International Growth Plays
Outbound, within Africa
“So if you want to run a business that has 5 million customers in Africa, you need to be in at least three countries.” - interviewee
African scale-ups are forced to be born ‘global’
As indicated in the Scale-up DNA section of this report, to reach a tipping point in terms of volume of customers and revenue, many fledgling companies internationalise well before their counterparts would in non-African markets. It’s one of the stand out idiosyncrasies of the African scale ecosystem. Research on 'Born Global' companies confirms the size of the domestic market has been shown to have an impact on the frequency of born globals within specific geographic markets.
“The time needed to expand an African startup has compressed drastically in the past five years. I have a company I'm working with that hasn't even announced their seed round, and is operating in Nigeria and Kenya. But operating in these countries is very different, compared to South Africa or Egypt.” - interviewee
“In Africa, you need to be in Kenya, you need to be in Ghana, in Tanzania, in Uganda to be able to get a critical mass. And the reason is because of those constraints around people having access to smartphones, income and so forth. So the capacity of the society is that only a few can afford this proposition. So you might get some in Kenya, get some in Uganda, get some in Tanzania, get some in Rwanda, to be able to build that decent base to run a business that is profitable on a sustainable basis.” - interviewee
Expansion comes with different - sometimes competing - risk factors. Ventures can hedge their ‘uncertainty risk’ by pursuing geographic diversification. Market diversification mitigates against shocks in one given market, which can make startups appear more stable. They do this due to the high levels of uncertainty present in many African markets: of regulations, of exchange rates, of political stability, and more. An interviewee told us that “it's a way of building antifragility into the business”. Expansion comes with added complexity and increased costs, which typically is associated with high-risk and increased potential for failure.
Expansion pains are predictable, if not entirely preventable
“You need to scale into other markets, if you want to get growth. There's a lot of pieces to put together.” - interviewee
“Building products for Nigeria and Ghana will have different models, because your customers are different in each country: they have a different relationship towards trust and other underlying barriers. How you communicate your value proposition, model, market strategy, or sales pipeline is different in each of those markets, because the context is different, the customer context is different. - interviewee
Research literature on the international activities of scale-ups is limited. What exists emphasises constraints, including lack of economies of scale, lack of financial and knowledge resources, and risk aversion. Going international increases risk because smaller ventures are less able to manage the uncertainty and risk than larger, more financially secure and experienced firms. More limited resources to cope with adversity are another factor.
A scaling fintech told us that going across markets is incredibly difficult with huge complexity and cost for every market.
“Navigation is a mix of trial and error, ensuring the right relationships are being built on the ground with service providers, law firms, public policy firms, logistics providers, people connected in the banking space. A lot of doors can be opened by people and relationships in Africa - building those key relationships early on, before entering the market, reduces some of the complexity.” - interviewee
Advance clear strategies to dictate future out-of-country manoeuvres
Strategy determines the patterns of internationalisation. The speed, scale, and scope of internationalisation are important dimensions from the perspective of firms’ behaviours and activities.
There’s an incorrect assumption that markets within the same geographical region are similar and that products are transferable between them. There are certainly similarities between different countries, especially within the same region. For example, most of Latin America is connected through a shared language and cultural norms, and both Southeast Asian and Middle Eastern countries possess (some) cultural similarities. But these similarities may be misleading, and can perpetuate a myth of uniformity - an artificial sense of connectedness when in reality the similarities exist on a surface level. It can be very dangerous to rely solely on perceived similarities in determining an addressable product market.
Scape Up Nation suggests that going international requires selecting the right entry mode, selling direct - at least initially - to get unfiltered customer interaction and feedback, and fostering local entrepreneurship while maintaining “one firm”. This requires combining local adaptation to cater to local market requirements with cross-country synergies and brand consistency. Success needs “growing multiple crops”, i.e. experiment to ensure rapid learning. Throughout, management needs to solve competing priorities between home and abroad and ensure real commitment of senior leadership.
Aside from where to expand internationally, another consideration for startups that pursue international expansion is how to make such expansion additive. In theory at least, the company should have proved or disproved certain hypotheses in its home market, and developed insights, playbooks, and processes that allow it to operate more efficiently in a new market. Successfully doing so can make a startup attractive to investors as financial advisor Victor Basta explains:
“Investors have a very wide spectrum of appreciation and views about international expansion. Some view it as essential to build out a platform, others only look at the negative of the incremental cost…If companies can go to an adjacent market and show that their cost of building out a certain size customer base is materially lower than their home market…that’s a proof point for a positive EBITDA economic expansion, which a lot of investors are particularly concerned about.”
If a company initially foregoes a deeply localised product approach to cater to the needs of users in several countries at once, it’s likely the company’s product won’t get the initial boost of domestic engagement and adoption needed to get it off the ground. The product could be killed before it even has a chance to scale because it will be diluted to the lowest common denominator between its multiple target countries, and won’t be differentiated enough for consumers in the home market. Bottom line: it’s a formidable path to scale a company internationally, and it’s important for both founders and investors to carefully consider the tradeoffs involved in thinking locally versus globally to give a startup the best possible chance to succeed.
