Should African startups focus on attaining $100+m or $1+b valuations?
“ Only a virgin girl could tempt a unicorn into captivity ”
At various points in time, unicorns have represented different things. In the middle ages, people believed that the horn of a unicorn possessed magical medicinal powers that could detoxify poison and purify water.
Princesses and noblewomen during this time used unicorns as their emblems. This mythical creature was also mentioned several times in the bible. Often as a testimony to its great strength. A car produced in the 20th century was called licorne; meaning unicorn in French. An allusion to the legendary creature’s speed.
Ancient folklore says the unicorn is a strong and swift animal that could not be captured. Except when a virgin is used as bait and placed in its path. On seeing the virgin, the unicorn comes to her and puts its head in her lap and falls asleep. Only then can this elusive creature be captured.
Since the middle ages, unicorns have become a symbol of speed, female virtue and purity. This may explain why the unicorn is often regarded as white. Even though its appearance is a very controversial subject. As different accounts have different physical descriptions of unicorns.
In today's globalized world, unicorns have saturated popular culture. You can find them on almost everything. From children’s Tv and toys to Adult T-shirts. It is also an important symbol for the LGBT community. On Instagram, the hashtag #unicorn has over 14.5m posts at the time of this writing. Then there is the unicorn wine, a bottle of wine that is rare and difficult to find.
These days it is also sexual slang. A unicorn is someone (usually, a bisexual woman) who sleeps with couples.
The business world isn't left out of this unicorn craze. Because of the rare nature of this one-horned creature. In 2013, Aileen Lee labeled Privately held companies worth over $1 billion as Unicorns.
We now have decacorns (companies valued at over $10billion) and hectocorns (companies valued at over $100 billion).
Since then unicorns have continued to be a hot-button topic in tech and business circles around the world. Moreso in Africa, because of how rare they are on the black continent.
As of November 2020, there is one hectocorn (Bytedance), over 25 decacorns, and over 600 unicorns in the world.
440 of these unicorns are from the US, over 60 come from Europe, in China, there are 113, India has 20. While Africa only has 2 Unicorns in this list. Promasidor and Cell C. Both South African countries.
The Reality of Unicorns
While some people see Unicorns as a product of technological progress and innovation, others believe that it is a sign of a bubble in the industry.
The value of unicorns are primarily based on their growth potential and expected development than their actual financial performance.
Unicorn valuations do not always reflect reality. Some of these unicorns are yet to turn a profit despite their abnormal high valuations. In 2018, a list of 15 US tech companies that went public in 2018 had combined revenue of $25 billion and a combined loss of $6 billion.
Companies are able to grow rapidly into unicorn status by either adopting a get big fast strategy, through buyouts from larger companies, by offering an IPO, accessing more private capital or taking advantage of tech advancements.
Only 3 companies in Africa have reached unicorn status. Promasidor, Cell C, and Interswitch. Who have not exactly followed traditional VC paths. While Jumia and Fawry are considered unicorns in some quarters. They are not because they are both publicly traded companies and are not privately held.
Compared with their US, Asian and European counterparts, funding for these African unicorns has come primarily from public companies and private sponsors, which tend to back mature companies, with typical private equity expectations.
Compared to the other continents, typically Africa is way off. However, there are several problems with focusing on the number of Unicorns in the African business ecosystem. They are:
Because a company is priced at over $1 billion doesn't mean it has a future. Current price does not indicate future value.
The current list of unicorns doesn't consider companies valued just below $1+ billion with the potential to cross over $1 billion. Future Unicorns.
Having Unicorn status doesn't account for a company’s growth rate nor its durability.
Africa has no obvious competitive advantage in technology. While people might point to fintech as a competitive advantage. However, consider two points. First, that a competitive advantage among sub-regions in Africa may double as a competitive flaw within the whole region e.g. saturation of fintechs. Second, that the most successful financial technology companies are outside of Africa, e.g. PayPal, Stripe, Square and Plaid.
Unicorns indicate a vibrant VC ecosystem. African businesses operate in an environment that is underdeveloped and where there isn't sufficient VC backing. Between 2014 and 2019, VC deals in Africa reached a total value of US$3.9 billion invested in 613 deals. In the same period, the VC deals in The US reached a total value of $587.2 billion, invested in 61,310 deals. In the same 2019 alone, the US saw the emergence of 73 unicorn companies.
Achieving unicorn status is not a guarantee of future success or continued growth. Retaining that status is.
Many emerging African startups and potential investors view the unicorn status in Africa as just hype and lacking in substance because of the rarity of unicorns on the continent. The emerging consensus is that Africa needs to look away from “mythical” unicorns, for now.
Unicorns or Centicorns
In developed markets like the US and China, the average holding period of a VC investment is between 8 to 12 years, sometimes longer. This mature VC ecosystem has resulted in a string of positive exits, which has become a basis for predictable returns.
