Web businesses’ uphill battle to make it in Africa

AFRICA’s economic growth rates and rising youth population mean that more and more entrepreneurs are looking to the continent for business opportunities. The typical strategy is to introduce new companies by recreating foreign business models in Africa. But for e-commerce start-ups, it is not that easy.

In 2010, my company created an app store. We then built a local version of the app store to reach African users. We followed with a crowdfunding platform and even opened an e-commerce website that sold electronics design kits via partnerships with US giants Altera and Microchip. The online businesses had flashes of success, but we quickly realised the path to profitability would be long and tortuous, requiring a constant injection of capital. In the end, we closed them.

We were not alone. Old local giants such as the e-commerce business Kalahari, the advertising firm InMobi and the e-classified site Mocality have retrenched, reorganised or closed down. In shutting down some of its e-commerce properties, citing “unprofitability” as a reason, media empire Naspers noted it was a “sad day for e-commerce” in Africa.

The following are the key reasons Africa’s internet business ecosystem is not profitable:

Distrust

Rich Africans have yet to embrace online shopping, because of internet fraud. In Nigeria, for example, where phishing is common, people are sceptical about putting their credentials online. But without these wealthier consumers, Africa’s e-commerce sector will continue to serve primarily students and other younger populations.

Cost of broadband

Mobile internet has enjoyed tremendous growth in Africa. Using Facebook may be free on some networks, but watching a three-hour piece of educational content on Coursera or MIT edX can cost $50 (about R600) in Congo. With the high cost of bandwidth, video-based internet businesses in Africa are struggling.

Logistics

Amazon and eBay are great companies that depend on the US postal system to serve their customers. In Africa, it is complicated given the continent’s nonfunctioning postal systems. Online businesses rely on motorbikes to make deliveries, which increases the cost of doing business.

Open markets

In Africa, there are “markets” everywhere, starting with the security guards who run stores in front of their employers’ mansions. In major cities, you can find unemployed young people selling wares at traffic lights. An e-commerce company must beat these open markets on price to be competitive. But because nearly all e-commerce firms are formalised so that they can access the banking system, they pay taxes. In Rwanda, the 18% VAT can put an online business at a disadvantage when its informal competitors do not pay the same.

Fragmented markets

For all the efforts to make Africa appear as one market, it is not. A company has to set up country-specific sites because of cross-border differences in currency, language, culture and more. This affects economies of scale and makes it more difficult for a business to efficiently allocate capital.

Literacy rates

Even if all the infrastructure and integration issues were fixed, Africa’s illiterate citizens would be unable to make full use of e-commerce sites that require reading and writing skills. Chad, Niger and Burkina Faso, for example, have literacy rates of less than 30%. Unless Africa invests in the education of these citizens, the pool of potential customers for the continent’s online entrepreneurs will remain small.

Fortunately, there are some companies attempting to tackle these issues. Take Jumia, a leading online retailer in Nigeria that sells everything from home goods to cellphones to health and beauty supplies.

Founded in 2012, Jumia has more than 1,500 employees. It raised $150m in new funding on a valuation of $555m in November last year. And Jumia is not alone; there are web firms such as Konga, Olx and Souq, with millions of dollars in funding, operating in Africa.

But although Jumia and other African firms may be successful in terms of market share, they are still not profitable. According to Rocket Internet’s 2014 public listings, Jumia had $28m in net revenues with $32m in losses.

Any start-up with a few million dollars in funding can move to the front of the pack because Africa has such a poor pool of companies. There are 3,186 firms in Africa with revenue of more than $50m. So when a firm raises $100m, it can beat anyone for market share because there are so few companies to challenge it. But then the company must seed a sector in a continent with low internet adoption and high illiteracy.

E-commerce in Africa could be very profitable, but it will take time and effort. Leaders on the continent must understand that besides launching websites, there are many elements entrepreneurs need to be profitable. These include more integration of the disparate African economies; investment in postal, broadband and transportation infrastructure; a Pan-African system to prosecute fraud and improve business trust online; and, most importantly, a boost in the literacy rate.

The internet is transforming commerce and Africa cannot afford to avoid participating in the opportunities it is enabling through the expansion of markets. But, before they jump in, African entrepreneurs — particularly those building web-based businesses — need to understand the hurdles they will have to overcome to be successful and profitable.

