The Africa SMME Tech Report

Issue No. 8. Africa-Middle East small business tech news for 28 June 2021. This edition features Tabby, Tamara, Spotii, PayFast, DPO Group, Kune Food, OZÉ, and more...

Will Tabby’s Fresh $50M Be Enough to Win in MENA BNPL Market?

MENA regional BNPL platform Tabby recently raised $50 million in debt capital, a move that comes soon after poured $110 million into Tabby’s regional rival Tamara.

The new round comes from Partners for Growth, a San Francisco-based firm that specializes in financing both venture and non-venture-backed companies across the globe.

We gleaned from PFG’s website that it focuses on financing growing companies in technology, life sciences, and health care, with annual revenues ranging from $10 million to $150 million.

BNPL is a way of financing online (and increasingly offline) purchases where consumers agree to pay off a purchase in equal installments (usually four), usually interest-free. It’s been described as a modern twist on the old layaway model.

All of the recent MENA BNPL funding pales when compared with the valuations of the major global BNPL players, which keep climbing into the stratosphere.

A case in point is Klarna. The Swedish BNPL company, launched in 2005, raised $639 million in equity earlier this month. This comes after raising $1 billion in March. Klarna’s valuation is now $45.6 billion, up from $31 billion in March.

Valuations for the MENA players remain unclear. We know from the Spotii acquisition that the company had an enterprise value of $20 million, making it a relatively small player in the market.

Spotii will continue to compete as Spotii in the MENA region, with the full backing of its now 100% owner Zip, an Australian BNPL that has been an investor in Spotii.

As the above chart shows, there are at least eight companies competing in the MENA BNPL market.

BNPL has grown dramatically in popularity, spurred on by a growing consumer disdain for existing credit models. BNPL is particularly popular among younger consumers — GenZs and millennials — who are acutely averse to revolving debt. Afterpay founder Nick Molnar refers to this as the “debit economy.”

The pandemic accelerated BNPL, largely because it accelerated eCommerce generally.

So how should we read Tabby’s $50 million debt round? Generally, funding events are celebrating in the startup community. And generally for good reason. Companies need capital to scale quickly. Especially in a land-grab situation like MENA’s BNPL space. But equity rounds are dilutive and debt rounds are, well, debt.

Last week we reported that Tabby has launched a loyalty programme, aimed at driving more repeat use of its BNPL solution. One and done purchase, vs having consumers use the service over and over, is a challenge facing all BNPL platforms.

The new loyalty programme gives customers actual physical cash that they can either use to fund new purchases, settle future payments or just put in their bank accounts. No doubt funding new purchases is the programme’s prime objective.

As for the recent debt round, it appears as though Tabby needed the money, at least in part, to keep funding consumer purchases. Not shocking given how this business requires funding consumer purchases upfront, de-risking the model for the all-important merchants who offer BNPL as a payment option for consumers. BNPL dies without merchant partnerships.

“Partners for Growth’s investment will bolster tabby’s capitalization to expand lending capacity and support the company’s growth. The vision is to grow the size of the facility as Tabby’s underlying sales scale over time,” Tabby offered in a prepared statement.

BNPL is a low-margin business that requires a lot of liquidity. And if too many buyers are one and done, Tabby and its BNPL peers are forced to keep feeding new customers into their platforms. This can become difficult to sustain over time.

We will keep a close eye on this market. Tabby and Tamara, by dint of their fundraising at least, seem to be leading the field at the moment. But we also wonder if global players like Klarna, Affirm, or Afterpay might not look at MENA and see an opportunity to consolidate a lucrative region that has clearly embraced their business model.

PayFast Founder Announces Departure

PayFast Founder & MD Jonathan Smit announced on LinkedIn that in August he will be leaving the company he founded. The announcement suggested that a difference of opinion with current owner DPO Group influenced his decision.

PayFast offers an online payment solution for merchants. Smit founded PayFast in 2007 in Cape Town along with Andy Higgins. Smit’s departure comes almost exactly two years after Kenyan PSP DPO Group acquired PayFast.

In the LinkedIn post, Smit reflected on the company’s 14-year journey. For starters, PayFast’s sector didn’t have the profile it does today.

”Things look very different now to what they did a number of years ago,” Smit wrote. “FinTech is sexy, eCommerce is booming and the future looks bright!”

He also reflected on the personal sacrifices and struggles involved in building a business.

“The journey to build this business has been a hard one. Building payments businesses is tough (Luckily, I was naive when I started...). They are fraught with complexity, regulation, and risk (Not to mention all the other factors which make starting and building a business daunting!). This took an incredible toll on myself and my partner in life for most of the journey,” Smit wrote.

He then suggested the real reason for his departure.

“Among other factors, that toll sent myself and the business on a corporate journey in the last few years which, in hindsight, was not right for me. The business continues on a strong trajectory on that path, but with the understanding that that path isn't for me, it is time for me to give thanks and move on to other things.”

It’s not hard to read between the lines here. Founders who sell their companies often don’t stay much beyond their lock-in period. And in this case, it seems clear that Smit isn’t on board with the direction DPO is taking the company.

We reached out to Smit to ask him to clarify the reason for his exit as well as to tell us about any future plans. He hadn’t replied by the time we published the newsletter.

Join the Conversation: Is Remote Work Straining the African Tech Labor Market?

Internet legend Marc Andreessen recently wrote a piece where he declared the shift to remote work as an even more consequential development than the creation of the Internet itself.

