#21 From the West to Emerging Markets
a16z hyped about fintech in Latin America, investor misconceptions in Africa, and context on African business when you come from the West.
Welcome! Have you ever wondered:
Why are investors hyped over fintech in Latin America? 🤑🌎
What are common investor misconceptions when investing in Africa? 💸🌍
Coming from a Western perspective, what to read to have a better context of African business? 📝🌍
If so, keep reading...
If you wonder what Emerging Markets explorer 🧭 is, start here.
Latin America’s Fintech Opportunity
A16z recently published an article on Latin America’s Fintech Boom. It’s been growing slowly, and a16z expects that it will start growing exponentially soon.
Softbank supports this theory: their Latin America fund is focused on creating a cluster of fintech winners.
The main reason behind the fintech opportunity is the unbanked population. Latin America has a population of 650M, and 55% was unbanked in 2017. The reasons behind a large number of unbanked population are:
Established banks cater to the wealthy.
A poor digital banking experience that still requires visits to physical branches.
Established banks have high margins, so they don't have incentives to change.
A cash-based economy, being of 90% of transactions in Mexico.
The unbanked population was an enabling factor for the growth of M-Pesa in Kenya; creating a precedent for fintech in Latin America.
The status quo is changing, especially after the pandemic. The factors propelling a change include:
New consumer expectations from the young and the increasing smartphone adoption.
A Fintech-friendly regulation in many countries.
The COVID-19 pandemic accelerating digital payments.
The presence of a real-time transaction infrastructure.
The adoption of fintech and banking has recently been accelerated in Latin America, reflected in the penetration of bank accounts:
Source: America’s Market Intelligence
The areas of opportunity a16z identified are:
Creating an accessible fintech infrastructure.
Modernizing business services.
Making real estate more transparent and accessible.
Pan-Latin American services.
Fintech in Latin America is living a strong momentum. An example is Nubank, which consolidated as the biggest fintech in the region. And its competitors are working not to be left behind.
You can read a16z article here: https://a16z.com/2021/04/13/latin-america-fintech/
Failure story: Western investors misconceptions from Africa
The last issue in the Generalist covered Tech in Africa and had a section dedicated to common misconceptions when investing in Africa.
Investor misconceptions come from unrealistic expectations on the Total Addressable Market and the replicability of business models.
Africa is often portrayed as a single entity when it’s a fragmented, diverse, continent. The Total Addressable Market is envisaged as the whole of the continent when value for a client in Kenya is very different from Egypt or South Africa. Once you realize this, the TAM becomes smaller.
Another error comes from the valuations. Africa is a populous continent, but, the discretionary income of an individual is significantly smaller. Mario cites the example of neobanks, in which the average deposits in Africa are $200 when a bank in the US might be $2000.
Finally, the success of a startup in the US or Asia doesn’t imply that the model will succeed in Asia. There is a model called Time Machine Management Theory that defends that the future is already here but is unevenly distributed. This supports the logic that what works in the US now, can be the next successful innovation in other regions.
This didn’t work in Africa: many startups failed to replicate a US success in Africa, like Uber’s strategies in Nigeria; or tried copying an Asian success in Africa, like the Gojek model, without the same amount of success. Nowadays, there is a new wave of African startups responding to the realities of the local environment. Examples include the Nigerian fintech Flutterwave, which recently became a unicorn.
Read the full article here: https://www.readthegeneralist.com/briefing/africa#toc-misconceptions
Source recommendation: The Flip
The Flip is a Newsletter (The Flip Notes) and podcast produced by Justin Norman and Sayo Folawiyo.
The Flip has an interesting origin: When Justin arrived in South Africa, his Western upbringing didn’t bring him knowledge on how to operate in the continent. He needed to find a new frame of reference, which was the beginning of The Flip Notes.
“The name The Flip comes from the opportunity to flip the script – to question some of the pervasive narratives on entrepreneurship and champion the entrepreneurs building a future inspired by Africa.”
The Flip Notes is a Sunday newsletter on different topics in business in Africa. It has a focus: the context. It is a space where the most relevant insights are distilled from the noise and brought up; representing the context Justin needed at his arrival in South Africa.
You can read it and listen to it here: https://theflip.africa/