Why Africa is the most interesting region for Russian entrepreneurs

Mikhail Lyapin, founder of Exotic business agency, co-owner of Obsidian SMS broker, AFROCOM representative in Kenya and Tanzania, author of a telegram channel about business in Africa @mzungugram, moved to Kenya in 2017 to develop his business. Now it is already the seventh year of his life in Africa, and he has no plans to return yet.

According to Mikhail, Africa — an amazing, diverse region, reminiscent of Russia in the 1990s, with all the opportunities and risks. He told why now even small Russian businesses should try their hand at this continent.

In the middle of the 2000s, I moved from my native Murmansk to Moscow. Until 2015, he worked in large corporate structures (Softline, IBS, Rostelecom, MegaFon), was responsible for various projects in the field of Cloud computing. These companies are big and sluggish, but excellent management schools.

In 2015, my partners and I created the fintech company Moneyrock. In 2017, he moved to Kenya, the city of Nairobi, to develop his business. At first I thought: I will quickly register a legal entity and return to Russia. Now it is already the seventh year of my life in Africa and I do not plan to return yet. Six months after the start, the company reached operating profit.

At the beginning of 2020, I sold my share to former partners. During the pandemic year, we launched the Obsidian SMS broker with a new partner. This is a company that buys large volumes of SMS traffic from local mobile operators and resells them at retail to foreign companies. This project is already profitable. We will soon release a few more online projects for the mass African user.

In addition to developing our own businesses, we help other companies enter African markets: we represent their interests in the region, we provide lead generation (customer acquisition) services in African countries, we hire staff, we conduct market research, we help with security issues, etc. Now our Exotic.vc team employs 23 people: four in various African countries, and the rest — in different CIS countries.

We have also started preparations for the opening of the AFROCOM Russian Entrepreneurship Support Center in Kenya and Tanzania (Chamber of Commerce and Industry of the Russian Federation) with an office in Nairobi, the capital of Kenya, which will help African entrepreneurs work in Russia, and Russian — in East Africa.

Here I will describe my personal, sometimes very subjective opinion about doing business in Africa and entering foreign markets. However, this is the opinion of a practicing entrepreneur.

What is Africa

It seems that Africa — it's one big country. In fact, the only thing that unites 54 countries is — it is a tectonic plate, a colonial past and the main languages spoken in the region. In all other respects, the countries differ.

Yes, South Africa — a European country with a significant proportion of the white population, there is a serious regulation of business and there is competition. And at the same time, there are French-speaking countries, most of which are most often totally poor and where the price of human life — this is the price of a bullet that can be fired at him.

Regions are very different from each other, the mentality and income of the population are completely different, different levels of infrastructure development, and so on. Even within the same country, there are clear differences in the characters and motivations of people depending on belonging to a particular tribe.

That is, if a company is present in one country, this does not mean that it can work throughout Africa. Distances are too great, sales markets and supply chains are different.

Our company works only in the key markets of Sub-Saharan Africa (the so-called Africa, which is located south of the Sahara Desert): Nigeria, Ghana, Cameroon, Kenya, Tanzania, Uganda, Ethiopia in the East, a little South Africa, that is, in eight countries out of fifty four.

These eight countries are home to 60% of Africa's population: 800 million out of 1.35 billion people. Damn conveniently invented, because each new country to cover the product — these are additional costs. In addition, 80% of these 800 million people know English and have smartphones with access to fast Internet, ready for English-language interfaces.

We chose our markets not based on convenience for life — places, maybe not very prosperous — but based on how promising, growing and voluminous markets it is and how much you can become the first in these markets.

In the US or Europe, I'll be at the end of the line of startups: I didn't get into the Ivy League, I didn't work at McKinsey. And here I am the first guy in the village. In a village where 700 million people live and 1.5 billion will live in 15 years.

Who needs to go to Africa

I will analyze the African macro-regions in a little more detail. For ourselves, we decided that there is nothing to do in northern Africa: we don’t want to deal with subtle Arab-Oriental matters. In the south, we are not attracted by the presence of only one target market for IT services — South Africa. The rest of the countries are too sparsely populated. And there we compete with other smart managers, white Afrikaners with excellent experience and education.

According to this principle, we have chosen for ourselves the west and east of the continent. West — this is primarily Nigeria, Cameroon and Ghana. All other Western countries always contain at least two of the three negative factors: total poverty of the population, small populations and French, which no one in my team knows.

East Africa — these are Kenya, Tanzania, Uganda. I like that all three of these countries have significant populations (from 35 to 55 million people each), high penetration of mobile wallets and mobile Internet. In this territory, in addition to English, the Swahili language is common — this means that the population is more or less homogeneous, which is convenient when creating products.