His key point is that remote work obliterates the “geographic lottery” that favors those living in global hot spots for great jobs. Think San Francisco, New York, London, Berlin, etc. This potentially means more opportunities for talented individuals in emerging markets.

We've been hearing for some time that it’s getting harder for African startups to find top engineering talent. Or at least talent they can afford. One reason cited is that many international companies are hiring engineers remotely, driving up salaries in the process.

The talent shortage issue came up on a panel of founders at BigFive Digital’s recent SMME Fintech Summit. You can watch the discussion here:

On the panel, conducted in early March, OZÉ founder Meghan McCormick linked rising engineer salaries to the “globalization of the tech talent market”. She was well ahead of Andreessen’s message. Here is what she said.

“In the last couple of months, we've seen entry-level salaries almost double…So the fact that all of a sudden there's going to be a big acceleration and how much people were willing to pay software engineers, I think it's related to COVID. And to the globalization of the tech talent market. Which is great. We love more young people making more money in the markets that we work in. But it also can be challenging as a business owner.”

Have you been experiencing this challenge? Please share your experiences via the comments button below. Let’s start a dialogue.

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What’s Behind the Kune Food Backlash?

In the last edition of the newsletter, we wrote about Kune Food, a new Kenyan startup that has raised $1 million to disrupt the food delivery space in Kenya. Kune is building its own food “factory” to provide good home-delivered food at lower prices than local competitors like Uber Eats, Glovo, and Jumia.

We reached out to members of the Kune executive team before we published our initial story. We had several questions at the ready but didn’t get answers before we published the newsletter.

We eventually connected and exchange pleasantries with Kune founder Robin Reecht but we still haven’t secured an interview.

The questions we wanted to ask Reecht at the time were focused on Kune’s business model and how it planned to deliver quality food at such low prices. These remain valid questions.

However, the coverage that has emerged in recent days showed that we overlooked a larger point Kune’s funding round raises involving the often delicate politics of start-up funding in Africa.

An article published on Friday in Quartz Africa shared how Kune’s fundraising and how the company has positioned itself has revived the controversy over white privilege in the African tech scene. And specifically, the widely held perception that white ex-pat founders have an easier time raising money than African founders.

Quartz reported that the coverage of Kune’s funding round, and specifically comments Reecht made about his motivation to launch the business, prompted a sharp backlash. Reecht stands accused of raising money to solve a non-existent problem, based on a blithe assessment of the market made after just a few days in Nairobi.

Here is what we wrote last week about the Kune origin story.

It’s the same story, oft-repeated. Each time with a new wrinkle. Entrepreneur discovers a need that cannot be met. Then launches a business to fill the gap.

Such was the case with French entrepreneur Robin Reecht. About six months ago he arrived in Nairobi to do a stint of remote working and found it nearly impossible to get great food delivered to him affordably.

In hindsight, we might have infused this with a little more skepticism.

The Quartz article reported that many Kenyans did give this story the side-eye. The critics, mainly on social media, complained that food delivery is well established in Nairobi, and Kune’s assessment of a market gap was overstated if not just plain wrong.

Many also perceived Reecht’s comments in a TechCrunch interview as tone-deaf. From the Quartz article.

“After three days of coming into Kenya, I asked where I can get great food at a cheap price, and everybody tell me (sic) it’s impossible,” Reecht, who is French, told Techcrunch in a June 17 interview. “It’s impossible because either you go to the street and you eat street food, which is really cheap but with not-so-good quality, or you order on Uber Eats, Glovo or Jumia, where you get quality but you have to pay at least $10.”

Here is just one example of the reaction this story elicited.

Regarding Kune’s investors. The $1 million came from an international group that includes Launch Africa Ventures (Mauritius), Century Oak Capital GmbH (Liechtenstein), and Consonance (Nigeria, Mauritius). On LinkedIn. Kune Foods described its investors as hailing from “South Africa, Nigeria, Kenya, Europe, and the U.S.”

This diverse collection of investors doesn’t fit quite as neatly into the paternalistic Western investor narrative as Kune’s online critics might hope.

Quartz contacted Reecht, who offered a statement of apology. However, he doubled down on the underlying premise of Kune Food.

In a statement to Quartz, Reecht apologized for his comments, expressing regrets about how his message came out, and enthusiasm for Kune and the funding it had received. “This is an industry that is very operations heavy and labor intensive,” Reecht said. “We will use funding to build an entire factory, hire 30 people in production, 100 delivery drivers, 10-15 marketers, 10-15 user experience people, among others.”

We reached out to Reecht again this week. We invited him to come on the BIG5D Podcast to talk about the backlash and explore Kune’s business model further. We hope he accepts.

A charitable reading of Reecht’s remarks might see them just as an eager founder trying to create a compelling story for his startup.

Still, the question remains if anyone other than a white ex-pat founder could have raised $1 million for this idea, cooked up based on spending just a few days in a city. And, notably, with such a brief operational track record. Kune has only undergone a limited trial of its service, delivering food to a single Nairobi office tower. The full rollout is still ahead, no doubt aided by the $1 million in seed funding.

In fairness to Reecht and Kune Foods, many new businesses will enter a space not to solve a problem for the first time, but to solve it better than those who came before them.

And Reecht never did say Kune Foods would be the first to bring food delivery to Kenya. He acknowledges his competition. He just pledged to do food delivery better, faster, and cheaper. If Kune pulls this off — no easy feat — it may well have a business.

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