Growth & Management Strategies

Deciphering how to succeed

Successful scale-ups have strong foundations. Without strong foundations - the building blocks consisting of leadership, culture, strategy, systems and human capital - a scaling venture is a metaphorical house of cards, betting more on luck than skill to successfully overcome the myriad of obstacles that African scaling firms encounter. With strong foundations cemented in place, a scale-up can develop its growth architecture - a unique web of human, financial, technological and systems threads - to enable it to flourish and grow, and also survive the inevitable storms an African scaling venture experiences.

All African ventures have distinct strategic options to consider. Two contrasting perspectives are outlined in separate Harvard Business Review articles, both of which have merit.  

• Professors Ronald Klingebiel and Christian Stadler interviewed 100 entrepreneurs to find out which ventures are most likely to thrive. They point to three things that Western investors should want from African entrepreneurs: 1. a focus on the top of the pyramid, 2. control over factors of production, and 3. innovation in distribution rather than in products. 

• Alternatively, Harvard’s authority on disruptive innovation, the late Professor Clayton Christensen, pointed towards pull strategies. When innovators develop products that people want to pull into their lives, they create markets. Their research focused on ventures that address the unmet needs of everyday consumers instead of seeking high-margin opportunities by chasing the middle class. His advice was to follow the lowest-margin opportunities, relentlessly managing costs by integrating as many elements of the activity chain as possible. 

Whilst African consumers have limited purchasing power, they are numerous and have a significant cumulative impact. Ventures can build robust businesses that are based on high volumes, small margins, and lean operations. Serving the majority of African consumers can represent a massive opportunity, but under certain conditions. 

It is argued that large, profitable opportunities in Africa are more likely to be created by deploying well-understood business models in poorly understood markets, rather than relying on frontier technology and innovation. Whilst Africa has a limited history of advancing new technological product developments, it’s the application, adaptation, and piggyback off new innovations in novel ways where the ingenuity and market opportunities lie.

Smart pricing strategies are needed to reflect the market conditions. Notably, the trend of buy now, pay later appears increasingly prevalent.  

McKinsey points to winning strategies being those that focus on multi-dimensional issues concurrently, as indicated by Figure 38. Whilst there is merit in each of the areas identified, a scaling venture has limited resources so needs to allocate budget sensibly towards efforts that go beyond driving top and bottom line growth, whilst keeping costs in check.

Scale-ups are born innovators. Faster-growing firms are almost twice as likely to innovate as slow-growing firms. Generally, such activities include the development of new products and processes that are positively associated with the likelihood of a firm exhibiting rapid growth. In Africa’s case, this is largely to fulfil unmet consumer needs. 

There are a wide range of indicators of innovativeness. Often measures look at the number of patents applied for and/or associated R&D spending. Research has shown that high-growth firms tend to be more innovative than non high-growth firms; however, not necessarily in terms of formal R&D.

A decade ago, two academics, Goedhuys and Sleuwaegen, undertook a survey of 950 African firms in 11 different countries. They proved that product innovation was positively associated with growing rapidly. To keep developing and launching new products, scale-ups tend to have a clear product roadmap which improves the product quality and functionality over time. These are underpinned by technology roadmaps. Fast-growth ventures place more emphasis on strategies relating to enhancing, updating or expanding their product line, and improving production. They also translate their strategic emphases into action by undertaking R&D, innovation and training. R&D investment increases the likelihood that a venture will be a high-growth one: international studies have shown that sustaining high-growth requires persistence of R&D investment and internal capabilities instead of collaboration (but few detailed studies cover African ventures).   

To create new products and services in Africa there are unique contexts in which to operate, which shape how scaling ventures are working - building both vertically and horizontally, sometimes at the same time.  A further McKinsey survey revealed that companies in Africa that vertically integrate have a higher chance of overcoming business challenges. Companies can vertically integrate in three ways – forward, backward or balanced.

• Backward integration happens when a company sets up a new company or acquires another company to gain control of the production process. For example, you are backwardly integrated if you own a fast-food chain and produce the raw materials you use.

• Forward integration involves taking control of a business’ distribution or retail aspect. When companies integrate forward, they take a more customer-facing role. 

• Companies can also choose a balanced integration approach — a forward and backward integration mix. For example, controlling production and retail distribution chains.

Because the ecosystem of enabling technologies has been non-existent or lacking in most African contexts, pioneering scaling ventures often need to be vertical stack operators, in other words, developing both the product/ service, and the enabling infrastructure that underpins it. This can be a matter of necessity to make the core model work.

