The Prosperity Paradox (by Christensen, Ojomo & Dillon) raises the the question; “Despite significant investments in economic development and charity, why aren't we seeing rapid improvements in developing countries?" In a similar vein, despite substantial investments in the tech ecosystem over the last decade, why haven't we seen remarkable outcomes?
Your typical conference on african investment has optimistic themes like 'Africa Rising, Lions on the Move, It’s our turn to eat'; but it's hard to argue that the private sector has responsibly managed venture capital (VC) investments. We criticize government waste but should also scrutinize how the private sector has managed the billions that have been invested.
I think the lack of progress is because we haven't focused on the right kind of innovation, as recommended by the prosperity paradox: Market Creating Innovation (or MCI otherwise I am at risk of contracting carpal tunnel)
Instead we have directed capital at investments in the junior siblings of MCI - efficiency & sustaining innovations. Until founders start focusing on hard problems and investors begin to be being more discerning we should not expect anything beyond mediocre returns for the majority of time & resources invested. The bad news is that a lot of the historic investment will yield strange fruit; but the prosperity paradox tells us that the beautiful companies have not yet been formed. For prospective and African economies this is great news.
Market Creating Innovation (and siblings) explained
I just spouted a lot of theory like some Harvard Business School reject (I was 😢😢😢) trying to convince the admission board that they made a mistake. Let’s break it down.
So the theory goes that there are three type of innovation; whilst they are all useful, they perform different roles in economic development.
Sustaining innovation - what i call innovation for the lazy person. You have made a breakthrough product but now want to extend it without doing too much. Think Absolut vodka and all its variants; lemon, mango, orange flavours.
Sustaining innovation creates a few jobs, gets more customers (you may hate normal vodka but add a few drops of orange and now you are a customer) and everyone benefits. Company makes more sales, the government’s taxes increases slightly and you finally have orange flavoured vodka tonic. So the total economy grows but every one gets small small
Sustaining is that auntie that cooks a pot of soup and shares it equally amongst everyone - its fair but some may still be dissatisfied
Auntie Efficiency - as her name implies results in more productivity for the innovator but there is typically a destruction in jobs. Imagine for example your company is into agriculture and you hire 30 famers/hands per hectare to clear land and plan crops.
This year you you buy a combine harvester which means that for every acre you only need 3 people. You retrench 90% of your workforce, the economy suffers because there is greater unemployment but this may be balanced by your productivity gains - maybe your yield is now 5x than before.
Efficiency is the auntie that makes food and gives a disproportionate amount to a few - many will go hungry (sorry for you) but a few (the company) will say efficiency is their best auntie ever.Market Creating Innovation - the big mama of all innovations. In MCI everybody wins. This is because MCI focuses on areas where there is non-consumption or where no market exists.
In Nigeria, before the deregulation of the telecoms sector there were only 500k phone lines; there were over 90million non-consumers of telephony. People wanted to make phone calls but they had no access or it was too costly. Post the mobile telephony revolution, millions who were not consuming mobile telephony came could now make calls.
More importantly, there were jobs created (distributors of airtime), 2nd order productivity benefits ( you could use your phone to order goods and services online) and everyone benefited- the phone networks got a massive increase in sales, the government gained higher tax receipts, employment was higher other businesses were more productive.
Auntie MCI is she who refuses to eat unless everyone in the house has eaten. She will even invite those strange neighbours that nobody likes to come and feast. With Auntie MCI, everyone must enjoy.
“Market creating Innovations transform complex and expensive products and services into simple and more affordable products, making them accessible to a whole new segment of people in a society whom we call non-consumers”
The problem we are seeing on the continent is that there is insufficient investment or focus on MCI. All the investments are in Efficiency or Sustaining Innovations.
The Data
Partech estimates that over the last five years >5 billion in venture capital has gone into African tech. In 2022, $1.2bn was invested in Nigeria alone - this number astounds me but I know Partech have good calculators in their offices so let’s go with this.
But on behalf of those who did not partake of this bounty, I have only one question. Please where is the money?
I believe we have big problems but we are funding the wrong thing; let’s use the Giant of Africa as a case study.
If you were to ask any Nigerian what our biggest problems are they would give you a combination of poor education, inaccessible healthcare, non-existent power, expensive transport / logistics. As they are speaking you might even see tears dropping or their hands trembling from PTSD.
Erm, but guess what we have been funding guys?
In the first column you see its all been fintech; over 70% in Nigeria on payments, crypto, neobanks, remittances. Because of course we can never have enough debit cards or payment options right?
Whatever country you are from we we can all agree that healthcare and education getting less than 10% combined doesn’t make sense given our issues. Why does this happen though?
With a paucity of successful exits over the last decade (I can’t count up to five) let us all agree that the current VC model is not working. From where I am kneeling (because boy this market is tough) the future is not bright. This is where market creating innovation rides in to save the day.