We should also mention Ethiopia, where everything is just beginning now and mobile wallets appeared only in 2020. There is a small civil war going on in northern Ethiopia. But 100 million people — this is a huge population and they will need our mobile services soon.

In the countries we have chosen, the most important rule is strictly observed: we buy cheap (low payroll costs, low customer acquisition costs) and sell the same products and services at a higher price than in the EU and the CIS. Contrary to stereotypes, everything in Africa is expensive, except for the labor of line staff.

For life and our head office, we have chosen the capital of Kenya, the city of Nairobi. This is a balanced region. There are low salaries for line staff, which is always enough on job search sites. At the same time, it is a relatively safe city, and the country itself is incredibly rich in beautiful natural landscapes and the ocean, an hour's flight from the capital.

Kenya — our key market. We start all our product experiments with it. And if successful, we will repeat in the other listed countries.

Which industries are of interest to Russian entrepreneurs in Africa

The main industries in which a few Russian entrepreneurs go in Africa, — these are mining, tourism (travel agencies, hotel business), financial and technological business (credit companies, payment systems and brokers), technology business (various web services, mobile applications), trade, online marketplaces.

Also agricultural business, construction, sales of Russian products, if you are lucky enough to find contractual producers who understand that investments in sales are needed.

We, the people who lived in Russia in the 90s, have already seen how the emerging market is formed and transformed by our own Russian example. Therefore, we predict quite accurately what will happen in Africa in the next 10-20 years.

I believe that here we have more chances of success than in developed, stable markets. The African market, due to high profitability and low costs for line personnel, will forgive Russian managers for relatively weak managerial and entrepreneurial skills: local specialists have these skills even weaker.

Those who are barred from going to California should go to Africa. In the US, our entrepreneurs are more likely not needed — there are enough of them. There our brother competes with the best minds in the world. The chances of losing are very high. Business in the US and EU — it's a vein-stretching game, like a big sport, where behind every successful entrepreneur is a thousand who couldn't.

In Africa, your quality of life will certainly suffer, but the chances of success are higher than in developed countries.

What Russia forgot in Africa

The usual international markets for Russia are lost or in the process of being lost. Trademarks of any product, except perhaps weapons, are weak, unknown to the general consumer market. Our manufacturers do not like to compete head-on with foreign products. They are not ready to invest in sales channels, that is, in sales and after-sales service. The maximum that is enough, — ship something at 100% prepayment.

This is extremely ridiculous: it turns out that a local distributor must believe in Russian products, while the manufacturer himself does not believe in it, since he is not ready to wait for a deferred payment and invest in sales. So far, Russia's efforts have only been enough for high-risk projects in the Central African Republic and other countries with unstable regimes and the construction of large infrastructure projects that can last for many years and end in who knows what. Like, for example, the construction of a nuclear power plant.

All of the above looks like an excellent introduction to finally starting to sell your products in African countries, where there is no negative attitude towards Russian products and where the population is ready to consume products with an unfamiliar brand.

Because in today's world, exporting countries have the largest market shares, not countries that are set up for import substitution.

There are a number of organizations in Russia (Chamber of Commerce and Industry, REC, Rosinfokominvest, Rossotrudnichestvo, etc.) whose task is to help Russian businesses go abroad. Until recently, the activity of our state organizations was aimed at helping mainly the largest state-owned companies.

Russian embassies in African countries (and in total in Africa there are thousands of employees who came to the region for high salaries) cannot help with this task either. They do not have KPI for the development of economic relations between Russia and Africa. You will not be helped with work permits or contacting sane local lawyers or accountants.

How not to help and resolve a conflict situation with a supplier or client from another country. Therefore, Russian entrepreneurs need to rely only on themselves in an unfamiliar and unfriendly region and start a business from scratch. Or contact compatriots who already have experience in the region in their industry.

For a long time, one should not count on Russian state organizations. Only recently the first news appears, which slowly inspire optimism. In any case, if you decide not to go to the region, then this will happen because you do not have such a desire, and not because the state or any other institution did not help you. The system of support for Russian business in Africa has not been created, and it is yet to be created.

Africa — difficult market. Profitable but difficult. It is necessary to create infrastructure on it: a favorable tax regime, financial instruments (various forms of export credits, guarantees for export credits, after-sales service guarantees for buyers), service centers for servicing equipment.

This is a long game, and we don't like to play long. Even Russian entrepreneurs include in their financial plans a return on payback in a maximum of a year and a half, while Western and Chinese manufacturers have it all.

