Originally published here by VestedWorld

“Software is eating the world.”

Marc Andreesen, Founding Partner, A16z

The famous quote above opens Andreesen Horowitz co-founder and general partner Marc Andreesen’s oft-referenced article published in The Wall Street Journal in 2011. In it, Andreesen justifies the growing private valuations for software-as-a-service (SaaS) companies in Silicon Valley and predicts a software revolution, saying:

More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Over the next 10 years, I expect many more industries to be disrupted by software.

Almost exactly ten years later, it’s safe to say he was right. What’s less clear is why this ‘revolution’ hasn’t consumed all corners of the world, and, more specifically, Africa. The SaaS revolution was propelled by its enormous benefits for all stakeholders — developers, users, investors, and customers — resulting in wider software adoption by SMBs and consumers, and the ability for startups to get up and running quicker and for cheaper. Meanwhile, enterprises have greatly improved their productivity while cutting costs. However, Africa’s SaaS revolution is only just getting started. For the majority of its businesses, including millions of SMBs, and public services, there is a specific need for local software solutions to local problems at acceptable prices.

As we’ve engaged with more and more SaaS companies, we wanted to better understand the challenges and opportunities for SaaS in Africa and what a “software revolution” might look like in the region.

Why SaaS? Why Africa?

Globally, businesses and individuals are switching from on-premise software or manual processes to SaaS and reaping the rewards of digitization and automation. These rewards include affordability, speed, scalability, extensibility, agility and low risk.

Many businesses in Africa are ripe for SaaS adoption and the subsequent improvements in productivity and growth. In 2015, the World Economic Forum cited low productivity as a major problem for economic development in Africa. Agriculture, a major sector in most African economies, contributes significantly to this problem but so does the services sector. Automation and AI in SaaS can also play a big role in alleviating the problem.

In evaluating the disruptive potential of SaaS in Africa, I took a look at its benefits over traditional software and manual alternatives, and interviewed various IT professionals in Africa to assess which points might be emphasized in African markets. I’ve highlighted six main benefits below.

Despite SaaS’s advantages and the need for automation in Africa, the SaaS industry on the continent is yet to attract the levels of investment seen in areas like fintech and agriculture, which begs the question “What are the challenges and opportunities in SaaS for companies, users, and investors in Africa?”

The Challenges

To answer the first part, there are many significant challenges faced by the SaaS industry in Africa. Here I have chosen to focus on what I think are the three main buckets of problems today — Economics, Trust, Environment.

Economics

“Price is what you pay; value is what you get.” — Warren Buffett, CEO, Berkshire Hathaway

The SaaS model has undoubtedly made software much more affordable, leading to greater adoption. However, many tools that have become industry standards in developed markets simply do not have the value-to-price ratio required to achieve widespread adoption in developing markets. Local SaaS companies may have an advantage on cost but many of their inputs, like cloud services, are still too expensive. Whether software is built locally or imported from abroad, low connectivity and frequent power outages limit its obtainable market in Africa. High costs of internet access and backup power sources mean the real price of using SaaS is much higher.

The current rush to build data centers across Africa should significantly improve the ability of cloud providers to offer better services in the region. According to Quartz, Africa’s data center market accounts for just 1% of global capacity but is expected to grow at more than 12% per year until 2025. Meanwhile, over 25% of the African population accessed the internet in 2018, more than double the rate in 2014, according to the International Telecommunication Union. Together, these trends suggest the economic case for adopting SaaS is getting stronger with time.

Trust

“Nobody ever got fired for buying IBM.”

Finding, buying, and implementing software is a complex task that many buyers find intimidating. As a result, they often resort to established brands or choose to build custom software to fit an existing internal process. Global software incumbents’ products are relatively expensive for African businesses, while African software companies often lack the trust that is built from decades of investing in a brand. Hence, local markets tend to be dominated by companies that build custom software or implement foreign solutions.

The technology ecosystem in most African countries is still very young, but there are many software companies making a name for themselves on a regional and global scale. According to Partech Partners, total venture capital raised by African tech start-ups grew 74% year-over-year to reach over $2 billion in 2019. Many of these funded companies realize the importance of their brand and thereby invest more aggressively in areas such as user experience, customer support, and customer success. Additionally, major events like Stripe’s acquisition of Paystack have brought more attention to the ecosystem from home and abroad. The lack of trust within the industry will likely improve naturally as the ecosystem grows, and African technology companies become more mainstream.

Environment

The last category includes macro factors and norms that create friction and are difficult for a single company to effect. Firstly, low familiarity with ecommerce and digital payments in most of Africa mean the typical self-service sales model for SaaS requires some behavior change from prospective buyers. Secondly, since software is relatively easy to scale geographically — with no major upfront fixed costs like factories — local SaaS companies face stiff international competition. Thirdly, in Africa, many of the largest enterprises are multinationals, which make software buying decisions at the global level and rarely consider local solutions, eliminating what is usually the most profitable segment of a SaaS market. Together, these factors severely cut into the obtainable market for a SaaS company and extend sales cycles significantly.

The number of Africans regularly participating in digital commerce and payments is growing. A Mastercard report in 2017, estimated that digital commerce in Africa was still less than 1% of retail, compared with 14% in the US and China. Mobile money payments in Africa exploded between 2010 and 2018, with the monthly value of transactions increasing 25x. These trends bode well for SaaS delivery models that leverage foundational ideas from both fields.

