Profitability over Press: Should We Change the Way We Measure Company Success in Africa?
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Profitability over Press: Should We Change the Way We Measure Company Success in Africa?
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By Faith Nyabuto, Analytics Lead, and Liviya David, Business Development and Research Analyst
April 11, 2021
Every year, social media is flooded with trending threads and viral infographics about the state of fundraising for start-ups in African markets. The largest rounds garner copious applause from investment professionals, thinkers, and entrepreneurs alike, who equate massive rounds with success. This media storm has fueled the perception that success should be measured more by headlines and funding rounds rather than growth metrics like traction and market capture. In reality, entrepreneurs may be better served by investing in profitability over press, by focusing their attention on strong strategy, sound operations, and building a loyal customer base. Simultaneously, investment professionals on the continent will need to take a new approach to enable the rise of innovative businesses beyond what is already popular in the market.
Fundraising in and of itself is not negative—companies need money to expand, launch new products and services, and hire top talent that revenues alone may not be able to cover. Raising money as a founder in Africa, particularly for local founders, is a major feat and deserves to be celebrated. In 2020, for example, the vast majority of external financing in Kenya went to foreign founders. That being said, the value placed on raising large amounts of external financing - whether from venture equity, venture debt, or philanthropy - by media and investment professionals can warp what actors deem as valuable in a company in Africa.
The perceived value of external investments in businesses in sub-Saharan Africa remains high, but it distorts the market by suggesting that external financing raised is a more important metric than actual performance. An outsize focus on becoming the ‘next African unicorn’ only fuels this perception. Flutterwave recently became the fourth unicorn in Africa, which means the race to the “next Flutterwave” will soon begin as investors crowd into ‘winning deals’ of copycats in a bid to fund the next unicorn. This reality has already borne out in developed economies: in the United States, WeWork is the archetype of this phenomenon. While its large funding rounds and high-profile press coverage fueled its rise, its flawed business fundamentals, including strategy, operations, finance, people, and customers, have left the company limping over the finish line to going public. In August 2019, its IPO stalled and its valuation dropped to less than 25% of its pre-IPO valuation in the last quarter of the same year. Media coverage on the attractiveness of its raises may have made WeWork attractive in the short-term, but when the dust settled, the reality was not as pretty.
Post-revenue and profitable companies exist in African markets, but they get less press than those who have raised huge Series A to D. Kentaste, a company that produces registered Fair Trade and organic coconut products, is growing to become a household name in Kenya and has operated for over a decade. They, however, receive little media attention despite their products being stocked in supermarkets across the country and despite relatively widespread consumer adoption and brand recognition. Meanwhile, WEEE Centre is solving a massive climate problem - electronic waste. They boast large corporations, NGOs, foundations, and SMEs alike as customers while simultaneously pursuing social good, but their work rarely comes up in public discourse compared to the existing media darlings of the African start-up crowd. This is not just a problem for PR teams to tackle - players in the African start-up ecosystem need to change the narrative.
Because fundraising is so frequently equated with success, many founders of companies on the continent are too reliant on external financing (equity, debt, grants) at the expense of strong business fundamentals. As a further risk, companies that end up succeeding in their fundraise may focus disproportionately on the milestones defined by their VC investors or the interests of their philanthropic funders instead of pursuing the company’s original goals. Companies that over-fundraise - in part in efforts to achieve unicorn status - end up facing an uphill battle to achieve scale, despite appearing to have outsized gains in the short term. Ultimately, those that do not spend disproportionate time fundraising may outperform the former in the long term.
The nascent nature of the venture capital industry in sub-Saharan Africa represents a unique opportunity to redefine the flaws that have taken root in other markets. VCs, investment professionals, and those with an eye on African investments should reconsider promoting the narrative that funding is a marker of success. For VCs, this means diversifying deal sourcing beyond referrals from their immediate networks, who may have invested in the ‘usual suspects’ that have fundraised heavily already and gained accompanying media attention. In addition to showcasing the biggest fundraising rounds on the continent, these actors should use their platforms to highlight companies that have solid business fundamentals and are scaling, but may not have pursued external fundraising. In doing so, investment professionals will open themselves up to unique business models that are attractive and worth considering, but may be overlooked currently due to the trend of ‘pattern matching’ based on high-profile fundraises.
By Faith Nyabuto, Analytics Lead, and Liviya David, Business Development and Research Analyst