As a representative of a major Russian export institute rightly noted a few years ago in response to my question about the financial and lobbying tools available to Russian business in Africa: “Are you involved in the extraction of hydrocarbons, precious stones or gold? If not, then you are not to us».

It is possible that with the opening of the Russian Business Support Center AFROCOM in Kenya and Tanzania (Chamber of Commerce and Industry of the Russian Federation) this year, the ice will break.

What are the advantages of working in the Kenyan market

Developed payment and GSM infrastructure

Penetration of mobile wallets and mobile Internet in key countries reaches 60-90% of the adult population. In 2021, the first 5G base stations will appear in Kenya for the first time. Working with banks is quite simple, but there is no such variety of banking products as in Russia.

On average, there are 5 to 30 banks per African country. There are no mobile applications and online banking.

No privacy laws, weak IT industry regulation, weak cash flow control laws

There is no state support for start-ups for foreign companies. But, to be honest, there is no special support for Russian startups going abroad. Rosinfokominvest and its peers do not perform their functions properly. The Investigative Committee and the Accounts Chamber of the Russian Federation are vigilantly watching that not a single state ruble is spent by Russian companies abroad.

And yet the entrepreneurial nature is such that you need to rely only on yourself — it means that a healthy project with a cynical entrepreneur at the head will do without outside support.

Large volumes of line personnel

This will lead to the transfer of electronics production from Asia to Africa in 20 years.

Low acquisition cost in B2C

The less money a person has in his hands, the less interesting he is to advertisers, as a client he costs less.

Low market requirements for the quality of managers

In the Russian Federation, do you manage with a C grade? So you will be great here.

No need to invent innovation

Keep a CRM, provide a service just fine and most often you will be in the lead.

What are the disadvantages of working in Kenya

It's expensive to live and do business

In Moscow, I spent 40% less on my family's bills. Services for business are more expensive, often times more expensive. On the other hand, this is good: it means that you can sell dearly.

People without any work experience

There seems to be an excess of line personnel in the country, hundreds of people respond to our vacancies. But often these are people without any work experience or only with useless experience of volunteering or working in an NGO.

Today we receive 600-1000 responses to a vacancy, which would receive 30-50 resumes in the regions of the Russian Federation. Since education is not yet the strongest side of the region, one has to resort to group interviews and homework to pre-screen candidates.

Poor quality of managers

Because of this, the prices for existing local managers are extremely high (for top managers it can reach up to $20-25 thousand). We import managers from the CIS, for whom we also have to overpay.

In addition, there is a high risk of their departure back, for example, if the spouse did not find a job on the spot and regularly informs the employed partner about his displeasure. But this is also a plus — this means that local competitors will also have weak managers.

No state support for foreign businesses

Almost every country has restrictions. For example, in Kenya, this is the need for an investor visa, which implies that you have free $100,000 in your account and pay $5,000 for two years in the country.

A similar payment will have to be made for each foreign employee. Since it is impossible to make a successful business in Africa without being in the region itself, you will definitely fall for these costs.

Low quality of life

This is Africa. Your quality of life will most likely drop. Although personally I get great pleasure from life here. I hope it's not stockholm syndrome.

If you don't work, compared to Russia, there are fewer options for having fun. You need to understand that moving — it is to earn money and grow professionally, increase your value to the labor market and society through valuable work experience in another region.

People live for today

This means that they will often try to deceive you, deprive you of your money, as in Russia only 20 years ago. It's just a feature of developing countries: the poor rarely think long term.

The logic of the local population, officials and employees is not always clear

This is due to ignorance of the local culture and the reasons why everything around happens this way and not otherwise. But this is more your problem, not the problem of the population. After a year or two, the visitor usually goes through all the stages of acceptance, understands how the machine works, and what needs to be pressed to make it buzz.

But yes, for the first year or two I felt like Piper Perri — blonde actress from the famous meme, where she sits on the couch, surrounded by five hefty Africans. Then the situation changed dramatically.

What is the most popular question asked by Russian manufacturers and service providers

"How to sell your products or services in Africa without investing in sales channels, but simply by giving the goods to a prepaid distributor or immediately standing on the shelf with a service provider (for example, a mobile operator)?"

So how do you get everything and do nothing? Here my answer is always — no way. Interestingly, this question is asked by both small companies and giants with revenues of 50-100 billion rubles. Since they are not ready to invest in sales, they most often continue to sell in the Russian Federation and Kazakhstan that they understand.

They don't understand that success in the market usually has prerequisites and most often they lie not in the area of special product uniqueness, but in the area of sales efforts. Even the best and most powerful motorcycle won't run without a little gas.

