Can African Tech Startups Succeed in a World Dominated by Facebook and Google?

Last year Facebook became the second largest e-commerce company in Africa after Jumia, the industry leader. The American social media giant did not celebrate that feat, though, because it never promoted itself as an e-commerce firm. But as global technology brands penetrate African economies, it is becoming evident that most local startups are experiencing new levels of competition, which could potentially disrupt their operations.

Across African markets, information and communication technology (ICT) is facilitating the process of socioeconomic developments. ICT has offered new ways of exchanging information and transacting business efficiently and cheaply. It has also changed the dynamic architectures of the financial, entertainment, and communication industries and provided better means of using the human and institutional capabilities of countries in both the public and private sectors.

The impact has been consequential: ICT is rapidly moving Africa toward knowledge-based economic structures and information societies, comprising networks of individuals, firms, and states that are linked electronically and in interdependent relationships. We have seen that redesign in Kenya, where MPESA, a mobile money solution, has emerged as the most important banking institution without a bank license. Even in agriculture, digital technology is working.

Across the region, banks are closing branches but expanding their digital channels as customers increasingly move online. The productivity gain from ICT in Africa is unprecedented, and unlike other transformative technologies, like the steam engine and aircrafts, ICT remains a low-hanging application that the locals could participate in on the creative side.

Yet while ICT has produced great gains, the internet itself could cause massive dislocation in local economies. The unbounded and unconstrained nature of the internet has made it possible for competition to become global. Online, geography does not protect a company from competition. That unbounded competition is a challenge for local entrepreneurs. African consumers know about the best global products, and local ones are expected to match them on price and quality. The elite global technology firms typically offer better solutions at zero cost.

That is the paralysis we are seeing in telecommunications, in e-commerce, and across the broad ICT sector. When WhatsApp makes texting and calls free (in some cases with better quality), local telecom giants bleed cash. When Instagram provides an amazing gallery to display products, local newspapers struggle. And when Facebook makes it possible for merchants to reach millions of potential customers at no cost without the typical marketplace subscriptions or commissions, traditional e-commerce begins to fade.

The implication is massive: Naspers, Africa’s largest company by market capitalization, recently exited its classified e-commerce business in some markets. That was coming after one of the continent’s pioneer e-commerce firms was sold after repeated struggles, despite raising more than $75 million.

Sure, Africa has promising startups, but those are in extreme niche areas like agriculture tech and waste management tech, where there is no direct competition with the global tech giants. Apart from those areas, everyone is competing against global ICT utilities like Google and Facebook. We are learning that having more customers, which the internet provides, does not necessarily translate to more revenue, since getting those extra customers typically means offering things for free or discounting them. And global consumer technology powerhouses like Tencent and Google use customers to generate data that drives growth and revenues. These companies aggregate the data and scale massively with near-zero marginal cost, which is all made possible by the internet. Because they are ahead with an enormous number of users, they keep getting better, and the data they accumulate drives improvements in their algorithms. Changing this order is largely hopeless, and that creates a competitive stasis for local entrepreneurs.

Overcoming the disruptive challenges posed by these global ICT utilities will be hard. But there are some options emerging for local African businesses:

Create sectors with offline components. We have noted that the sectors where global tech giants can cannibalize and take over are usually ones that are fully executed on the internet. Startups that operate in sectors with strong physical elements still have promising businesses despite using the internet to drive them. For example, those working to collect farm data by partnering with farming cooperatives and communities are largely protected from what happens online. Across the continent, many are preaching this survival sermon of hyper-localization in niche areas as the only way to avoid global tech firms and their competitive tentacles.

Relocate to the U.S. Major investors, typically from outside the U.S., are demanding that some local companies move to Silicon Valley, where they could have better access to enabling infrastructures like talent, finances, and legal systems as a way of deepening competitiveness while keeping the products Africa-focused. Infrastructure is one of Africa’s weakest links and continues to derail local startups’ capabilities to build products with big enough moats to overcome foreign competitions. This option has gained popularity in fintech: Becoming a U.S. business brings a new level of legitimacy at the pan-African level. Nigeria’s Paystack began in Lagos and has since relocated some of its core developments to Silicon Valley.

Of course, this trajectory would reshape local economies as they lose the entrepreneurs and the businesses to foreign lands. Due to their fiduciary responsibilities, founders must make the best decisions for their firms.

Build on existing infrastructure. Google’s language translation services are the best available. Very soon, Google Swahili- and Google Igbo-enabled tech solutions could become the local standards. A good strategy could be to find ways to position startups to build on the existing infrastructure of these ICT utilities instead of directly competing with them. The promise of voice assistant technologies in local languages could be powered by Google, in this case.

Across Africa, consumers may be thrilled to get free high-quality products from global ICT utilities. But local entrepreneurs still struggle to compete. Without these emerging companies, there would not be functioning economies in Africa. Taking the advice above could help these startups gain a competitive edge over global companies. Over time, though, the best way to fix the issue would be to invest in education and infrastructures that can help the continent compete and create category-king companies in global commerce.

Another Must Read: Why African fintech startups are becoming even more attractive for investors

Author:  Ndubuisi Ekekwe (Harvard Business Review)