. It was at this point in August 2021 that we should have known investors were rethinking valuations for startups. I do admit that some of the valuations were insane(e.g $20M for a $1.5K revenue startup) but it’s interesting to read this in retrospect. I remain bullish on technology in Africa and I’ve been here to know that these slumps are temporary. We were here in 2016/2017 and we’re here again. Many startups facing down rounds and reduced valuations will go on to achieve massive success and provide high ROI for their investors. Others will die, some will remain in zombie mode for a very long time.
I just returned from the gym to write this. I’m super pumped, blood is flowing through my veins and into the keyboard so this article is going to be very passionate and exciting.
Last week OPay announced a $500M raise at a $2Bn valuation, before that Kuda raised $55M at a $500M valuation. The ecosystem is again rife with bubble conversations and scepticism about these valuation numbers.
It’s sad that many people work and invest in our industry and fail to understand what it is truly about, how technology companies grow and what investors in these companies do.
In this article, I’m going to provide some viewpoints on how to approach what’s happening in the technology ecosystem in Africa today.
What do computers do?
I studied Information Technology in university and two of my favourite courses were: Information Technology & Society and Computer Ethics. In these courses, we studied the impact of computers on society and vice versa. We were also provided with philosophical and other frameworks for how to make decisions for some of the software or hardware we would help build after graduation.
Two things stand out here:
Moore’s law is the observation that the number of transistors in a dense integrated circuit (IC) doubles about every two years.
The summary of Moore’s law is that over time, computers get faster and get cheaper. This means that computers enable more computing transactions and get in the hands of more people. One of the characteristics of computers(which I also learnt in my IT & society course) is that they’re ubiquitous. They’re literally everywhere.
If computers aren’t somewhere today, they’ll be there tomorrow.
Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).
The summary of Metcalfe’s law is that the more people are connected via a computing network, the more valuable that network is and the more people join the network.
It’s important to note at this point that Moore and Metcalfe’s laws don’t exist in a vacuum. They can be disputed or interrupted by various external events — anything you can imagine at all can affect a computer network — societal norms, bigger companies, hype, a pandemic, etc. The point of these laws and the reason we studied them in university was to help us grasp a better understanding of information technology esp with computing, how it works and how much value computing systems create as a network. The term network is very important here: OPay, Kuda and anyone else building software or hardware in Africa today are creating new networks(on top of computers) that enable some sort of transaction to occur better, cheaper or faster.
Computers create markets
Now that we’ve sorted that, we see that computing networks and computers will sometimes enable things that weren’t done prior. By enabling new types of behaviour, computing networks and computers create new markets. Erik Torenberg takes a deep dive into new market creation in this piece.
I’m going to give some popular examples of how computing networks and computers create markets.
In 2012, Facebook IPOed at a $96bn valuation. Many people thought it was overvalued. Before then, many Silicon Valley insiders had thought Facebook was overvalued at well. The problem was these people compared Facebook’s valuation at any point in time to the value of the advertising industry. They measured what was, not what it could be.
They assumed Facebook was eating into the advertising market and failed to see that Facebook was creating a whole new market. Here are some examples of actors in the Facebook value chain today:
Facebook Platform, Instagram Platform, FB & Instagram advertising platform, Small and Large Businesses on Facebook & Instagram, Content Creators & Influencers, Content Creator managers and Influencer managers, Facebook and Instagram advertising experts, Graphic Designers, Motion graphic designers, Short film makers, App developers, The list goes on and on.
In 2020, Facebook’s worldwide revenue was $84.2 billion numbers — this is despite the fact that most businesses in most countries cannot advertise to potential customers via Facebook — the company still has a large opportunity to capture and it will continue to create this market in new territories.
2. Paystack
Coming closer home, a great example is Paystack. In 2015, the total value of transactions in Nigeria on the web was around 91 billion naira. In 2016, Paystack launched and I remember the sentiments that time: people simply said they weren’t going to be able to capture the market and claimed it was fixed. They didn’t understand that by making payments easier and faster, Paystack was creating a new market for ecommerce, apps and new types of services that previously did not exist.