I explain this phenomenon by the cowardice of the average Russian entrepreneur, his very local, Russian business erudition. At the same time, the Chinese are actively investing in sales in African markets, both themselves and with the help of various Chinese financial institutions. And that is why they dominate in a number of industries in the region.

How the economy and start-up industry will develop in Africa

Weak local management will lead to the fact that the number of operating foreign companies in the region grows exponentially from year to year. I do not believe that in the next 5-10 years in Africa we should expect the development of technologies that are considered modern in developed countries: blockchain, machine learning, VR, AI, etc.

It will be relevant in 10-15 years. On the contrary, we just need to qualitatively repeat what we already created in our country 10-15 years ago. Classical technologies achieve success here: there is something to do in the field of broadband Internet access, data center services, the most banal financial and logistics services, and online stores. If in the EU and the CIS these are already commodities, then here these services are very expensive, and the quality of their provision is extremely low.

On average, the assessment of venture projects in Africa, other things being equal, will be significantly higher than in Eastern Europe or Russia. The GDP of key African countries is growing rapidly, even during the pandemic, countries show a noticeable increase in this indicator up to 10% per year.

The population is also booming and wants to consume. So, for example, if now the population of Nigeria is 200 million people, by 2030 it is expected to grow to 300 million. The population of Kenya — 52 million people. In 10 years it will be 60-62 million. All these people will have a smartphone and a mobile wallet to buy something.

Currently, urbanization is in full swing in the region — migration of villagers to cities. So, in Kenya now only 30% of the population lives in cities, while in Russia 75%. This means that the African market is still very far from saturation, because urban residents consume more products and services. Although the birth rate is slowly declining, there are four children in the average household. Even 15 years ago, there were six children per family in Kenya.

The state of the startup industry

Local startups are mostly weak so far. To make strong projects, you need corporate experience of managing managers and a good education. There is almost no one or the other in the region. But the number of Africans who have completed labor school in foreign companies is growing: even now I know local specialists who earn $15-20 thousand per month. This means that in 5-10 years we will see a lot of serious, scalable local projects.

Foreign startups are present here, mainly teams from the US, UK, EU, India, China. There are only a few teams from the CIS.

As for investments, for me, local investors (large banks, insurance companies) look risky: they do not have an all-African coverage and therefore in some of the regions for the project they may turn out to be ballast, giving nothing but money.

Besides, you may not know their real intentions. They often have little understanding of venture capital investment — this is reminiscent of many Russian investors ("godfather venture"). It may turn out that 10% transferred to the investor at the beginning of the relationship will quickly turn into 100%, as happened, for example, in Uzbekistan with a number of Russian companies to zero.

For Russian investors, African startups — this is not clear. As one Russian investor told me, “I might as well send money to the moon.” I think that, again, the result of poor erudition: our people have never really been anywhere and do not know English, they live in captivity of stereotypes about "do not go to Africa for children to walk."

Chinese and Indian investors prefer to work with other Chinese or Indians more often, and for European investors, Africa is understandable — it is precisely the European countries (Great Britain, France, Germany, Italy, Portugal) that once colonized Africa.

However, my own projects are financed by rare Russian investors whom we met a few years ago. They are all united by a rare deep understanding of the African market, often by the presence of business interests in this region.

Russia now produces 2% of world GDP. Any of our entrepreneurial successes in Russia today — this is a fight for the crumbs. Africa — these are the same 3-4% of world GDP. Very similar values, right? Today, however, seven of the 10 countries with the highest GDP growth in the world are in Africa.

This market is growing even in a pandemic. There are more and more people. Very soon, in 2025, the population of Africa will exceed the populations of India and China, and then it will grow inexorably.

All these people want to eat, drink, download apps and pay for service subscriptions. To pay for their needs, they have the simplest Android smartphone with Internet access and a mobile wallet. Therefore, over the past decade, the weight of telecoms in the market capitalization of the continent has grown from 13% to 29%, while the raw materials and energy industries — fell from 34% to 23%.

Western and Chinese investors understand the prospect: venture capital investment in Africa has grown from $415 million in 2015 to a forecast of $2.8 billion in 2020.

With this column, I am not encouraging everyone to move to Africa. There are 30+ business models in this region in which I dream of creating leading businesses. In addition, our brother is less predictable, less stable as a business partner. More prone to opportunism.

But my interests — This is also the interests of my state. A strong state can only be created on the basis of export growth, and our products are almost not welcome anywhere, except for a few pariah countries. In fact, there is one large foreign market, which is not only not open to Russian products, but at least does not disdain it. And this market — Africa.