In Africa, the VC ecosystem is growing but it is still a toddler. VC-backed African companies have just started to complete their first life cycle from seed to exit. So it is unsurprising that African VC ecosystem is just starting to see a string of positive exits.
Just last year, Jason Njoku, Iroko's CEO in this blog post asked where the $100m African exits were. In 2020 we have seen Nigerian payment company Paystack get acquired for $200m by Stripe and DPO was acquired for $288m by Network international.
It took Interswitch 17 years to attain Unicorn status in 2019. The fintech company was valued at over $1 billion dollars after a $200 million equity investment by Visa gave it a $1 billion valuation.
For African businesses operating in tough, under-resourced, and often underregulated environments. These companies hardly have an enabling infrastructure and must build the said enabling infrastructure that their businesses and products require. They cannot afford to focus on attaining Unicorn status when their business is just beginning. They must aspire to a better valuation model that suits them.
Gloopro CEO, Doc Olumide, proposed a better model for African startups to focus on. Instead of unicorns, he suggested that African startups focus on becoming centicorns.
Centicorns are business ventures that are valued at $100m+. Doc Olumide suggests that an African ecosystem with a lot more centicorns will lead to an ecosystem capable of producing more unicorns.
African startups focusing on revenue growth over a sustained period and on a path to sustainability or exit will likely lead to more African centicorns which will open up a path to unicorn status for those startups.
Focusing on building an African Unicorn is deeply rooted in a set of beliefs unique to Silicon Valley and its conception of how to build a startup. Unsurprisingly, these beliefs do not always translate well to the African ecosystem.
Silicon Valley used to have a monopoly on innovation. Not anymore. Only twenty-five years ago, 95% of the world’s venture activity occurred in the United States. Not anymore.
Advances in technology mean innovation can now take root everywhere. In the past few decades, China and European cities like London, Berlin and Tel Aviv have become global startup powerhouses. China above all has propelled itself to the forefront of the global innovation landscape. It is now home to 100,000 startups and 35% of the world’s unicorns.
In markets like Africa, where there is a venture capital shortage, macroeconomic uncertainty, a lower tolerance for risk, less acceptance of entrepreneurship as a career, or limited enabling infrastructure, the Silicon Valley model fails. So does the current expectation of having multiple Unicorns.
More Funding, More Exits and More Unicorns
Entrepreneurship is especially hard in Africa. Every African entrepreneur must accept the realities of the fragmented ecosystems they operate in. Most African entrepreneurs set out to build sustainable companies that solve real problems in their community. Sometimes not because they want to, it's because they have to.
African entrepreneurs operate in a less mature and supportive ecosystem. So they then have to wait a long time to receive financing.
Africa startups need more funding, they need a more sizeable and professional VC industry. But the local stakeholders must first recognize the VC opportunity in Africa.
VC teams on the continent will also need to build high-risk, high return portfolios that can be validated by subsequent financing rounds at growing valuations, and by value-generating exits.
Creating sustainable companies in Africa that can go on to be Unicorns will involve both attracting more capital to African VC and generating success stories. But right now, African startups must have realistic expectations when it comes to the availability of capital, investment requirements and valuations.
African businesses are becoming more ambitious, so VCs need to step up to match and nurture their ambitions by serving the needs of the entrepreneur for business building, talent support, and guidance, from financing to exit.
If we can nurture a new generation of African VCs focused on these values, Africa will generate its share of unicorns.
Africa can be Optimistic
There is no doubt that Africa has massive underserved markets. Even though low-income demand is a common theme on the continent. Closing the tech gap in the continent through local technology-enabled solutions can go a long way in extracting more value from the massive underserved markets in the continent.
African companies often leverage proven technologies. So the tech risk is lower. This can provide a predictable exit path for African companies associated with large private equity funds.
The African VC ecosystem is growing. The continent is seeing a growing supply of early-stage and growth capital, related business-building support and even $100m+ exits.
On average African companies are receiving venture capital of up to a few hundred thousand dollars for seed-stage financing rounds. For more mature companies seeking growth or expansion, they can receive up to $10 million or more. The average range for VC investment in Africa is between $500,000 to $10 million.
Africa has attractive markets and companies that can scale, but to have more companies attain unicorn status, they need sufficient local capital and business-building capacity, which come with VC and favourable economic policies.
While companies in the developed world strive to breed unicorns, African companies must capitalise on opportunities but must also be able to survive in a drought. They cannot focus on growth at any cost.
Growth is great, but profits are more convincing proof of long-term viability. A self-sustaining African business will not need to go out hunting for money from tight-fisted venture capitalists or sceptical investors. They have more leverage to pick the type of VC funds they want to work with.
African startups focused on building sustainability and resilience with the right funding and support can attain centicorn status and leap-frog things from there when unicorn-like gaps inevitably open up.
Till next time. Take care