Digitizing informal trade is the multi billion-dollar challenge for the next wave of African tech unicorns. If they succeed it will be transformative for a continent where near 90% of employment is informal.
Flutterwave, a Nigerian payments company, is now worth over $3bn — the highest valuation of any African startup to date. The first wave of African tech unicorns, including Flutterwave, Wave and Farwy, are leaders in fintech, reducing friction in transacting across the continent.
Fintech accounts for 60% of African venture capital investment, but a new cohort of companies such as Sabi in Nigeria, MaxAB in Egypt, and Sokowatch in Kenya are transforming how hundreds of thousands of merchants operate in Africa’s extensive informal economy.
With tools to support logistics, management, and operations for micro, small, and medium-sized enterprises (MSMEs), these startups are challenging the notion that informal transactions need to be formalized, but rather just made more productive. The next wave of African billion-dollar companies are tackling the challenge of digitizing informal trade.
A staggering 60% of global employment remains in the informal economy, outside the purview of the state. This figure is even greater in sub-Saharan Africa, estimated at 89.2%, with markets such as the Democratic Republic of the Congo, Senegal, and Mozambique coming in even higher at above 95%.
This scale is not only apparent in employment but value, as sub-Saharan African economies are estimated to derive between 25 and 65% of gross domestic product from informal production, with Nigeria and South Africa at the higher and lower ends respectively. With such great reach, it should be no surprise that the informal economy permeates across classes as well, with even tertiary degree holders finding their way to the informal economy about a quarter of the time.
Dodging the taxman, but uplifting the bottom of the pyramid
Informality has its noted drawbacks. By definition, informal work is not taxed by the government, leading to a tax revenue shortfall in the range of 35 to 55%, by some estimates.
People earning their living in the informal market also lack formal social safety nets, an issue that has been so clearly revealed during the Covid period as many countries were simply unable to sustain lock-downs for even a matter of weeks. Survey data from Nigeria in the early months of the pandemic showed that 56.3 and 39.2% of urban and rural workers respectively had faced job disruptions, and while countries such as Algeria touted taxing the informal economy as a potential solution, research has shown that such programs are difficult and often bring in less revenue than they cost.
Informal work is defined by frictions and inefficiencies as MSMEs are operating at sub-optimal scale, unable to buy in bulk or easily compare prices for logistics services. But this is where innovative startups are leveraging technology to make a difference.
Take MaxAB, a startup that operates in the Egyptian grocery sector, in which 400,000 small grocers make up 90% of the market. The company’s mobile platform serves to optimize procurement and logistics, enabling manufacturers and distributors to lower the transaction costs of dealing with so many micro-merchants, while empowering vendors with efficient cost-effective solutions.
Nairobi-based Sokowatch reduces supply chain costs by up to 20% for its MSME users. The company connects retailers to local and multinational suppliers, including Fortune 500s such as Unilever and Procter & Gamble, and provides merchants credit that banks often would not.
In the Nigerian market too, a growing startup ecosystem is creating digital platforms to support the country’s 41 million MSMEs. Entrants like Bumpa and Kippa are focusing on creating ease-of-use bookkeeping tools and adding online functionality for small vendors, while Sabi has pioneered an app that allows merchants to access tools to manage their stores, record sales, order merchandise, receive financing, and connect to a network of 10,000 local agents. After only one year of operations, Sabi announced in 2021 that it had already reached over 150,000 merchants who recorded $1.2bn in sales on its platform.
Investors onboard
This uptake speaks to user demand, and successful funding rounds underscore investor interest.
Even in its early stage of development, Sabi has already conducted a bridge funding round to expand beyond Nigeria, and MaxAB attracted $40m in Series A financing in 2021. This figure still trails already scaled e-commerce actors like Twiga Foods, a Kenyan company that reached Series C in 2021 surpassing $100 million raised cumulatively.
With marquee backers like Goldman Sachs, international buy-in is evident, and with Covid-19 thrusting global e-commerce to the forefront, the sector should only stand to see more venture attention as a result.
Above all, increasing the productivity of the informal sector is more than just an investment opportunity, but a social imperative. Ten to 12 million Africans enter the workforce annually and most will end up turning to the informal sector to earn their livelihoods.
Africa’s young people cannot wait for African economies to formalize African economies at a snail’s pace. It is a development necessity that the informal market become more productive. Fortunately, Africa’s next round of unicorns are doing just that, transforming the informal economy from within, eliminating inefficiencies and information asymmetries, and unlocking broad-based value.
Source:theafricareport.com | Aubrey Hruby