Lessons on closing the “Pioneer Gap” for African Fintech Companies

East Africa has led the world in the rapid expansion of financial inclusion over the past decade. In 2007, Safaricom launched the mobile money platform M-PESA; by 2009, 40% of Kenya’s adult population was using the service to save and send funds to their friends or to the local grocery store. Today, that number is at 75% — an astronomical pace of progress for an emerging market economy.

Yet does financial access equal financial inclusion? People across East Africa can now make payments using their mobile phone, but true financial health only begins there. As just one example, smallholder farmers, who provide 80% of the food supply in sub-Saharan Africa, need access to credit, tools to build short-term savings, and the ability to access short-term loans to help families survive difficult economic shocks and build wealth.

Entrepreneurs can make a difference — and institutions can help

This kind of transformational access to financial inclusion requires bold new solutions, and an emerging generation of entrepreneurs are tackling them.

Last year, in partnership with The MasterCard Foundation and the DOEN Foundation, Village Capital ran a program to identify and support entrepreneurs from Sub-Saharan Africa who have the potential to increase financial health for smallholder farmers. We asked two questions:

1. What are the opportunities that entrepreneurs are pursuing that increase the financial health of smallholder farmers?

2. What barriers are holding back these entrepreneurs from success?

Out of that program came a white paper, Breaking Barriers: Enabling Scale for Digital Finance Innovations for Smallholder Farmers in Sub-Saharan Africa.

Source: Village Capital

In this paper, we’ve built on the work of Mercy Corps, The MasterCard Foundation and others to identify areas of most promise — and disproportionate impact — that investors and ecosystem players who care about financial inclusion should focus on. Drawing on interviews with our entrepreneurs, we highlighted the most persistent barriers to success for entrepreneurs and propose solutions.

Promising areas of opportunity

Despite the growth of impact investing and active interest from the private sector in entrepreneurial solutions, the reality is that not all “Fintech” startups in East Africa are ready for commercial, non-concessionary returns — at least not yet. But with the right support and investment along the way, they can be.

As one example, take M-Kopa. The fastest-growing startup in East Africa, M-Kopa has provided financing for solar energy to 300,000 homes (and is adding hundreds each week). The company recently raised $19 million from Generation Investment Management (co-founded by Al Gore), Blue Haven Initiative, Richard Branson, Steve Case, and others — investment that is seeking non-concessionary, market returns. And we have faith that M-Kopa can deliver exceptional returns to investors — now.

M-Kopa’s journey to commercial investment didn’t happen overnight. M-Kopa and the larger ecosystem of pay-as-you-go solar companies has received millions of dollars in “pioneer gap” grant subsidies from the Shell Foundation and others over the last eight years. Besides M-Kopa, these subsidies are paying off in promising enterprises such as Off: Grid Electricin Tanzania and Simpa Networks in India. In each case, grants brought the companies from the early pilot stage to raising investment capital.

Categorizing FinTech companies in Africa

In 2015, Mercy Corps (drawing on work by Vodafone and Accenture) mapped the digital financial and non-financial services space in Kenya and categorized subsectors as maturing, emerging, and nascent. Companies in the nascent and emerging areas will likely require grant subsidies to get to a point where they are ready for non-concessionary returns.

1) Maturing: Mobile payments, mobile vouchers, savings, mobile-based agricultural information services, traceability systems.

2) Emerging: Micro-insurance, lending, digitally supported agricultural extension services, farmer helplines, smart logistics, trading capital

3) Nascent: Supplier management, distribution management, cooperative management systems, tendering platforms, bartering platforms.

Companies in the emerging and nascent spaces require support from investors, grant makers, and development institutions to get them through the pioneer stage, and that’s what we focused on in selecting companies for the Village Capital 2015 Fintech for Agriculture program. Atikus, for example, provides insurance to small business lenders focused on agribusiness. Farmerline offers a digital agricultural extension service to farmers in West Africa. Mifugo.trade is a tendering and bartering marketplace for cattle, which is a billion-dollar market in Kenya alone.Chamasoft helps digitize “chamas”, or informal savings groups that 70% of Kenyans are estimated to belong to, in order to build wealth. Farmdrivehelps farmers build credit scores for lending based on production.

