Why thoroughbreds will outpace unicorns in the race towards profitability

African businesses will spend more than consumers over the next five years, according to consultancy McKinsey

Dubai's Network International bought Nairobi-based payments company DPO Group in July last year for $288m - a deal Botho Emerging Markets Group founder Isaac Kwaku Fokuo describes as a 'win-win' for both companies. Image courtesy of Network InternationalShow less

Entrepreneurship will drive economic growth and innovation in the Middle East and Africa, but the short-term gains are more likely to be realised by tech-driven businesses that are focused on enterprises rather than consumers.

Covid-19 has exposed the volatility of the market, which can leave consumer-focused businesses more exposed.

While business-to-consumer (B2C) companies often require a long runway to achieve the kind of scale necessary for profitability, business-to-business (B2B) firms can generally achieve sustainability more quickly. Instead of B2C unicorns, entrepreneurs in the Middle East and Africa should consider how they can build B2B ‘thoroughbreds’.

Investor Micah Rosenbloom defines a thoroughbred as a company with transformative potential with exits in the neighbourhood of $100 million to $500m. While these opportunities may make headlines less frequently than unicorns, they play a catalytic role in the entrepreneurial ecosystem.

Unicorns are, quite literally, one-in-a-million whereas a small number of thoroughbreds can transform a local economy. Not only because they generate jobs but also because success stories inspire other entrepreneurs and investors to develop new ventures and drive a start-up culture.

The Middle East and Africa may be home to a young, digitally savvy population and the start-up cultures of Nairobi’s Silicon Valley and Dubai’s Silicon Oasis are gaining traction. But the reality is that venture-backed businesses face an expensive, uphill battle to achieve scale. The stories of local tech unicorns like Careem and Souq are the exception rather than the rule; the troubled tale of the listing of pan-African e-commerce company Jumia Group on the New York Stock Exchange should serve as a cautionary tale to ambitious entrepreneurs and investors. Given the reality of the road to exit, more entrepreneurs would be wise to focus on the market potential of the B2B sector.

Business-to-business spending in this region outpaces consumer spending, which opens the door to forward-thinking entrepreneurs to tackle enterprises’ pain points. While household consumption in Africa is expected to reach $2.1 trillion by 2025, spending by the continent’s businesses will reach $3.5tn over the same period, according to consultancy McKinsey. Similarly, in the Middle East, enterprise spending on software is projected to achieve double-digit growth in 2020, consultancy Gartner forecasts.

From financial services to logistics, many sectors are ripe for B2B disruption, and many entrepreneurs are taking note. Take Xpence, the UAE’s neobank for start-ups, which combines bookkeeping and banking in one app. They have a ready market in the country’s SME sector, representing 98 per cent of companies operating in the UAE and 52 per cent of non-oil GDP. In Ghana, supply chain platform Jetstream Africa is powering global trade logistics for African suppliers and exporters by enabling smaller suppliers to benefit from economies of scale usually only available to large corporations.

Entrepreneurs should focus more on forming deliberate alliances with B2B partners that can serve as customers and potential strategic partners. In a world of increased uncertainty, the thoroughbreds will emerge out of companies that can quickly identify synergies that may generate merger or cross-sell opportunities.

Enterprise partnerships are often the pre-cursor to acquisition. Given the cost of acquiring customers can be high in the Middle East and Africa relative to North America and Europe, offering a large corporation a means to solve its internal business challenges and better serve or extend its customer base is a surefire way for entrepreneurs to enhance their visibility in the market.

Ethiopian Airlines, Africa's largest airline, is a compelling example: it has acquired a 45 per cent stake in Zambian Airlines and 40 per cent of Asky Airlines. It also has plans to make strategic investments in Ghana, Malawi and other countries.

B2B businesses often offer a clear path to exit in a region where exit strategy can be challenging to predict. With IPO market readiness much lower relative to peers in mature markets, companies in the Middle East and Africa often turn to direct equity sales to local incumbents and multinationals.

For example, in July, Network International, a Dubai-based payments company, acquired Nairobi-based DPO Group, a payments services provider for African businesses, for $288 million. DPO Group will continue to operate under the same brand while being wholly owned by Network International. It’s a win-win: incumbents can access innovative, nimble approaches while promising entrepreneurs can tap a legacy customer base and the larger firm’s associated distribution channel.

The Middle East and Africa could be home to tech’s next gold rush. But for entrepreneurs in the region to strike it big, they must look at the opportunities that have been neglected – chief among them, booming enterprise spending. Instead of chasing consumer businesses dependent on massive amounts of cash and users, entrepreneurs should explore how they can create value for the local business community by finding innovative solutions to business challenges.

Isaac Kwaku Fokuo Jr is founder and principal of Botho Emerging Markets Group