Next Wave: Africa’s investors have their work cut out for them

One of the biggest news stories last week, at least in Nigerian tech circles, was my colleague’s (Ngozi Chukwu) reporting about Payday, the virtual card app. Per her reporting, Payday which announced a $3 million pre-seed earlier this year is now seeking a buyer after a potential deal with Moniepoint fell through amidst internal strife and customer complaints. Like Payday, two other fintechs, Dash and Float, raised significant sums which were subsequently lost or misappropriated. Stories like this, where startups raise significant sums only to go bust months down the line, inevitably get a lot of attention. The businesses involved usually have thousands of customers and interested stakeholders from investors to regulators.

The stories are a reflection of the inflection point Africa’s startup and startup investing industry has come to. Namely, the age of accountability. Not just accountability for founders, but accountability for a venture investing model where the proper signals have been overwhelmed by the noise of the herd and the momentum of hot deals.

It is not an African thing. Globally, the venture capital industry appears to be at a junction where its most potent narrative—that it funds breakthrough innovation no one else will touch, and generates superior returns—is wearing out. Startup busts are expected given the nature of the market. But not fraudulent implosions. In short, venture investors are being held liable for the implosion (especially where fraudulent) of apparent portfolio winners. Don’t believe me? Talk to any limited partner (LP) worth their salt, or call your general partner friend and ask for an honest summary of how conversations with their fund’s investors are going.

Investing in private untested businesses is supposed to be difficult. In Africa, due to the lack of widespread and efficient formal systems, the uncertainty inherent in mostly informal markets raises the difficulty level a notch, or several notches higher. This means that both entrepreneurs and investors take a mutual oath to fight through the risks of building anything on the continent. It also means African VCs, more than their American, European or Asian counterparts, have to fight the tendency to groupthink.

Leaving the in-group
For an asset class whose name and preferred origin narrative celebrates anti-pattern matching, venture investing is susceptible to herd thinking. Following the herd is not always a bad thing. But this is typically only true when the herd is following established and clear standards. Where the herd is trying to find a way, everyone doing the same thing and kissing the ring of Lord Average raises the risk premium for the group.

The last 18 months are perhaps the best illustration of the capital-destructive power of groupthink and how it can affect even the most respected venture firms. As a result, following the herd is now (at least on social media) openly railed against.

What is bigger than the schadenfreude (of which there’s not too much because somehow everyone was touched) is the lesson that for venture capital to be taken seriously. It ought to be reoriented around clear standards. At first glance, this looks like it’s opposed to be anti-herd thinking. But it is not. Venture capital suffers from an acute lack of standard definitions and methodologies in much the same way startups need to come clean about what “revenue” means. In this scenario, leaving the in-group can simply mean doing the hard work even if it clashes with the latest trend. Take a minute and think about what doing venture investing this way can mean for Africa where areas like financial inclusion have been squeezed for every ounce of milk?

Momentum is one of the reasons a herd of buffalo is not something you want bearing down on you. We’ve heard stories from investors and entrepreneurs alike of how much momentum crushed term sheets and upended cap tables (much later). However, momentum investing is not a viable venture capital strategy.

Again, this is a global problem. To quote Professor Aswath Damodaran, Wall Street’s Dean of Valuation:

While there are a few exceptions, venture capitalists for the most part are traders on steroids, riding the momentum train, and being ridden over by it, when it turns.
In Africa, it can be the precursor to startup death, and capital destruction that will (unlike the Americas) be difficult to rebuild and recover from.

Dumping the fluff
Narrative is powerful. Narrative properly harnessed can create a world of difference and value. But in the finance world, narratives only last so long. The simpler the narrative, the easier it is to become folklore. But the worst thing about narrative-driven financials is that in an environment where knowledge is dreadfully imperfect, the best storytellers (not necessarily the best businesses) win.

Look, narrative investing is cool, maybe even fun. But it can also suffer from an inadequacy to demonstrate substance when cattle dung hits the fan.

That is not to say an investment thesis or term sheet that can be distilled into a story is bad. The point is that over-indexing on this type of substance is a great way to get caught up in the buffalo herd stampede.

Whether you are trying to raise from local LPs or hitting up DFIs and foreign LPs, it is only a matter of time before reality catches up with the story. In Africa, this will not be the first time.

Spreading the lessons
Part of why our narratives have remained simple is because of the failure to bulk up the story with lessons from the ground. Like how Float lost investor funds and other startups’ assets for months, but everyone kept quiet until the damage was more than done.

The funny thing is that, more lessons from pitfalls and successes may do more to catalyse capital inflow than relaying the same tired old reasons why one must “invest in Africa”.

The price of this fluffy narrative, groupthink and the lack of teachable moments is millions of investor cash.

Nigerians Abroad Send $20 Billion Home, Highest Remittance in sub-Saharan Africa

Total remittances in sub-Saharan Africa in 2022 totalled $52.9 billion
Nigeria had the highest remittance in the region during the period
World Bank stated that the sub-Saharan region witnessed a high cost of remittance.

A recent World Bank study found that out of the estimated $52.9 billion remittance flow into Sub-Saharan Africa in 2022, Nigeria accounted for the largest.

Nigeria accounts for 38% of total remittances at $20.1 billion, greater than Ghana's 11.9%, Kenya's 8.5%, Tanzania's 25%, Uganda's 17.3%, and Rwanda's 21.2% rates.

This is according to a World Bank report titled, “Remittances Remain Resilient But Are Slowing”

A remittance is money sent from a foreign country back to the sender's own.