In 2018, Paystack announced that it was processing N10 billion naira monthly. Roughly 10% of the total value of web transactions in 2015. By the end of 2019, the value of web transactions in Nigeria totalled 478,140,101,693. These are numbers by the Central Bank and are publicly accessible to anyone.
What are computers and software doing in Africa today?
Startups in Africa today are doing a couple of things:
- Enabling previously manual, untraceable, unverifiable transactions to become digitised with computers so that they can be automated, tracked and verified by stakeholders in these transactions.
- By doing the above, they’re creating new markets of possibilities. New ways of doing things, new types of jobs and enabling new types of businesses to exist.
- Startups are using available technology: smartphones, the internet and mobile networks to build these platforms. Metcalfe’s law and Moore’s law already show us how this is going to happen. New networks are being built on computers around different types of events and transactions.
But the market is tiny
The market is tiny because it’s inefficient and disorganised. The people are also poor because the market is inefficient and disorganised. Startups(using technology) seek to create new opportunities for people to be more efficient and organised, so they can better manage their time and be richer.
You could throw a stone at any industry in Nigeria today and you would find how grossly inefficient and incompetent it is because there’s too much manual work going on and nobody knows who is doing what with value being scattered across the supply chain.
How venture capitalists invest in and value companies
Venture capitalists invest in upside and take very large risks. This is the most important thing to note about venture capital investors. They’re not the same type of investors as other types of investors. They’re not like stock market investors who dip because the company was projected to hit 10% growth in one quarter but hit 9.8% instead.
They literally chart unknown paths.
Venture Capitalists invest in what a startup could be in the future. Not what it is today. Like the Facebook & Paystack examples above, venture capitalists in those companies thought deeply about the future their computing platforms would build vs the status of the industries they operated in at the time of investing.
Different types of venture capitalists also play different types of games. Some VC firms have a lot of cash and can invest hundreds of millions in one company, others can invest only a few tens of thousands. Other VC firms have a strong brand and founders flock to them so partners and customers will take them seriously.
So if you ever see an announcement and think the VC firm is stupid, it’s very likely that you’re the poorer VC firm(or you’re just a poorer person) and you simply can’t take such risks.
Derin Adebayo writes about some of the games VC firms play globally and in the African market. Morgan Housel of Collaborative Fund writes about this phenomenon and cautions small VC firms not to play the same game as large VC firms.
Instead of tearing numbers apart & complaining that markets are small, African VC firms and angel investors must decide what game they’re playing and optimise their methods to better suit their objectives. They should also take some computing and society courses. It seems we don’t know why we’re here.
Every day is Day 1
Today is Day 1 and every other day for the next few years will be Day 1 in African tech. We’re going to see companies grow much faster(because of work others have done), create new & massive markets, capture and provide more value. We’re also going to see startups approach larger valuations much faster than Flutterwave and Interswitch.
I leave everyone with this verse
Haggai 2:19
The glory of this present house will be greater than the glory of the former house,’ says the LORD Almighty. ‘And in this place, I will grant peace,’ declares the LORD Almighty.”
It’s a bit absurd to expect things to be the same as they were in 2013.
Thank you for reading this article. I write about technology, work and marketing. If you enjoyed this, you’ll love my newsletter.
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Further Reading on this topic:
- What is a tech company? — Ben Thompson
- Why software is eating the world? — Marc Andreesen
Some other notes:
- Not all VC investments pan out to an exit. VCs know this.
- Not all startups are successful. Founders and VCs know this.
- Not all problems are solvable by technology. Founders and Engineers know this. They will try anyways. If you have another opinion, you should also try.
- Contrary to popular belief, computer science students actually take ethics courses. When have ethics courses ever stopped a bad actor from acting badly?
- This doesn’t mean that Kuda itself or other companies with high valuations will succeed. This article is also not excusing companies with a bad product, clearly small TAM, terrible business models, poor unit economics and insane valuations.
- People also forget that FairMoney, a Kuda competitor raised $42 million in July 2021. In 2019, PalmPay — another Kuda competitor, raised $40 million. This means that Kuda’s raise and valuation are not far-fetched from its peers at similar milestones.