Through in-depth interviews with companies who are scaling — and ones who are not — we identified three barriers that ecosystem support leaders should focus on in order to build companies that improve the financial health of smallholder farmers:

Barrier 1: Talent Acquisition and Management

In a 2015 study of 197 enterprises, “Show Me What You Can Do,” Village Capital and the Shell Foundation found that despite the conventional wisdom that “the people make the company”, 90% of CEOs of small and growing businesses do not consider hiring a strategic priority, and 63% do not budget any time or money for hiring. Companies in East Africa in financial inclusion particularly struggle in finding team members with core financial management capacity. Companies often also face a chicken-and-egg problem: private investors want to see great talent, but companies — before fundraising — cannot afford good teams.

Solution: prioritize human capital as a strategic priority

To help companies hire better, grant makers and investors ought to consider (as leaders such as Shell and DOEN Foundation have done) the cost of human capital in grant or investment support. This help in building teams to attack private investment could play a huge part in closing the Pioneer Gap across the continent.

Intermediaries focused on helping companies build human capital should be as abundant as those focused on financial capital and fundraising. The Aspen Network of Development Entrepreneurs and Argidius have recently launched a talent challenge focused on supporting these intermediaries; and organizations such as Shortlist, Edge, and Impact Business Leaders (all of which I’ve helped advise) are examples of emerging talent solutions in the last few years.

Barrier 2: Channel access

In the US, consumer technology often suffers from “app overload”: any new app needs to grab consumer attention in a crowded app store.

Fintech solutions in East Africa suffer from a symptom of the same disease: consumers need to quickly understand what a technology solution is trying to do, and any solution needs to work with dozens of other solutions that are also competing for their attention.

For example, in Kenya, channel access and opportunity for interoperability are still constrained by large incumbents. Though M-Pesa has extended financial access to millions of people, the way that parent company SafariCom currently manages access and integration with its platform may hinder “what’s next.”

Agrilife Limited, for example, has proven to be a critical digital extension service for farmers, offering payments, supply chain tracking, and information all in one stop — yet they need to market the product individually. SafariCom’s USSD channel currently only hosts one product, SafariCom’s own “M-Shamba” which means that many users don’t even know that the agrilife option is out there. If it functioned more like a Google or Android “app store,” entrepreneurs would have the freedom to compete for customer’s attention, and services could be better integrated by the teams that execute best. (Full disclosure: Village Capital’s alumni company Lipisha, along with other startups in East Africa, recently sued Safaricom for monopolistic behavior.)

Solution: More partnering from startups, and open infrastructure from institutions

Entrepreneurs out to to approach big companies from a perspective of partnership, not competition. Any startup that needs to build productive relationships with major market players in order to scale needs to keep the value-add to these players in mind early-on. M-Kopa, for example, has developed a value proposition so attractive to Safaricom that their target product is co-branded.

And major market players need to understand that entrepreneurs can help their ultimate goals. For example, if Safaricom were to reduce barriers for startups to display on their USSD channel (a rough analogy for an app store), they would likely have considerably greater services to offer to customers — increasing mobile phone usage, M-Pesa transaction value, and revenue.

Barrier 3: Access to appropriate capital

Part of the promise of private investment in entrepreneurial solutions to poverty is that private capital can support companies more effectively and sustainably than philanthropy. Yet many investors have taken this promise and turned it into mismanaged expectations. Private investors are using Silicon Valley-style term sheets, with Silicon Valley return expectations. But as mentioned above, the best-performing companies had initial funders with a more long-term view, and are now raising serious commercial dollars.

Solution: Alternative investment models

Investors in Sub-Saharan Africa should explore new and creative ways to de-risk investments in early-stage companies. Firms such as GroFin and even Kiva have offered debt structures, revenue-sharing agreements, and royalty-based financing for early stage companies. In agrifinance, revenues are semi-predictable and success is likely more reliable than in Silicon Valley, but 100x exits are not possible. Investors who innovate on different structures of capital — not just the products and services of their investments — will be successful.

“It’s always impossible until it’s done”

It might be time to celebrate a victory on access to financial services that we never thought possible in East Africa — but it’s not time to declare victory on financial inclusion yet. Investors and ecosystem players need to think differently about human capital, partnerships with incumbents, and investment structures in order to be successful. But as Nelson Mandela once said, “It’s always impossible until it’s done.” A decade ago, 75% access to formal financial services in East Africa would have seemed impossible. True financial inclusion is the next barrier.