The other side of M-PESA
M-PESA, the oft-heralded east African success story, expanded to the South African market in 2010. It was operational for six years. Only about 76,000 users actively used the product. Among the reasons M-PESA failed was a misunderstanding of how the product could and would be used in the South African market. In East Africa, it served large portions of the population who were lower-income and did not have access to any alternative financial services. South Africa had a significantly higher banking penetration and stringent banking regulations. It is also worth mentioning that Vodacom, the local telecoms partner, had partnered with South African bank Nedbank, a bank which caters largely to middle class and wealthy clients, rather than lower income and unbanked clients.
Ventures should determine global, regional or local approaches
The book Out-Innovate suggests that innovators need to evaluate their industry dynamics and understand the likelihood that a global, regional or local model will win the market. He suggests that, assuming resource intensity is high, network effects are global, and there are limited local complexities, then innovators should scale as fast as possible to responsibly capture as much global share as possible before someone else does. If the opposite is true - if there are regulatory barriers, low resource intensity, or more regional network effects, the ventures should instead focus on their regional or local markets. Most markets are in the middle.
10 Outbound intra-trade considerations
We have summarised 10 ‘outbound’ intra-trade considerations in Figure 39, as an acknowledgment that few African ventures are actually trading successfully in international global markets.
Figure 39: Outbound intra-trade considerations. Source: Systemic innovation
A number of important factors that could be considered when prioritising and staging expansion plans include:
1. Avoid uniformity
Evaluating industry and market dynamics is critical to determining strategy, as is developing products or services that localise easily. Uniform approaches which do not assess specific peculiarities may have limited success.
2. Undertake research
Scaling is extremely difficult regardless of where the venture is based. To face the hurdles surrounding scaling a company head-on, founders and investors must be vigilant and thoughtful in their product research from day one. This means using market research and customer research as a point of departure, and technology solutions and products as a destination.
3. Plan your strategy
Founders must decide whether to employ a local, regional, or global strategy from the onset, as indicated by Figure 40. They must understand which markets serve as teasers, which are “must win”, and what an expansion roll-out looks like over time (as these decisions drive hiring plans, capital raising, and product development). And clearly identify which countries are part of their “good market” for future growth, and determine which countries share similar needs. If a common need exists across countries, a product can be tweaked to reflect small cultural or consumer differences. But, if there is not a common need across countries, a product that is localised to one country cannot and will not scale to another country. Taking the time to plan and define a market upfront is the best way, and the only way, to fully achieve product-market fit and build a company that is scalable. Ideally, for successful expansion, a venture should have proved or disproved certain hypotheses in its home market, and developed insights, playbooks, and processes that allow it to operate more efficiently in a new market. Too often, companies underestimate the risk-adjusted cost of expanding from one end of the continent to the other.
Figure 40: Local versus global winners Source: Out-Innovate
4. Glocal organisational factors
Combine global expansion expertise with localised ownership strategies. Local leaders need to lead the operation, building off relationships with ecosystem players.
You need to understand the context in which you're building, you need to understand the cultural nuances, you need to understand the infrastructure gaps, and other slight differences. And without that in-market insight, you would not be able to understand the barriers that your portfolio is facing and why adoption looks different in one market versus another. - interviewee
5. Triangulate the truth
An interviewee told us that “even when working with professional service providers, you still have to double and triple check the advice.” A venture may need to use multiple service providers in the new country to provide legal opinions, then “triangulate the truth” from them.
6. One country at a time
Get one country right. Then get the next one right. Know that you'll learn every time you do it. There'll be slight tweaks. Scaling across countries is much easier if they are proximate, not only physically but culturally and administratively.
7. Don’t go into a new market unless you can afford to hire experienced (new) people to lead the process
The amount of management time and focus spent on internationalisation is completely disproportionate, and runs the risk of the business failing because they can't focus on their day jobs.
8. Build an adaptable product (and localise)
Modulate for different price points, adapt to local languages, tweak to reflect varying customer needs.
9. Leverage partnerships and networks
Especially with corporates that already have an established presence in the new market, and can provide solid advice on setting up correctly. Navigating growth around partnerships is a subject that came up frequently in our interviews and the founders workshop we hosted in March 2022:
“I think from a scaling perspective, we need international partners. We need partnerships so our unique niche ideas can be grown, so we can accelerate into markets quicker, and have the depth of expertise and know-how to reach markets easier.” - interviewee
“Oftentimes successful companies can scale by finding strong partners in the regions they want to target. We have found this to be imperative for scaling in Africa; however, finding the right partners to assist with an expansion can be time consuming, nuanced, and difficult.” - interviewee
“Partnerships are key - the continent is huge - so you need to partner with telecoms and those sorts of businesses to have reach.” - founders workshop participant
“Successful companies can scale by finding strong partners in the regions they want to target. We have found this to be imperative for scaling in Africa; however, finding the right partners to assist with an expansion can be time consuming, nuanced, and difficult.”