According to the report, the rise in remittances to the region helped several struggling African nations. Some of the issues the suffered included; food insecurity, supply chain problems, a severe drought (the Horn of Africa drought), floods (in Nigeria, Chad, Niger, Burkina Faso, Mali, and Cameroon), and debt servicing issues keep their current accounts healthy.

Remittances to low- and middle-income countries (LMICs) totalled $647 billion. Meanwhile, this amount was predicted to only increase slowly, by 1.4%, to $656 billion in 2023.

Globally, the total amount of remittances is expected to reach $840 billion in 2023 and rise by another $18 billion in 2024.

The World Bank stated that compared to foreign direct investment (FDI), official development assistance (ODA), and portfolio investment flows, remittances have continued to represent an even larger source of external finance for LMICs over the past year.

It further stated that excluding China from the sample makes the significance of remittances as a top source of foreign financing for LMICs more clear.

The report noted that remittances have become several countries' most important foreign exchange earners.

It added:

“For example, for Kenya, remittances are larger than the country’s key exports, including tourism, tea, coffee, and horticulture. Those countries more dependent on receipts as a proportion to GDP include the Gambia, Lesotho, Comoros, and Cabo Verde.”
According to the World Bank, Sub-Saharan Africa has the highest remittance expenses, demonstrating the high cost of remittance on the continent.

It noted:

“Senders had to pay an average of 8.0 percent to send $200 to African countries during 2022Q4, compared with 7.8 percent in 2021Q4. Costs vary substantially across the region, ranging from 2.1–4.0 percent in the lowest cost corridors to 17–35 percent in the highest.”

“For example, sending $200 in remittances from Tanzania to neighboring Uganda would have cost a migrant 35.5 percent in 2022Q4. Banks charge the highest costs, thus emphasizing the importance of cross-border mobile money transactions. In Kenya, Rwanda, Tanzania, and Uganda, such transactions are constrained by limited interoperability among telecom operators and money transfer operators.”

According to projections, remittance growth into Africa is expected to decline to 1.3% in 2023 from 6.1% in 2022.

The World Bank said that risks to the outlook include capital outflows, measures to control foreign exchange, and sanctions,

According to the report, Nigerians abroad have repatriated about $168 billion to Nigeria in the last eight years.

The Association of Bureau De Change Operators of Nigeria, ABCON, assured that the Nigerian economy will start to capture the diaspora remittances after full integration into the I&E window.

“1 Naira to 1 eNaira”: CBN Tells Nigerians Abroad to Send Money Home Using Its Digital Currency

The Central Bank of Nigeria (CBN) has asked Nigerians abroad to consider eNaira as a payment option for diaspora remittances, Legit.ng reported

The suggestion is in the bank's circular titled, "Operational Framework for eNaira Payment Option to Recipients of Diaspora Remittances," dated June 15, 2023.

In the circular, addressed to the International Money Transfer Operators (IMTOs) and the public and signed by CBN's director of Trade and Exchange Department, Ozoemena Nnaji, the apex bank noted that the move was in furtherance of efforts to liberalize the payout of diaspora remittances.

Potatoes are starchy vegetable food with alot of great health benefits when consumed due to it's nutrient to the body.

It can be grown for commercial purposes by selling them or for consumption.

Here is a short video on how to grow it in your apartment.

https://www.youtube.com/watch?v=Jan1y14GmX8

Fast, the high-flying US-based checkout app start-up founded and led by Australian entrepreneur Domm Holland, shut its doors after burning through tens of millions of dollars in cash a month.

Announcing the closure via a tweet, the company said it had “pave[d] a way” in the e-commerce industry, but did not identify the cause of the near-immediate shutdown. “Sometimes trailblazers don’t make it all the way to the mountaintop,” it said.

Based primarily in San Francisco, Fast sold “one-click checkout” software to online merchants. It raised $165 million from investors – including payment operator Stripe – since it was founded in 2019, according to funding website Crunchbase.

But experts have raised questions about the management of the fintech company, especially the manner in which growth was managed by CEO Domm Holland.

The problems may have been compounded by a common issue in start-ups, said Colin Kinner, a Brisbane-based start-up mentor and investor: a strong marketing push to highlight the business proposition, “with no substance underneath it.”

“There is an expression, ‘build a wave and then find a way to put water under it,’” he said. “I think a lot of companies do an excellent job of building a wave [of interest in their business], and Fast has done that extremely well. But my concern with companies that overstate their business is that there is little substance to it.”

Professor Colin McLeod, a Melbourne professor in commercialising new technology in start-ups, said that it appears Fast’s management failed to sufficiently develop its technology to effectively match its business proposition.

“Fast took the world by storm because everyone is trying to make payments more simple,” he said. “But it seems there was a gap between its plans to build the technology and their ability to generate enough funds.”

The company was reportedly seeked a buyer after failing to raise more funding, amid concerns about low revenue. It had most recently been backed by venture capital firms Index Ventures and Addition, who tipped in more than $100 million in January 2021.

But it only generated $790,000 in revenue last year, despite adding 400 new employees and burning through $13 million a month, according to technology industry publication The Information.

Mr Holland was the CEO of two other companies before Fast, both based in Australia. He was responsible for the launch of Tow, a start-up promising to be the “Uber of towing”, in Brisbane in 2014. The company had a contract with Queensland Police to tow vehicles related to its anti-hooning legislation, but was liquidated in 2018.

Fast raised over $100 million before it finally closed business.