Wednesday, 25 January 2023 05:23

The African founder’s dilemma: To internationalise or not?

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In Africa, only some ventures can achieve the consumer and market reach required to be successful solely in their own domestic markets. As a result, they are often required to internationalise much earlier than is the norm in developed markets. Paradoxically, this comes with additional costs, complexity and challenges.

Business conditions in most African economies have improved significantly over the last 15 years. A flurry of pro-business continental and regional multilateral agreements – including the African Continental Free Trade Agreement, AfCFTA – and new startup regional laws have helped to address some of the challenges. 

But conditions need to be conducive to a thriving entrepreneurial ecosystem bustling with unicorns. 

Aside from wanting to increase their addressable markets, scaleups internationalise early because geographical diversification mitigates against shocks in one particular market. 

They often do this due to the high levels of uncertainty present in many African markets. Issues that create that uncertainty include regulations, exchange rates, political stability and more. It’s a practical way of building antifragility into a business.

Pain points are countless

Each country has its own macro and market challenges, including complex and costly regulatory compliance challenges and last-mile delivery obstacles. Structural barriers like these not only make it much harder to scale but also make it much more costly. 

Smaller ventures are less able to manage uncertainty and risk than larger, more financially secure, experienced firms. Limited resources to cope with adversity are another factor. Investment risk profiles consequently increase, resulting in what VCs call the Africa discount.

Entrepreneurs and investors want certainty when entering new markets. They seek cooperative, transparent and standardised processes with clear timelines so decision-makers can be held accountable. This allows them to plan and allocate resources appropriately. 

In reality, regulatory requirements are anything but certain. Neighbouring countries differ wildly from one another, regions even more so. It can be easy to open a company but hard to get a visa or bank account. Or vice-versa. 

The ratio of complexity to size is way out of kilter

The depth of complexity varies per vertical. FinTech ventures often involve particularly high cost and complexity per market, given that they require licences, agency agreements, customs clearances, and a range of banking and regulatory approvals. 

These complex compliance requirements not only increase costs but also reduce competitiveness. 

Scaling ventures need regulatory and licensing certainty. African governments need to solve intra-governmental competition, poor coordination efforts, regulatory inconsistencies and high unpredictability issues. 

Regulatory agencies can help by standardising their processes with clear guidelines, improving transparency, and being more open and consultative with their approach

Ten tips to mitigate risk

Until these macro conditions improve, founders can mitigate risk when developing and staging expansion plans by considering some of the recommendations we make in our Scaling in Africa report. 

  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. Founders and investors must be vigilant and thoughtful in their product research from day one. This means using market 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. 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. 
  4. Glocal organisational factors. Combine global expansion expertise with localised ownership strategies. Local leaders need to lead the operation, building on relationships with ecosystem players.  
  5. Triangulate the truth. Regulatory frameworks are so murky that 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 enter a new market unless you can hire experienced 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 and 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. 
  10. Build and document institutional memory. Document the learnings and turn them into playbooks based on learnt lessons. Don’t skip steps in the process. 

Scott Walker is a partner at Systemic Innovation. He has over 20 years of professional experience advising private and public sector clients on global innovation, systems change, strategy, government relations, policy, corporate affairs, research and sustainability issues. He holds two undergrad and two master’s degrees (international affairs and public administration).  

Belinda Bowling is a partner at Systemic Innovation. She has over 15 years of leadership experience working with corporates, social businesses, and the United Nations in Africa and Asia. Sector expertise includes systems change, social impact, entrepreneurship, sustainability, climate change, education, public health, youth and gender. She holds a law degree, a master’s (LLB LLM) and an executive MBA. 

Editor’s note: This research project was undertaken by Systemic Innovation in collaboration with HYBR UK and a broad team of experts in Africa, and funded by the UK Government’s innovation agency (Innovate UK) and Absa Group.

 

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