MCI in practice
As mentioned, all types of innovations are critical in a market but the sequencing is important. For emerging markets, we need to focus on MCI because hello, in every sector there is a much higher % of non-consumers than consumers. This is why if we take Carbon or other neobanks as an example, the potential growth of neobanks is capped by the number of people that already have bank accounts.
Christensen et al give us a 5-point checklist to determine if an innovation or company is pursing an MCI strategy. Elon Musk’s SpaceX is a classic example of MCI in action:
Business models that target non consumption - whilst NASA and other government agencies are the main customers, SpaceX has made rocket launches available to smaller governments who previously couldn’t afford the services, like Bangladesh, and other smaller commercial ventures
Enabling technology - There have been many but reusable rockets have been the key game-changer
A new value network - SpaceX has brought in 70% of its supply chain that was previously external. It is manufacturing 70% of goods out of a need to guarantee low cost or high performance resulting in the creation of sub-companies within SpaceX.
Emergent strategy - the business model of SpaceX has evolved and extended. From launching rockets, it now does satellite rideshare (yes you read right), provision of internet bandwidth via Starlink and human spaceflight to name a few
Executive support - erm, its Elon, he wants to conquer Mars. Enough said.
But MCI is hard - it requires thinking & execution on a higher level and perhaps integrating vertically/horizontally across value chains.
If I look at most of the big investments in Nigerian operators they have historically been in efficiency innovations:
Fairmoney, Branch and thOse guys that were selling rice and beans for N20 a plate
Flutterwave & Paystack
Jumia (tufia) & Konga
Omnibiz, Sabi, Marketforce
Helium Health, Reliance
Across various sectors, its efficiency all the way.
There is an argument that some may be MCI. When we pioneered digital loans at Carbon, I could make the argument that we were providing loans to non-consumers. The banks weren’t lending any money to their customers but if we are keeping it 100, we didn’t create new banking customers. Similar with payment platforms, yes, we brought new consumers into the market but for the most part Flutterwave & Paystack have the same customers that Interswitch is chasing.
The only trend that I believe may fall under MCI were agency banking (ESL,Nomba, Moniepoint etc) But even then I am not sure; MCI really addresses the alleviation of the core struggles of non-consumers so to the extent payments for people in rural areas were a core struggle then agency banking ticks the box.
But would love to hear disagreements or companies that I have missed.
Why the limited number of MCI investments?
MCI requires a combination of two rare creatures - a founder committed to a very difficult problem and investors that understand the sector AND are not looking for quick returns.
MCI is hard, you need to create new value chains and it can take time. If you hear “free” as part of a pitch you can already tell that its not MCI. Non consumers will pay for goods/services if they get value. And MCI may take a lot of capital or ingenuity or both.
Your typical VC if they are not an industry expert may not know MCI if you slapped him in the face. He would rather invest in “X for Africa”, another classic sign that that project is not MCI and companies that have graphs that always go up and to the right. MCI requires investors that understand the local context, committed to the space and understand what it takes. Its not for the faint hearted and may even require diligence in locations that don’t have 5 star hotels. Yes, its that demanding.
I believe that we will get closer to this when we have successful (or not) founders who have transitioned to investing and managing pools of capital.
We don’t have either of these. But we are at a point in the cycle where the tourists are gone; the founders who were looking to upgrade their lifestyle and the VCs who just wanted their 2 and 20 fee structure.
Some of the greatest areas where there is non-consumption include healthcare, , education, agriculture. These three areas will have a catalytic effect on the economy but they are not for the faint hearted. How many founders have you heard say they want to be the Kaiser Permanente or Monsanto of Africa?
Not many and there is a reason for that. If you are a founder looking to solve real problems, there is no better time to start a company.
The beautiful one are not yet born
The VCs who are investing on the continent are investing for quick returns and so structurally there is misalignment between what they want and what is needed for them to be successful. Africa is a poor continent with a wealth divide that has been widening for years. What this means is that if you want to sell to consumers the best strategy is either luxury items or goods/services that appeal to those of the bottom of the socio-economic scale. These are typically things that will either help them save money or things that increase their productivity. Anecdotally at least, the majority of the investment I have seen over the last years have been targeting consumers instead of non-consumers.
Venture Capital as we know it is not working; we need a class of investment that is patient, has deep industry knowledge to partner with entrepreneurs and is long-term greedy. We need a new investment class that is focused only on market-creating innovation.
The good news is that where serious challenges exist, massive wealth creation opportunities abound. If we can fund the right founders who are full focused on these problems, we can spawn a generation of market creating innovators. In my next piece I will shed some light on these elusive founders so tune in next week.
In the meantime, my dear brothers & sisters, celebrate with for now is the time for the beautiful ones to be born.
My thanks to Efosa Ojomo for the intellectual banter and guidance in putting this together. All errors are mine; like I said, I was an HBS reject.
What about alternative proteins?