• Ekekwe is a founder of the nonprofit African Institution of Technology and the editor of’Nanotechnology and Microelectronics: Global Diffusion, Economics and Policy’

• This article was first published in Sunday Times: Business Times

AFRICA’s economic growth rates and rising youth population mean that more and more entrepreneurs are looking to the continent for business opportunities. The typical strategy is to introduce new companies by recreating foreign business models in Africa. But for e-commerce start-ups, it is not that easy.

In 2010, my company created an app store. We then built a local version of the app store to reach African users. We followed with a crowdfunding platform and even opened an e-commerce website that sold electronics design kits via partnerships with US giants Altera and Microchip. The online businesses had flashes of success, but we quickly realised the path to profitability would be long and tortuous, requiring a constant injection of capital. In the end, we closed them.

We were not alone. Old local giants such as the e-commerce business Kalahari, the advertising firm InMobi and the e-classified site Mocality have retrenched, reorganised or closed down. In shutting down some of its e-commerce properties, citing “unprofitability” as a reason, media empire Naspers noted it was a “sad day for e-commerce” in Africa.

The following are the key reasons Africa’s internet business ecosystem is not profitable:

Distrust

Rich Africans have yet to embrace online shopping, because of internet fraud. In Nigeria, for example, where phishing is common, people are sceptical about putting their credentials online. But without these wealthier consumers, Africa’s e-commerce sector will continue to serve primarily students and other younger populations.

Cost of broadband

Mobile internet has enjoyed tremendous growth in Africa. Using Facebook may be free on some networks, but watching a three-hour piece of educational content on Coursera or MIT edX can cost $50 (about R600) in Congo. With the high cost of bandwidth, video-based internet businesses in Africa are struggling.

Logistics

Amazon and eBay are great companies that depend on the US postal system to serve their customers. In Africa, it is complicated given the continent’s nonfunctioning postal systems. Online businesses rely on motorbikes to make deliveries, which increases the cost of doing business.

Open markets

In Africa, there are “markets” everywhere, starting with the security guards who run stores in front of their employers’ mansions. In major cities, you can find unemployed young people selling wares at traffic lights. An e-commerce company must beat these open markets on price to be competitive. But because nearly all e-commerce firms are formalised so that they can access the banking system, they pay taxes. In Rwanda, the 18% VAT can put an online business at a disadvantage when its informal competitors do not pay the same.

Fragmented markets

For all the efforts to make Africa appear as one market, it is not. A company has to set up country-specific sites because of cross-border differences in currency, language, culture and more. This affects economies of scale and makes it more difficult for a business to efficiently allocate capital.

Literacy rates

Even if all the infrastructure and integration issues were fixed, Africa’s illiterate citizens would be unable to make full use of e-commerce sites that require reading and writing skills. Chad, Niger and Burkina Faso, for example, have literacy rates of less than 30%. Unless Africa invests in the education of these citizens, the pool of potential customers for the continent’s online entrepreneurs will remain small.

Fortunately, there are some companies attempting to tackle these issues. Take Jumia, a leading online retailer in Nigeria that sells everything from home goods to cellphones to health and beauty supplies.

Founded in 2012, Jumia has more than 1,500 employees. It raised $150m in new funding on a valuation of $555m in November last year. And Jumia is not alone; there are web firms such as Konga, Olx and Souq, with millions of dollars in funding, operating in Africa.

But although Jumia and other African firms may be successful in terms of market share, they are still not profitable. According to Rocket Internet’s 2014 public listings, Jumia had $28m in net revenues with $32m in losses.

Any start-up with a few million dollars in funding can move to the front of the pack because Africa has such a poor pool of companies. There are 3,186 firms in Africa with revenue of more than $50m. So when a firm raises $100m, it can beat anyone for market share because there are so few companies to challenge it. But then the company must seed a sector in a continent with low internet adoption and high illiteracy.

E-commerce in Africa could be very profitable, but it will take time and effort. Leaders on the continent must understand that besides launching websites, there are many elements entrepreneurs need to be profitable. These include more integration of the disparate African economies; investment in postal, broadband and transportation infrastructure; a Pan-African system to prosecute fraud and improve business trust online; and, most importantly, a boost in the literacy rate.

The internet is transforming commerce and Africa cannot afford to avoid participating in the opportunities it is enabling through the expansion of markets. But, before they jump in, African entrepreneurs — particularly those building web-based businesses — need to understand the hurdles they will have to overcome to be successful and profitable.

• Ekekwe is a founder of the nonprofit African Institution of Technology and the editor of’Nanotechnology and Microelectronics: Global Diffusion, Economics and Policy’

• This article was first published in Sunday Times: Business Times

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