During the 2008 financial crisis Warren Buffett famously coined the phrase “only when the tide goes out do you discover who’s been swimming naked.” What was true a decade ago has been amplified with the current global economic crisis. In 2019, the valuation bubble of global “tech-enabled” business models that extended from San Francisco to Fukuoka quietly burst, exposing fundamental flaws in numerous global tech giants’ business models. Uber, Lyft, WeWork and Oyo to name but a few, raised mid-to-late rounds at astronomical valuations from investors who ignored gross margins, head scratching unit economics and unsustainable business practices in favor of top line “GMV” growth. By rewarding these practices, investors incentivized similar behavior in other venture-backed companies, and encouraged sensational FOMO behavior from investors to whom hype and perceived scarcity mattered more than practical pathways to gross margin profitability.
by Jean-Claude Homawoo, Co-founder, Lori Systems
Later in the year, this folly seemed likely to subside when SoftBank’s Vision Fund I was forced to write-off massive losses from the revised valuation of numerous portcos, a moment punctuated by Masahiro Son apologizing to SoftBank limited partners. At both the Goldman Sachs Private Internet Company Conference last October and Web Summit in November, building sustainable business models dominated the conversation. This reaffirmed my conviction that at Lori we needed a renewed focus on sustainable growth.
Josh Sandler (Lori Co-founder & CEO), Uche Ogboi (Lori COO) and I discussed this with our leadership team and together set out to make the necessary changes across our business to ensure we accelerated this drive to profitability. As the world collectively settles into a new post- with-COVID reality, I am more convinced than ever that for the African continent especially, 2019 holds valuable lessons. We must forgo the so-called growth-at-all-cost (GAAC) strategies in favor of sustainable growth practices, to prevent our fragile African venture and tech ecosystem from suffering similar shocks which could have devastating consequences to our collective tech-fueled ambitions.
It’s hard to fault investor enthusiasm for the Africa tech opportunity. After years of false starts, 2019 was a great year for tech on the continent. According to Partech’s Africa Report, 234 companies secured US$2.02B worth of investment, with Kenya and Nigeria emerging as premier investment destinations on the continent. As African start-ups like ours began to mature, global players such as CZI, a16z, DST and Goldman Sachs began investing. The entry of global venture investment actors into Africa’s fundraising market is a positive sign for the continent, flipping the script on the traditional narrative that African companies are not a fit for elite venture capital firms.
The opportunity is undeniable, but as Lauren Cochran notes, GAAC-scaling loss-making businesses in this environment is an “unsustainable concept”. GAAC of high-tech, high margin businesses has its merits, but this is a new breed of models. Tech-enabled companies that build software with physical world realities have different economics, and GAAC for that subset of business models never made sense, in any region. And yet less than a year after those high-flying startups were reappraised, we continue to see investors and founders, including in many of the worlds fastest growing markets, make poor decisions that will endanger not just the health of their own businesses but that of their ecosystems as well.
Of the countless 2019 startup horror stories, WeWork ticked the box on all the cautionary tales. Questionable accounting, unsustainable valuation growth, scheming investors, and unethical business practices punctuated by an 87% valuation drop all feature in this story. A recent Forbes India article chronicled Oyo’s story as another case in point. Oyo’s destructive unit economics turned a 4.5x increase in consolidated revenues for the year ended March 2019 into a 7x increase in losses to $335 million.
What happens at Oyo matters for the start-up ecosystem in India, but it also matters far beyond. If Oyo, India’s third most valuable start-up with venture funds including Softbank, goes bad, it will have far-reaching consequences for other emerging market startup and venture ecosystems. On the heels of the 2019 masterclass, and with the COVID pandemic adding uncertainty to already unreliable capital markets, we continue to see companies live dangerously, pushing flawed growth strategies that mortgage the future health of their businesses to deliver vanity metrics today.
At Lori we’ve forced ourselves to think carefully about what sustainability means in the context of building a globally leading e-logistics company that lowers the cost of goods in many of the worlds fastest growing markets by delivering 10x efficiency improvements with technology — a $200B market in Africa alone. We have been able to build a business that prioritizes longevity, while driving rapid growth and expansion by avoiding shortcuts and prioritizing innovation, which often requires extra effort and strategic design. To us, building a market leader will involve a focus on sustainable growth, unit economics, and scale through technology to ultimately impact the billions we serve across our focus markets.
How tech in Africa plays out in this new decade is anyone’s guess but in companies like Paystack, Trella, Sokowatch, Safeboda and many more, we see peers that collectively carry the ambitions of the next generation of entrepreneurs. With this comes the responsibility of building startups that create value, grow, exit and provide returns to shareholders while inspiring and funding the next generation. In their HBR article titled Building a Startup That Will Last, Ken Chenault (former CEO of American Express) and Hemant Taneja (Managing Director of General Catalyst) emphasize that “the potential for career-defining gains got the best of many investors and advisors, and [they collectively] failed to coach founders on the fundamentals of sustainability. We are only now recognizing how untenable the “move fast and break things” attitude was to become”. Founders cannot build sustainable companies alone, they need investors to have the right incentives and reward sustainable business models over those that mortgage the future for short term gain. Only then will we make strides in building and scaling resilient frontier-market companies that can scale beyond the continent, generate alpha and set a new standard for African tech.
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