Professor Tim Weiss notes how African ventures develop capabilities early on in their lifecycle to solve non-core problems for which outsourcing partners do not yet exist. As a result, their organisational designs are characterised by complex internal role structures and a portfolio of specialisations to deliver the core product. These "full-stack” firms operate with minimal outsourcing and relatively large employee pools to create a comprehensive set of in-house solutions that strategically minimise dependency on the broader environment.

“If you're building a Nigerian business - a market where electricity, internet, water can be limited - all these fundamentals are not a guarantee for tomorrow. So it’s going to take a bit longer. This isn’t because the business model is bad. It's not that you shouldn't be doing what you're doing. It’s the context in which you’re operating.” - interviewee

Tomi Davies, President of the African Business Angels Network (ABAN) and member of this project’s advisory board, notes how the pioneer fintech soonicorns are building the foundational infrastructure (including connectivity to mobile money, to banks, licensing across multiple jurisdictions and agent networks) required for the next generation of financial services in Africa:

“This building phase typically does not reflect in the revenue growth curve resulting in the slower uptick of valuations on them relative to the newer fintech companies who have focused on rapidly monetizing ab initio by growing their offering with products such as crypto-trading and ecommerce. These fintech soonicorns however are each turning their monetization engines on, Cellulant with Tingg, MFS Africa with its revamped campaign, and Paga with its new PoS [point of sale] partnership and activities growing 105% year-on-year. In the months ahead he expects to see discerning investors recognising this blend of infrastructure and monetization. These are sustainable models that are defensible and should help in upward valuations of these soonicorns.”

Building horizontally means ventures offering related business models which reinforce a core offering. This can help leverage existing customers' bases to capture more of a nascent market, build out profitability, and improve competitive positioning more generally. This is common, especially in technology firms. Author Alex Lazarow notes how implicit diversification strategies for frontier innovation are often built-in - extending different business lines etc that work synergistically - resulting in ventures being more adaptive because they provide multiple, self-reinforcing, product lines. Examples are fintechs which leverage their payment platforms to extend further service offers - from insurance, to saving, and loans. 

This allows ventures to capture more market share, increase their relevance to customers, and take advantage of network effects as long-term plays. As the firm scales customer relationships, distribution channels must be developed and the product/service offering expanded, refined, and repositioned to meet the needs of an expanded market. More so in Africa if quick international expansion is required to capture growth, increasing the challenges the scale-up faces.

There is little systematic knowledge about the factors that enable new companies to scale in this way and how ventures develop value propositions for diverse parties, customers, investors, partners, suppliers, employees, and how they align these value propositions with its scaling objectives. Participants in our investor workshop in March 2022 suggested more training was needed about the pros and cons of diversification at each stage of organisational growth. 

Some aspects of diversification may be more naturally woven into African business model planning to make these ventures more agile and adaptable. Blending vertical and horizontal diversification can also create competitive and technological moats. But equally this also adds operational complexity and risk, and increases the likely time required to reach scale. Far more research is needed to understand these complex factors in more detail.

“We need to find the balance between trying to grow at all costs, versus keeping a balance in the P&L.” - interviewee

Successful scaling requires an understanding of unit economics, which is key to understanding current financial conditions and predicting future growth. The unit economics concept helps calculate revenues, profits and losses. 

The Vice President of the Office of Equity and Investment Funds at the U.S. International Development Finance Corporation, Laurent Cochran, helpfully breaks down the unit economics fundamentals for Africa, and why the ‘growth at all costs’ scaling model doesn’t translate easily to Africa.  

Laurent Cochran also warns that entrepreneurs typically suffer from overconfidence and positivity biases, which cause them to try to do too much with too little in the hope that they can secure more resources later. This increases risk and sometimes causes failure.

“Founders must understand the importance of finding and prioritising a path to profitability. They can’t continuously run at a loss for 5-10 years in Africa.” - interviewee

Naturally, high-growth firms do not grow in the same way.  At all stages of the scaling process both the ventures and innovators need to know whether the venture innovation is having the expected impact, and whether there is progress towards establishing an effective scaling pathway. It becomes necessary to measure progress, impact, and apply learnings. Numbers matter. 

“If they [ventures] don't have the key economics within them, like knowing how to use the financing efficiently across the different aspects of the businesses, it will be hard for them to scale.” - interviewee

“Founders need to understand how important numbers are to their investors. They need to have high level financial information at hand at all times.” - interviewee

“Founders need to improve their reporting.” - interviewee

Investors clearly care about identifying and measuring impact too — ventures need support: An investor explained to us that “one of the things we started to notice was how much support they [ventures] require on the visibility of their own numbers and growth trajectories; simple dashboards that can help them assess whether they are on track for the type of growth that they want”.

