What African Fintech Startups Can Teach Silicon Valley About Longevity
Construction companies have traditionally suffered from high failure rates. According to 2022 Bureau of Labor Statistics data cited in Harvard Business Review, About 65% of companies in the US alone fail within the first 10 years, and only about 25% survive for 15 or more years. These grim numbers raise the question: What factors separate businesses that survive and thrive from those that fail?
One of the most conventional strategies for small business longevity is the acquisition of financial resources. Although this approach has gained popularity in the West, especially among technology startups in Silicon Valley, it has not improved the startup survival problem. In fact, it seems to have worsened the situation. Statistics show that US-based companies raise the most capital and experience the lowest longevity, while Africa-based companies raise the least capital and experience the highest longevity.
Our research shows what may be responsible for these different results. Between 2022 and 2023, we studied more than 200 top-level managers in one of Africa’s fastest growing industries: fintech. We found that the secret may not lie in investor readiness, but in change readiness: “the ability to continuously initiate and respond to change in ways that create benefits, minimize risk, and sustain performance.” Fintech companies in Africa have shown a phenomenal ability to initiate change in their environment by increasing underserved populations’ inclusion in the financial system and access to financial services.
Three misplaced priorities
We found that Western entrepreneurs exhibit three misplaced priorities that have a negative impact on their readiness for change – and subsequently their longevity. We illustrate the African perspective using Payhippo, Sycamore and Bankly, three leading Africa-based fintech companies we studied.
Focus on investors rather than the market
The holy grail for most startups in the West is venture capital. On the surface, it appears that an influx of investment is sufficient to help a company survive the nascent phase. Consequently, for as many as six to nine months, entrepreneurs tend to focus on securing capital.
According to IDEO, four major storytelling moments are essential for any entrepreneur: the elevator pitch, the origin story, the pitch deck, and the internal story. This is the conventional wisdom in the West. But in the mad rush to get funded, many Western startups neglect a more important pursuit: market acceptance.
Instead of prioritizing polishing the pitch deck and refining the elevator pitch, we have observed that African entrepreneurs place much more emphasis on developing marketing materials, such as proposals, sales letters or websites. For example, Sycamore took a lean approach to market entry and prioritized product development. By choosing to bootstrap in its early days, the startup freed itself to be more customer-centric in its marketing materials. The pitch, flyers and online ads were intended for the target customers – small and medium-sized businesses – not just the investor class. Based on this approach, Sycamore was able to operate primarily on customer revenue and organic cash flow for most of its first year of operations, as opposed to relying solely on equity financing.
Bankly’s storytelling strategy was to highlight their ability to meet key customer needs for security, reliability and trust through their financial products.
In the case of Payhippo, the company always focused on direct-to-customer communication and utilized direct sales techniques in the first two years. In the third year, they decided it was time to start telling their brand story through online and offline advertising. From video-led content to event sponsorships and sales activation campaigns called ‘market storms’, their approach has always been direct to the customer. Testimonials, for example, are one of the best ways to build relatability, so Payhippo focused on video content that spotlights how they’ve helped their customers along their business journeys. Everyone loves a success story, and the videos helped potential customers understand what they would receive when they signed up. It also served as a product pitch for new users. Payhippo’s brand focused on talking to customers, which helped them improve their product, increase revenue and grow their business.
Engage individuals rather than communities
Western culture is individualistic, and while this trait can be helpful for idea generation and innovation, it can be detrimental when forming the strategic alliances needed to grow beyond the idea stage. according to Journal of Business VenturingEntrepreneurs in communal societies like Africa have an advantage when acquiring resources because they can rely on connections and relationships built with other firms.
Sycamore’s approach, especially for acquiring lending customers, was mostly based on closed networks established over time. For example, the first five customers consisted of the founders’ former classmates and work colleagues. Managers used the old sales method of creating a list of professional contacts, then calling each person one by one to schedule a visit or sell to them directly over the phone. Although this was quite time-consuming, it helped Sycamore target a few high-value customers that they could serve effectively. This initial customer base, combined with personal attention, led to significant loyalty from these customers, who have been with Sycamore for many years.
Bankly selected community influencers who could speak the language of their target segment, many of whom were Semitic rural dwellers.
Likewise, Payhippo worked with associations and unions that represented the interests of potential customers and ensured brand presence in markets and other clusters where their customers were. Working with associations and sponsoring their events strengthened the brand among some of their most important customer groups.
We celebrate external fundraising rather than external validation
The laser focus on capitalization common among Western startups lends itself to the celebration of capital raising as an important indicator of progress. according to Financial Times, in the US, venture capital often flows into companies with unproven business models, thus giving rise to “irrational” valuation figures. Case in point is Stytch, a two-year-old authentication software startup that had less than $1 million in annual recurring revenue when Coatue Management and other investors valued the company at $1 billion. Despite the scant evidence of market acceptance and traction, this earned the company the coveted “unicorn” label. To avoid the inevitable crash associated with this “overvaluation trap,” companies must come up with fresher and more realistic narratives for valuation and value creation.
For most African startups, the celebration is not linked to alignment with the investor’s agenda, but to alignment with the external environment. Milestones such as certifications, authority approval and acquisition of operating licenses validate that a company makes a mark and has an impact on the operating environment.
While fundraising gave Payhippo an opportunity to grow the business, it was equally important to celebrate product milestones. In 2022, one of the founders made a thread about their 97% fundraising rate. This went viral and gave them free press about the product in three publications. Payhippo also recently acquired a microfinance bank (at the approval stage at the time of writing) to advance their mission as a one-stop financial service for African businesses.
Similarly, Bankly celebrated their ability to cross regulatory hurdles, as well as user acquisition and transaction milestones, such as the number of people they protected against loss. Longevity and the addition of key employees were also cited as achievements worth celebrating.
A major highlight for Sycamore was the award of approval from the Federal Competition and Consumer Protection Commission (FCCPC). The company was keen to be recognized and fully verified by regulators to give it wider acceptance as a bona fide player in the fintech space, particularly in lending. Being the first company to be awarded FCCPC approval in Nigeria certainly gave the startup a boost in credibility. This was cause for great celebration within the company, with press releases going out during that period to announce what was clearly a major victory. It also showed public agencies and regulators that a start-up can comply with the regulations. This is critical considering that Sycamore operates in the fintech industry, where trust is most important.
. . .
The search for legitimacy is a major challenge for entrepreneurs worldwide. To ensure longevity, we encourage startups to adopt these three priorities of African entrepreneurs:
- Tailor storytelling to customers instead of investors
- Engage communities of stakeholders rather than individuals
- Celebrate concrete milestones instead of raising capital
Stories like Sycamore, Payhippo and Bankly are not uncommon in Africa’s fintech industry. We have found that these three strategies are fundamental to ensuring an entrepreneur’s readiness for change, as well as their ability to thrive by making a positive impact on society.
How change-ready is your business?