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2021 Year End Reflections
Euler Bropleh
Charlie Munger once said that "…if [Berkshire Hathaway's] predictions have been a little better than other people's, it's because we've tried to make fewer of them." While we all hope that we can replicate the success that Charlie, Warren, and the rest of the Berkshire Hathaway team has had over a sustained period, early-stage investors are in the business of making predictions. We make more predictions than we could possibly count in the course of a year — from before we even have an initial conversation with an entrepreneur to after we make a final investment decision. Most of these predictions are based on our conviction in the direction that an industry or a market is heading, faith in the entrepreneurs who are leading the business, market observations and trends, projections, and historical precedence. It takes years to determine whether some of our predictions are right or wrong; however, that time period is much shorter when it comes to our annual predictions.
Earlier this year, we shared what we believed would be some of the top trends over the course of 2021. Here's a review of how accurate those predictions were:
Summary of VestedWorld's 2021 Predictions
The (Continued) Global Rise of African Creative Content — We wrote that "African creative content across design, fashion, television, movies and music will become even more ubiquitous." In art, major art galleries and auction houses have all seen growing demand for and record sales of African art over the course of 2021. In literature, a Tanzanian writer Abdulrazak Gurnah won this year's Nobel Prize in Literature and South African writer Damon Galgut won the Booker Prize and Somali writer Nadifa Mohamed was shortlisted for the award. In music, Burna Boy's GRAMMY Award for Best Global Music Album, WizKid's "Essence" remix featuring Tems and Justin Bieber (which reached the top 10 of the Billboard Hot 100 and became the first song with lyrics in Yoruba to debut on the Global 200 chart), and the expansion of record labels and music streaming platforms across the continent were acknowledgements of Africa's increasing contributions to global music. In fashion, South African designer Lukhanyo Mdingi won the LVMH Prize for the fashion industry's most promising young design talent (the second time an African designer has won the prize since 2019), a collection by Kenneth Ize for Karl Lagerfeld was released blending minimalism with traditional Nigerian Aso Oke cloth, the MET (one of the world's largest and finest art museums) acquired another LVMH Prize winner Thebe Magugu's 'Girl Seeks Girl' dress for their permanent collection. And in film/television, Netflix and UNESCO partnered to launch 'African Folktales, Reimagined' which will allow emerging filmmakers across Sub-Saharan Africa to introduce a global audience to stories that have been an important way of passing down culture, heritage, and values across African societies, and Amazon Prime Video entered into a multi-year licensing deal with Nigerian producers Inkblot Studios following a similar deal that Netflix entered with EbonyLife.
Appearances of "Debt Trap Diplomacy" May Cause Tensions to Flare — Our prediction that tensions would flare and strategic infrastructure assets in various African countries would be seized by Chinese firms as a result of loan defaults by African governments has been inaccurate. While it is true that Chinese institutions are key lenders to infrastructure projects across Africa and a few countries such as Zambia and Kenya have defaulted or come close to defaulting on loans provided by Chinese entities, the lenders have generally been willing to restructure the terms of existing loans. There has not been an instance where the Chinese government has seized an asset from a country as a result of a default or restructuring of a loan. The widely cited seizure of the Hambantota Port in Sri Lanka never actually occurred. In fact, a Chinese firm entered into a long-term agreement to lease the port from the Sri Lankan government. The idea of debt trap diplomacy has been widely discredited and there are signs that China is tinkering with the ways that it finances development in Africa.
Two Steps Forward, One Step Back for African Youth Activism — We suggested that we would not see significant changes to entrenched government power structures as a result of youth activism and that has, unfortunately, proven to be true. While youth activists across the continent have become adept at leveraging social networking platforms and using mobile phones to coordinate demonstrations, highlight political mismanagement and human rights violations, communicate their grievances, and demand better governance, African governments have used a wide range of repressive tools and regulations to deny freedom of expression and the right to gather to demonstrate. This has led to continued disenchantment with the current state of affairs and tacit/explicit support from youth activists for coups that have occurred in some countries over the past year.