“Limited impact” was a frequently cited justification by partner investors when declining to exercise their rights of first refusal in a USAID-funded programme. Yet, fragmentation in the definition and measurement of impact presents considerable challenges. “Limited impact” is not necessarily actionable feedback for an entrepreneur if “impact” is more clearly defined (e.g. number of units? revenue increase?).

“It's very simple. The only actual thing that matters beyond product-market fit is customers and revenue. All the other stuff is ancillary; and unfortunately about 90 percent of all the content within ecosystems is focused on just that. It's a glorified circle that has no value. It's people taking out press releases to say how they're going to turn into that unicorn. Nobody cares. No VC falls for it. It's noise.” - interviewee

International research studies have shown that the majority (74 percent) of high-growth startups fail due to premature scaling. Customer discovery, validation and customer creation are where premature scaling most likely occurs. Classic mistakes include building out a stellar MVP without being confident that the opportunity (market size and timing) is worth it, and investing too heavily in firms without sufficient (or any) early adopter feedback.

When customer issues arise, the feedback loops from customer service to product development should be instantaneous, allowing the firm to respond promptly and effectively. It is common knowledge that there are significant data gaps and bottlenecks across Africa’s consumer information flow.

Across many of Africa’s markets, billions of cash transactions occur daily but only a small amount, if any, of the data is captured. Africa’s markets are still very informal. As a result, despite there being an abundance of data to be harvested, the formal systems needed to record such data are lacking. There are also bottlenecks. Some regulated sectors - such as the public sector, telecommunication sector, and the banking sector - have aggregated data on their customers but this is not publicly available. Most businesses and organisations in Africa still use very traditional methods to collect data, such as questionnaires and interviews. These paper-and-pen surveys are inefficient and often result in incomplete and unclear data. A bottom-up approach is the better way to offer detailed and nuanced data to understand local consumption trends but the inefficiency of these traditional data collection methods is further compounded by insecurity, the remoteness of key population hubs, and poor infrastructure. This makes it nearly impossible to produce the kind of timely and regular data businesses require. The frameworks for consumer data protection are also not harmonised in most African countries. 

As a venture grows, specialisation takes over and layers of organisation appear. Information about defects or other issues needs to flow from the field service representatives, to managers, to management and back down into product development  teams. This process needs to be fast and responsive. Africa has networks of field agents - boots on the ground - but with limited data collection (and informal processes), any adjustments will take longer.

Customer-facing activities are essential to attracting and building sustainable relationships and  responsiveness. Internal operations need structure and standardised processes to achieve efficiency and low cost. Increasing transaction volumes in sales, billing, purchasing, and production often expose the limitations of ad hoc processes. 

When functional specialisation requires that communications span organisational boundaries, structure and process become essential and a flexible work environment becomes difficult to manage. When infrastructure processes are weak or missing, ventures risk the alienation of customers, lost sales, misallocated resources, and compromised operational or financial control. Conflicts often arise between the need for stability and standardisation in operations and customer demands for customisation, variety, and responsiveness. These must be resolved, taking into account both the needs of current and prospective customers and internal constituents. Effective planning is essential to avoid the chaos that inevitably occurs when market success leads to activity levels that overwhelm existing systems.

Academics have noted that technology ventures must develop complex internal competencies to make up for the nascent developmental stage of the entrepreneurial ecosystem. As a result, technology ventures must scale complexity rather than simplicity. Entrepreneurs often develop strategies opportunistically, lacking a frame of reference because they are starting from scratch, and they take a similar ad hoc approach to building their organisations. Founders tend to view formal structures and processes as bureaucratic threats to their entrepreneurial souls. They also worry about losing speed, control, and team intimacy. When they eschew order and discipline, however, they pay a steep price: chaotic operations and unpredictable performance.

As the firm grows, the fluid and flexible environment of the startup becomes unwieldy. Informal communications and decision-making processes are no longer effective. More hierarchical and formalised management structures become a necessity during growth phases. Consequently, a small line of research on rapid firm growth has focused on what structures and systems need to be introduced when growing organisations change significantly. 

Contrary to the popular belief that the development of management systems kills the entrepreneurial spirit, ventures that implement these systems are associated with faster growth, larger size, and a lower turnover of their CEOs. In the U.S, VC-backed startups are more likely to implement these systems faster. No data exists yet for African firms. We highly recommend researchers consider this critical topic to understand where distinctions and similarities apply. 

