SME: Real-world solutions

Entrepreneurs in frontier and emerging markets could bring hefty returns for angel investors. But the risks are high

  • By Peter Guest
  • 09 Oct 2013
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Jumia is Nigeria’s answer to Amazon, an online retailer selling everything from books to consumer electronics to apparel. But in a country where credit cards are scarce and trust in internet businesses is shaky, actually making a transaction is far from simple. Facing a near-impossible hurdle to his business, Raphael Afaedor, the company’s co-founder, put his couriers on motorbikes to get payment directly from customers, linking his online marketplace to the cash-based economy.

With an under-developed payment infrastructure and a large proportion of the population without a bank account, Nigeria’s internet economy is, by necessity, strongly rooted in real-world solutions. The country is often touted as a consumer goldmine, with more than 160 million people and economic growth exceeding 5% per year for more than a decade. Nigerian consumers have also shown an incredible appetite for technology, in particular mobile phones. The number of mobile subscribers increased a hundredfold over the past decade, reaching 120 million this year, according to the Nigerian Communications Commission, the national regulator. NCC data suggests that around 20% of those currently use the internet through their phones; with the advent of cheap, data-enabled handsets that number is likely to rise fast.

Jason Njoku, the British-Nigerian technology entrepreneur and founder of iRoko, one of Nigeria’s most successful online media businesses, compares the country’s opportunities to those of developed markets in the early days of the online economy.

“If you go back to 1995 and see what kind of businesses they were building, they are the kind of businesses that will reign supreme in Nigeria, because they facilitate offline activity.”

Njoku takes an example from his own life to illustrate the potential for turning unstructured offline businesses into online ones. Nigerian weddings tend towards the

flamboyant, and whole areas of Lagos become impassable on weekends due to the trails of well-wishers spreading across the city. “Mine was a small wedding and I had 400 people there,” he says. “We had a drinks budget of about $15,000. I did that over email. The guy sent me a spreadsheet of prices. I never met the guy, I never spoke to him on the phone. I had a bankers’ draft, he sent the alcohol, I paid for it. He didn’t even have a website. I later found out that his margins on those things are 50%. And there was the problem as to whether it was even [real brands].”


The drinks business was one of the first that Njoku and Bastian Gotter – the angel investor behind iRoko and now a colleague at the company – looked at when they founded an incubator, Spark, in Lagos to back up-and-coming talent. Spark funded, an online portal offering wholesale and retail alcohol to consumers, founded by a local entrepreneur, Lanre Akinlagun. “In Nigeria, becomes the super-distributor who gets the best prices, is cutting deals,” Njoku says. “[Akinlagun] is cutting out layers of profit and bringing that reduction in profit margins to the consumer at better prices, more convenience, well-branded... That will be a $20 million or $30 million turnover business in the next few years – it just has to be, because there are so many transactions going through.”

The incubator has also backed companies selling bus tickets, online estate agents and hotel listing sites, all of which are using the nascent spread of internet-enabled devices across the country to create efficiencies. In August 2013, Spark raised $2 million from 17 high net worth individuals to further expand its network.


On the other side of the continent there are bigger ambitions. In January, the Kenyan government broke ground on a $14.5 billion, 20-year project to build a new home for the country’s technology industry. On a site 60 kilometres outside the capital, Nairobi, the city is envisioned as a hub for business process outsourcing, software development and light industry, and is built on the back of Kenya’s growing reputation as the centre of African innovation. That reputation stems mostly from the development of the M-Pesa mobile money transfer system, which sprang out of the country in the mid-2000s and revolutionized the way consumers transact in developing markets. That went global, and along with the Ushaidi mobile phone reporting platform that was developed during the 2007–8 post-election violence, became a watchword for Kenya’s technological prowess.

Currently, the main artery of “Silicon Savannah” is Ngong Road, Nairobi, a long, straight highway linking the centre of town to the upmarket suburb of Karen, which is home to incubators such as iHub and 88mph – Silicon Valley-esque spaces which at least look the part of cutting edge development shops.

Just as in Nigeria, Kenyan society has become better connected over the past decade. There are now more than 30 million mobile phone subscriptions in the country, and the arrival of large fibre optic cables onshore has reduced the cost of bandwidth, which was previously prohibitively expensive for businesses and individuals. This alone promises to improve conditions for entrepreneurs and investors drastically. Periodic media coverage of new technology, often piggybacking on M-Pesa or making ripples on the Apple app store has kept the Silicon Savannah message in the public eye. However, the absence of any truly path-breaking deals to peg a value on the Kenyan tech scene has led to fears that despite the noise, there are few companies delivering meaningful results.


Telecoms have transformed the Kenyan business environment, but the future of the internet industry is far from decided. The government’s expansive plans for developing the industry claim that Konza City alone can create 200,000 high tech jobs by 2030. But the older heads in the Kenyan technology scene warn that building apps for Apple’s app store is not going to have any fundamental impact on the economy, and despite the obvious talents of a few programmers, the country cannot keep pace and compete with other emerging markets. Njoku, who has looked at startups and incubators across developing markets, is unconvinced.