Strong Distribution Networks will be King — We explained that companies with large, loyal, far-reaching distribution networks would be best positioned to deliver services and goods to a broad swath of the population across the continent and would raise significant capital as a result. Key examples of this were Zipline's $250M Series E funding round and TradeDepot's $110M equity and debt round. Increasingly, distribution of services and goods across the continent is also being coordinated by a network of agents. The number of active agents across the continent grew from 1.9M at the end of 2019 to almost 2.5M by the end of 2020. That growth is expected to continue in 2021 and beyond. A widespread and well-managed agent network can help provide financial services, serve as the pick-up and drop-off point for physical goods, build brand awareness, and educate and recruit customers in a much more capital efficient manner than if a company attempted to do those things by themselves. In addition to financial services firms, logistics, retailtech, health service providers, and other businesses are relying on a network of exclusive and non-exclusive agents for various business needs. For example, both Omnibiz and Sabi (two of the emerging stars in the RetailTech ecosystem) allow agents to earn a commission by recruiting and training local retailers and keeping them updated on the latest information about each company's products and services. Also, MFS Africa acquired Baxi, a super-agent network in Nigeria, to expand its network of agents across the continent and, in part, expand the range of services that those agents can offer to customers.
The Fortune at the Bottom of the Pyramid — While the anticipated emergence of the African middle class has driven the business and investment decisions of many, we indicated that companies that could leverage the agent distribution models and partnerships to provide affordable products and services to underserved consumers in urban and rural areas would be met by eager consumers who have been neglected or provided with sub-par offerings. Over the past few years, many FMCG companies have repackaged their products into smaller packages (sachets) so that they could lower the price and make those products more affordable. This trend continued to accelerate over the course of the year. We also saw significant growth in the number of companies targeting businesses that have historically served lower income customers — small retailers (ex. TradeDepot, Omnibiz, Sabi, Betastore, Alerzo, Marketforce) and food stall operators (ex. TopUp Mama, Kwanza Tukule, Vendease). The volume of sales that are channeled through small retailers and food stall operators justifies the increasing focus on this segment of the market. We also noticed the success our portfolio company Victory Farms saw as it expanded its sales operations outside of Nairobi to rural, lower income parts of Western Kenya. Sales through those rural branches now make up a meaningful share of the company's revenue. Consumers are benefiting this shift by gaining more reliable access to affordable products and services and we believe this trend will be around for a while.
Continued Strength of COVID-resilient Sectors — Our prediction that the financial services, information technology, and healthcare sectors would continue to see growth through 2021 was spot on. Of the $5B+ that has been raised by early-stage companies in Africa over the last year, more than 50% has been invested in those three sectors. COVID has only accelerated the need for, and benefits of, businesses in these sectors. From widespread agent networks that can provide a range of services (discussed above) to enabling broader access to healthcare and information, these solutions have been helpful to people across the continent and will allow countries to rebound faster and build back better post-pandemic through increased access, improved service, and lower costs in these key areas.
Red Tape Will Inhibit the Full Implementation of the African Continental Free Trade Area (AfCFTA) Agreement — Although we were right that poor infrastructure and inefficient and inconsistent customs procedures would take time to resolve, thus delaying full implementation of AfCFTA, our assessment was unfair. In reality, the formal start of the free trade area is one of many steps that will be required to achieve greater economic integration. Negotiations between countries to harmonize procedures is complex. As the Secretary-General of the African Continental Free Trade Area Secretariat recently pointed out, it took Europe 72-years to establish level and depth of market integration that exists in Europe today. Expecting a continent with more countries and people to achieve a similar feat in less than a year is unrealistic. We recognize the herculean task that is required to fully implement the agreement and are encouraged by sense of commitment that countries have shown to make sure that they Agreement is implemented in a reasonable timeframe.
The Search for the Golden Goose Will Lead to an Increase in M&A Activity — We knocked this one out of the park. In many of these transactions — MFS' acquisition of Baxi, AutoChek's acquisition of Cheki Kenya and Uganda, Sendy's acquisition of a significant stake in Kamtar International, Ajua's acqusition of WayaWaya, MarketForce's acquisition of Digiduka, and several others — we saw a number of M&A transactions across the continent for many of the reasons we anticipated, geographic expansion, market consolidation, building on established platforms, and in preparation for greater intra-continental trade. This was a welcome development in the ecosystem, and we expect it to continue for a while.
It's been an extremely good year for the early stage investing ecosystem in Africa and we're ending on an extremely high note. With a number of investors recently announcing new funds (4DX, Ventures Platform, Alitheaia), the entrance of global venture funds into the market, and an expanding pool of talented entrepreneurs building companies that have the potential to transform the continent, we are excited about what is in store for 2022 and beyond.
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