Beyond Business Model Innovation For Your African Startup

This is a Short Note.

Two companies: Groupon (a pioneer ecommerce marketplace connecting subscribers with local merchants by offering discounts on activities, travel, goods and services)  and  Blue Apron (an ingredient-and-recipe meal kit service) share one thing in common. Both are business model innovators. They rose not necessarily because of new fundamental technology underpinning their businesses, but rather, a new business model, supported by technology.

There are challenges to such business processes. The first is that they can be easily copied by better executors. Also, incumbents with more capital can radically challenge them. Most times, those businesses struggle, especially if they do not have the capital and the operational capacity to become category-kings, as quickly as possible. So, they can pioneer a new area, but they can easily fade, due to lack of resources or operational capacities.

With no easy way to quickly dominate and scale through network effect, they become regional players with no apparent capacity to transfer abilities to other regions without massive new investments in the new locations.

So, if New York-based Blue Apron wants to come to Lagos, it has to essentially invest and setup a new system that replicates that business model in Lagos. It cannot serve Nigeria without necessarily having physical operations in Nigeria. The same applies to the old Groupon when it was a pure price discounter. It required the foot soldiers who visited shops, restaurants and other places to negotiate the discounts.

Contrast them with Google and Microsoft. Google has a core technology through its search technology. Microsoft invented the world of personal computing through Windows. Google Search and Microsoft Windows are core technologies that no one can challenge in a battle without real preparations. They can scale and serve the world without necessarily being around the world. Anyone can use Google Search from any part of the world. Windows is used globally even though Microsoft does not have to be everywhere.

The African Case

In Africa, we tend to be business model innovators. One of the reasons is our lack of technical capabilities. So without the technical depth, the only way we can be in business is to innovate at the level of business model. There is nothing wrong with that. However, the problem is that such businesses always struggle to defend their domains.

When Groupon was in its peak, Lagos had more than ten clones starting from Deal Dey. But when the fad passed, many of the companies went with it.

Most investors are always skeptical of such businesses because there is no fundamental thing that can protect them from competitions. Network effect has to be won on geography thereby making it harder to dominate easily. You cannot just unleash a code and see the impact around the world.

Yes, I do note that starting a business built this way is easier. However, the day you start it is the very day people can easily copy you. The key competitive weapon becomes capital which will be needed to accelerate growth. It is like ecommerce: The ability to raise capital and also execute operationally are the key drivers of the strategy. In Africa, you have to win city by city as you have to build logistics one city at a time. That has a huge impact on value derivable from assets, turning a largely asset-light business in most parts of the world into an asset-heavy business.

Planning Your Startup

One of the easiest ways to do well in raising money is to do something not many people can do. If you can have a fundamental technology, you will be in a good trajectory to entice investors. Look at Paystacks, a Lagos fintech, it has something it has built. Where possible, a technology innovation-anchored startup should be what you should aspire to create.

Come up with a technical solution to a problem. That solution, anchored on technology, becomes the defining capabilities of your firm in the market. That can take you to great places than just copying a business model which others can quickly rip and replicate, pushing you out of the business easily. That you have pioneered a business model does not really give you an edge if you do not have capital to accelerate growth.

But where you have innovated on core technology, you have a better chance to success: you can hold your turf. This does not mean that business model startups are not good. My point is that focusing on startups anchored on core technology should be your preference, where possible. When you do that, the chances of raising money from investors are always higher.

It is very simple: many venture capitalists do not count non-technical founders when they analyze startups. You may think you have three founders with only one technical founder when the investors see only one person as founding the company. They have discounted the non-techies. You must have a product before you can think on how to sell the product. That explains why team formation is the first test for any new startup.

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