“When I wake up and put my money in, I want to see it back,” he says. “How many venture capital-backed companies are there in Kenya? Not many. Because they’re not building many companies with a view to monetization. So what are you building? You’re building this interesting, cool tech for tech purposes. So you have all these incubators but they’re not churning out major companies. That’s something that’s going to come back to bite them unless they do that very quickly.”

Andrew Bartley, the chief investment officer for telecoms, media and technology at the International Finance Corporation, also sounds a note of caution.

“I think you’re going to find a lot more hype than in reality on the ground. The ecosystem in California for venture capital and technology innovation has taken some 50 or 60 years to develop,” he says. “There are a lot of moving parts in the innovation ecosystem that need to come together at the same time. When it works well, it’s self-reinforcing. If all the pieces aren’t really in place, the growth can stumble along.”

The development of this kind of ecosystem is dependent on a combination of macroeconomic climate, regulatory environment and availability of capital, alongside cultural and social factors surrounding interest in and support for entrepreneurship.

“I think you’re seeing some early signs of that in Kenya, but I don’t have the expectations that it will... in the space of five years, become the innovation hub of Africa, and there will be hundreds of millions of dollars of venture capital flowing there,” Bartley says. “I think it’s going to take a lot longer than that.”


Domestic investors still lack the experience of backing these new sectors, while overseas investors have a wide range of innovation hubs to look at to back new technology, and could be deterred by the less-than-ideal investment climate in Kenya. The country fell to 121st in the World Bank’s Doing Business rankings this year, although it is still 10 places above Nigeria.

Staffing is also an issue. While there are exceptional individuals producing interesting technology, the relatively small number of technical graduates that the country produces means that the talent pool is still limited.

“Another big part of the equation when it comes to technology innovation is the level of technical skills and education in the country,” Bartley says. “Even a place like Russia or Ukraine, which has a very deep reservoir of scientific and engineering talent, it’s 20 years since the Berlin Wall came down, and you’re just starting to see a more vibrant technology and innovation sector emerging in those countries. I’m not sure anywhere in Africa really has the depth of engineering and scientific training to become a scalable technology hub on a global level.”

Kresten Buch, one of the co-founders of 88mph, agrees that the environment for talent is challenging.

“What is missing is also that there are very few experienced founders here. They are really having trouble executing or turning ideas into businesses. I guess that is the same for a lot of US and European startups, but relatively it’s tougher here for the founders. They just don’t have the education levels here or the experience of being in a competitive market.”

Buch’s fund and incubator, like Spark in Nigeria, has tended to focus more on entrepreneurs looking for local solutions to local challenges, rather than technology to sell into developed markets: “I’m not talking about the kind of startup in the US that’s making the next Twitter plugin,” he says.

“There are a huge amount of challenges in terms of talent and follow-on funding, but on the other hand, there is a massive, massive market opportunity, because when you go from zero internet to 30–35% mobile internet penetration in four years, there will be massive opportunity for disrupting things.”

Financial services, for example, are ripe for further disruption. More than 70% of Kenyans do not have access to a formal bank account, and despite M-Pesa’s impact on payments, financial inclusion remains a huge social challenge for the country. It is probably in addressing these challenges that the start-up space will find its greatest value. 88mph has invested in transaction businesses, including one, Manyatta Rent, which allows tenants to pay rent through their mobiles.

The knock-on impacts of the current rounds of disruptive innovation could deliver broader social benefits, just as M-Pesa did. Whether they scale and become major contributors to the fabric of the economy remains to be seen.

There are wildly varying statistics, but youth unemployment in Kenya could be anywhere between 1.5 million and 10 million people. Youth unemployment in Nigeria could be as high as 70%. Economic growth has not had a transformative impact on job creation in either country, and although information technology can create high-quality jobs, whether, as the Kenyan government hopes, it will solve a growing employment gap is far from certain.

  • By Peter Guest
  • 09 Oct 2013

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 164.80 545 9.83%
2 BofA Securities 139.54 459 8.33%
3 Citi 128.00 437 7.64%
4 Goldman Sachs 99.84 283 5.96%
5 Barclays 92.11 342 5.50%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Deutsche Bank 9.11 38 6.62%
2 UniCredit 7.52 36 5.46%
3 BofA Securities 7.39 29 5.37%
4 BNP Paribas 7.38 42 5.36%
5 Credit Agricole CIB 6.01 35 4.37%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Credit Suisse 3.10 7 9.18%
2 JPMorgan 3.10 21 9.18%
3 Citi 2.87 19 8.51%
4 Morgan Stanley 2.81 15 8.33%
5 Goldman Sachs 2.43 15 7.19%