Most investors in the US or Europe would think it was crazy if their pre-seed or even seed stage company was planning an international launch. The advice would likely be: stay focused, prove product-market fit first then think about international expansion at your Series B round.
For financial companies with the extra burden of regulation and licensing in new jurisdictions it is even more daunting to consider international expansion than it would be for, say, e-commerce or other digital sectors.
We think they (African startups) play by a different set of rules when it comes to finding “product market fit”.
But this is exactly what we are seeing in the African markets. Many startups are launching in multiple countries and even crossing over oceans to launch on multiple continents before their Series Seed or Series A rounds. What is driving this trend? We at DFS Lab think it is because product-market fit has a different definition in the context of the many small economies that comprise Africa vs the definition in larger economies.
First, let’s look at some data to show what we mean:
[caption id="" align="alignnone" width="1200"] Photo: DFS Lab[/caption]
We put together the above table looking at the biggest fintech startup investments in Africa in 2018. We were curious about geography and multinational expansion. A few trends stand out.
First, the majority (7 out of 13) of the biggest deals in African fintech over the past year are series A or series Seed. The sector is growing fast and new companies vastly outnumber old ones — much like a country undergoing rapid population growth where most of the population is still very young.
It’s an exciting time to be in fintech in Africa!
A second interesting pattern; we see that most (4 out of 7) of these newer Series Seed/A stage companies had already expanded to multiple countries before their latest A/Seed round. The average for these companies is to be active in 3.1 countries by the time of their raise.
- Number of countries active: 23
- Average for all companies: 4.5
- Average for companies’ Series Seed and A: 3.1
This phenomenon is puzzling. And it mirrors what we see in the DFS Lab portfolio. Many of the companies we support are considering international expansion from the very beginning. “Can you help us with introductions in Pakistan and Indonesia?” was the question from one of our Africa-based portfolio companies. At the time, they had managed to close only a handful of customers with a completely manual, spreadsheet-based product (they purposefully hadn’t even written any code!).
So what is going on?
There are a few hypothetical forces that could be driving this trend.
Force # 1 — companies in Africa often go longer before raising institutional capital so may be further along by the time they get their Series Seed than companies in other geographies — i.e. they may have already demonstrated some form of product market fit and be focused on scaling before they get their first round of venture investment. We think this force has something to do with it but is not the main driver.
Force # 2 — the basic economic imperative to find a large enough addressable market to justify venture investment is driving companies to expand internationally before they truly find product-market fit. *Most countries in Africa are too small of a market to be interesting on their own. For comparison to US-based landmarks: Kenya’s GDP is just bigger than Jacksonville FL and smaller than Louisville/Jefferson County. Even Nigeria — Africa’s largest economy — has a GDP only a bit smaller than Boston, MA. Very few startups in the US would attempt to raise venture money claiming they were only going to target a single mid-sized US city — they must target them all. And so it goes with African startups — they must target the broader continent and even beyond to find a big enough market to be interesting to international venture investors.
*Kenya GDP 74.94 billion US dollars in 2017 — just bigger than Jacksonville FL at 71.4 billion and smaller than Louisville/Jefferson County at 74.95 billion US dollars in 2016 ; Nigeria GDP 375.77 billion US dollars in 2017 — just bigger than Atlanta, GA at 363.7 billion dollars and just smaller than Boston, MA at 422 billion US dollars in 2016
Force #3 — one theory is that lower labour costs and greater similarity of regulations and customers across countries make its easier to go from one country to the next in Africa than it would be to launch in a second country outside the US. Even if this is partly true, there still appears to be a lot of complexity in launching in a new market with new regulations, languages, and incumbents to deal with. We don’t put a lot of stake in this theory.
Is this trend positive? We hear this question often but we think it's the wrong question to ask. To the extent the trend of launching in multiple countries is driven by the economic imperative of force # 2, it will be the reality many startups face. But what advice do we offer founders wrestling with the question of when to expand and how?
Everyone will answer this question differently, but we have a few observations.
First, we believe the right way to think about this issue is in the context of product market fit which (some investors would say) is the primary mission of a Series Seed/A stage company.
Marc Andreessen is often credited with coining the term PMF (Product-Market Fit) in this post. He defines it as 1) being in a good market with 2) a product which can satisfy that market. People tend to focus on part 2) — whether the product sells or satisfies customers because that is what they can control. But being in a small market is often more damning because you can’t do anything about it. In the context of this post, it’s about proving whether you can satisfy customers in more than one market to prove you have both a good product and a large enough market.
If I have a product that is loved and rapidly adopted by the 15% of Kenyans who have a smartphone but doesn’t work elsewhere due to different market conditions or consumer habits, I don’t really have product-market fit to a good (large enough) market.
Asking the PMF question in this way positions the international expansion question much earlier in the growth cycle of the company at the stage before product market fit rather than at the scale stage.
As I said above, each founding team will answer this question differently and there probably is no right answer for all. On the list above we see Cellulant in 11 countries by the time of their recent Series C while M-Kopa is only in Kenya and Uganda with many more rounds and dollars raised under their belt. Paystack’s recent series A is a good example — though they were only in Nigeria as of the raise, the press release states the main purpose of the series A investment is to scale to other countries.
At DFS Lab we focus on supporting our portfolio teams so they can make the best decisions for themselves and offer resources that help them in that journey.
Examples of ways we try to help our founders with this choice include:
- We connect our portfolio with other successful founders who have pursued a multi-country strategy (e.g. connecting them with CEOs of some of the companies in the above table). Authentic advice from someone who has been there is sometimes the most helpful thing.
- We help teams set up learning trips and make intros to other markets. We’ve even gotten a few invited along on paid learning trips to China or Silicon Valley to get inspiration (e.g. with Pezesha who went on the Caribou Digital Live Learning trip to China)
- And we sometimes ask the natural question “Is it too soon to expand?” Rather than risk going off the rails trying to expand into multiple markets early — just tell the story of how that happens while focusing your real energy on getting things right in your home market.
Whatever teams decide, they can’t lose sight of the need to always deliver a product that customers want and make sure they can do that reliably. For African teams, this may mean focusing on customers next door, or those across the continent and beyond.
This article first appeared on Jake Kendall's Medium and was republished with his permission. Jake is the Founder and Director at DFS Lab, an early-stage accelerator that supports entrepreneurs in Africa and South Asia to refine, grow and launch fintech businesses in emerging markets.