10. Build (and document) institutional memory
Document the learnings and turn them into playbooks (based on lessons learnt): As a fintech founder told us, “We don't skip steps in the process; it makes it faster (as we don't make the same mistakes twice)...it’s easier and faster to execute, and ensures diffusion of knowledge.”
Solving at the Ecosystem & Systems Levels
A new book from the World Bank, Africa in the New Trade Environment: Market Access in Troubled Times, points to several pathways to help African export woes, including tapping into trade with Asia, specifically targeting its growing middle-class. This assumes that the combined challenges of low economic density, long distances to world and regional markets, and thick borders can be overcome. These are all high hurdles.
An International Trade Centre dedicated solely to supporting African scaling ventures with a specific, practical, and actionable remit to help connect these firms with new markets would be encouraging. Too often support remains policy-orientated alone, with few short-run (practical) outcomes. Simple steps would include developing basic guidance tools and making them widely available and accessible. African governments have within their ability to design simple digital market expansion toolkits (per country), enable access to government services, and catalyse hands-on operationalisation support to a targeted number of scaling firms. Such efforts are likely to help achieve African trade goals more quickly.
“So many companies are trying to make that jump so early in their journey, and there's probably a need to help them navigate this.” - interviewee
One basic challenge is that not enough guidance and support exists to help companies seeking to expand into new markets. Information is opaque, and dedicated assistance conspicuous by its absence. Signposting and support mechanics will help reduce information asymmetry and increase awareness of how to navigate the complexities.
“Across the continent there are scaling needs, but there are logistical nightmares, in the sense that just transporting goods across continents is hard. There's visa requirement problems. And different rules or standards across these countries. Sometimes it can be easy to open a company but hard to get a bank account, or vice versa. The rules are just divergent. Most legal services in these markets are not built for foreigners. They can charge an exorbitant price. We don't have a central repository of information in most countries. You need to go to a lot of places to find it”. - Interviewee
Some smart new ventures, such as Norebase, which serves 12 African markets, are capitalising on this (wide) knowledge gap.
Governments must ‘walk the walk’ to enable trade for scaling ventures
Governments can help themselves by standardising their processes, increasing efficiencies, and improving transparency in their processes (with clear timelines). Some Governments (such as Rwanda) have significantly improved their coordination activities.
Rwanda Development Board
The role of the Rwanda Development Board is to simplify the investment process for those looking to do business in the country. It brought together all the agencies and investors with which investors had to interact under one roof. It’s a one-stop shop providing access to information such as taxes, licences, immigration, utilities, mortgage restrictions, and many other services. It has made the business environment more efficient and the processes transparent in the process. Whilst its regulatory reforms in the business environment have been found to present a mixture of true progress and window dressing, coordinated systems-led efforts such as these indicate what is possible, even if there is more work to do to encourage private sector transformation and reducing the domination of government-related companies.
Other solutions include the following:
Design sectoral collaborations: Greater emphasis on sharing service providers, like lawyers and accountants, and knowledge exchange on regulatory requirements in different markets. During our Investor Workshop held in March 2022, more co-investing (between regions, and pan-African) was recommended. A scale up coach we met proposed the development of smart interventions to shrink the gap, cost and risk of scaling internationally.
Improve access to established networks: Some public-private partnerships exist to support startups, such as Go Global, which aims to provide early stage startups with the tools needed to expand globally via the UK; one of the few implementation programmes that exists which is dedicated to supporting scaling ventures. Others, such as Endeavor, already provide help with market expansion (from strategic to super tactical), however only within their networks. A challenge to the organisation would be to deploy concept development exercises with various ecosystem actors to ‘open up’ to see what more can be done further to help pool advice and resources outside of its immediate working circle(s). After all, their mission is entrepreneur first, ecosystem second, then Endeavour afterwards.
Advanced technology solutions: Smart contracts are contracts whose terms are recorded in a computer language on the blockchain in a distributed ledger system, instead of in legal language in a written document. Potential benefits include low contracting, enforcement, and compliance costs; making it economically viable for numerous low-value transactions. As contract terms are triggered automatically once specific requirements are met, this reduces human engagement, which drives down costs and importantly reduces the potential for corruption. Some efforts are underway. Sierra Leone has a five-year plan (2018-2023), supported by the World Bank Group, to reduce the time and costs needed to move goods across its borders. The goal is to reduce trade costs by 10%. Blockchain is already emerging as a key tool in stamping out corruption and waste, improving traceability, and has the potential for many other applications including combating tax avoidance, and providing greater transparency and public accountability. Greater shared learning around digital transformation efforts (what is working and where improvements are needed) may prove to be highly beneficial to a range of audiences.