The Opportunities

In spite of these challenges, we are seeing an increasing number of SaaS companies in our pipeline recently. The variety within the group is impressive — including solutions for SMBs, banks, ecommerce, procurement, and human resources. This brings us to the question “Where are the best opportunities for SaaS in Africa?”

Before evaluating opportunities for SaaS, I first developed a simple framework for this evaluation. The criteria included the following:

Unique processes

Generally speaking, the most attractive areas for SaaS investments in Africa lie in industries and functions that operate very differently on the continent compared to developed markets. These local business processes require SaaS with extensive localization. We believe African SaaS companies can address this urgent need for local solutions and find product-market fit where global competitors cannot. Highly regulated industries like telecommunications, financial services, taxes, procurement and accounting are great examples.

In the case of procurement, rigid processes are defined by government and corporate policies. These procurement processes account for a massive portion of every organization’s spending. In many countries, procurement spending amounts to over 40% of GDP, of which approximately 70% is government spending. Kenya-based Xetova and Nigeria-based Gloopro are creating software tools that make it easier to follow such policies while encouraging greater transparency.

Payroll and accounting standards also vary by each country’s regulations. Albert Akuamoah, a Senior Developer at CuroGens said, “Payroll and accounting software needs to be specific to local needs so that, for example, it accounts for the fact that Ghanaian compensation includes lots of allowances compared to other countries”. One company taking on this challenge is SeamlessHR. The Nigeria-based company, described as “Workday for emerging markets,” is building a cloud-based HR platform that helps medium to large-sized companies automate and optimize their HR operations, including payroll. Accounteer is another Nigerian SaaS company that builds accounting software for African SMBs.

Unique culture and norms

Another area with exciting potential is solutions for people-facing roles where understanding local culture and norms are critical — think marketing, sales and support. If the previous point was about process, this one is about people. Customers across Africa’s countries are unique from the rest of the world and from each other. Local SaaS companies can beat foreign competition by turning their local knowledge into more relevant software and smarter AI features. This would increase their differentiation and value for African businesses on the continent. Akuamoah again pointed out “Localization handling, including language and currency conversion, is complex yet very important in certain software applications.”

Unique ecosystems

The ecosystem of integrations and plugins around a SaaS product are often just as important as its internal features. Alex Ntow, Chief Technology Officer of EITBS, a Ghana-based IT business solutions and services provider, said “APIs are important. You have to integrate with other solutions because it is more efficient than building a whole new solution in certain cases.”

Similar to AI, integrations and ecosystems offer an opportunity for local SaaS solutions to differentiate themselves from global competitors. For example, the hyper growth of fintech in Africa is unbundling financial services and creating a need for easier integrations between platforms. Okra, a Nigerian fintech company, is building the connections that allow customers to connect their fintech apps more easily and securely. We expect similar innovations in areas such as agriculture (see Leaf), education (see Clever) and marketing (see Segment), once there is a critical mass of disconnected applications. In telecommunications, our portfolio company Viamo developed software that integrates with mobile network operators in 26 countries to enable organizations to reach over 30 million mobile users. We see the emergence of API companies as natural outcomes from the first wave of digital services in these spaces.

Impact

We also asked where SaaS has the most potential to change lives. We believe the greatest potential for this outcome lies in solutions for financial services, health, and education. The cost savings and increased productivity of SaaS can expand the reach of these important services to millions of more people. Nigeria-based Helium Health recently raised $10 million Series A to digitize healthcare stakeholders in Africa. Edves, also based in Nigeria, is doing the same but in education. TeamApt raised $5.5 million in 2019, to digitize financial institutions across Nigeria. Our portfolio company DrugStoc has played a critical role in supplying medication to medical facilities during the Covid-19 pandemic. Meanwhile, Viamo has helped organizations in each of the aforementioned sectors provide key Covid-related information to millions of people via their mobile phones. These companies are just a few of the many companies in Africa that are using software to make key services more inclusive and drive economic growth.

An Exciting Road Ahead

The SaaS revolution that Marc Andreesen described is gripping Africa and other emerging markets. As seen in developed markets, the search for transformational productivity gains will drive much of SaaS’ growth on the continent. But there are also many reasons to be particularly excited about the unique path ahead for Africa. For one, African SaaS companies are creating innovative solutions for African business needs. This focus is leading to creative new business models for SaaS, and could position African SaaS companies to expand to other emerging markets with similar business challenges and shared disconnects with products created in Silicon Valley. In emerging markets, SaaS also has the added potential to contribute to economic growth by increasing productivity in key industries and expanding access to financial, education, and health services — addressing some of the biggest development challenges in Africa. I would encourage fellow investors in the early-stage African ecosystem, who are looking for social and financial returns, to strongly consider adding SaaS to their portfolio this year.

Sources:

1. https://lillianli.substack.com/p/why-are-there-no-massive-chinese
2. https://a16z.com/2011/08/20/why-software-is-eating-the-world/
3. http://country.eiu.com/article.aspx?articleid=263251210
4. https://www.africa.upenn.edu/Acad_Research/softw_heeks.html
5. https://www.forbes.com/sites/forbestechcouncil/2020/09/01/the-new-era-of-saas-is-here-and-ai-is-leading-the-charge/?sh=7c58b8184b24
6. https://www.finextra.com/the-long-read/44/there-is-more-to-digital-payments-in-africa-than-m-pesa
7. https://mastercardfdn.org/wp-content/uploads/2019/03/BFA_Digital-Commerce-White-Paper_FINAL_Feb-2019-aoda.pdf
8. Conversations with various IT professionals and software users in Africa