In 1972, a Harvard Business Review article entitled “Evolution and Revolution: as Organizations Grow” was published which talks about the entrepreneurial crisis when the venture reaches a certain scale and moves to a higher growth stage. The author, Larry Greiner, identifies a series of developmental phases that companies tend to pass through as they grow. He distinguishes the phases by their dominant themes: creativity, direction, delegation, coordination, and collaboration. Each phase begins with a period of evolution, steady growth, and stability, and ends with a revolutionary period of organisational turmoil and change. The critical task for management in each revolutionary period is to find a new set of organisational practices that will become the basis for managing the next period of evolutionary growth. Those new practices eventually outlast their usefulness and lead to another period of revolution. Managers therefore experience the irony of seeing a major solution in one period become a major problem in a later period.

Fifty years later, we have not found any in-depth studies covering how African firms transition and mature, and which management systems (financial, strategic, human resource management) are best applied. We recommend studies that explore which systems, processes and technologies are used (with as much granularity as possible) in which countries, at which points during growth phase(s), covering different sectors, assessing whether systems are applied reactively or proactively, evaluating metrics, such as cost to income ratio implementation points. Research alone will not suffice. 

Management systems are important. As an organisation grows and matures, organisational structures, strategic and operational planning, accounting and financial systems, human resource systems and the like become increasingly important. At each stage in an organisation’s development, these systems must be developed, enhanced and fine-tuned in order to accommodate the evolving needs of the business. No “one-type-fits-all” solution or strategy for management structure in high-growth firms exists - the functionality of various management processes are contingent on a number of firm-specific or industry-specific factors. But some clear principles will have useful application. 

“I would say, for startups, the biggest problem is how do I manage my finances? I've just got a bundle of cash from someone willing to invest. Suddenly, they burn through it fast. By the next month, they've blown a million Rand and they just don't know how it happened. They didn't understand the economic implications, they were just told by people to obtain clients and that's the way you're going to scale. Go get more funding, and more. They ended up burning themselves out until a lot of them failed. I'd say about 70 to 80 percent of them failed at the startup stage because they just couldn't handle their money properly.” - interviewee

Strong financial and resource management infuses resilience in the venture which helps drive the vision. It can act as a shock absorber when external or internal challenges shake the foundation of the business, which is especially helpful given that African firms often operate in volatile conditions. Leadership teams of scale-ups need to think about how they leverage and focus their resources at all stages and all times. This is key to improving the chances not only of commercial success, but also long-term survival. 

Investors want and expect entrepreneurs to maintain credibility and manage financial resources prudently, focusing efforts and resources on the right activities, managing capital and cash flow efficiently, delivering reliably on financial projections, and demonstrating responsible behaviour in managing other people’s money. The appointment of a CFO or Finance Director can support this process, particularly in being able to provide more informed strategic advice to the leadership team. Having a financial professional within the leadership team will also improve the likelihood of the startup developing dashboards, projections and other data-related tools to shape executive decision-making.

“The other aspect is governance, and the best practice around this, which will help them raise capital, and increase their sustainability. This will help really professionalise the business and become a true corporate.” - interviewee

Establishing a strong governance framework can help build greater resilience: growth prospects can be supported if firms build a governance structure early on their business journey, as it can be used to support the strategic direction of the organisation and provide it with greater flexibility and resilience as it grows. Risk management (and mitigation) frameworks are also essential, but not always applied. Academic studies in Africa have confirmed that leadership teams often deploy risk management techniques reactively and ineffectively, rather than preemptively and strategically, which really unlocks their value.

As ventures mature there is an increasing expectation that better governance features are needed. This becomes a given for investors - who often sit on boards - to have some oversight. A non-executive board full of investors is therefore not usually the best composition, certainly given the risk that investors might not always act in the best interest of the company, but in the best interest of themselves, as shareholders. Moreover, diversity is an important factor in the effectiveness of a board. Other desirable board characteristics (which can help founders build faster-growing and higher-performing companies) include, for example, industry knowledge or sector experience and access to senior global networks.

Management needs to be prepared to continue to meet new challenges as their businesses evolve. Each phase of an enterprise usually experiences challenges of different nature. This makes it necessary for startup firms to augment their managerial capabilities as they grow. Scaling firms should look at using non-executives at an early stage to bring external expertise and guide investment decisions. Additional considerations include being more self aware as scale-up boards are not evaluated (internally or by third-party specialists).

Sage advice from Beau-Anne Chilla, an impact investment manager at DOEN Participaties, includes the following recommendations: 

• Choose the composition of your board wisely (when possible), and make sure the right knowledge regarding the phase of your organisation is present to assist you in the main challenges you will face on your path to growth;

• Make sure the right balance between investors and independent board members with sector and market knowledge is present in the board composition. Consider allowing investors to be board observers only;

• Make up-front arrangements about how long a non-executive board member can stay involved, to make sure investors of different investment rounds follow each other up (securing knowledge about the phase of your startup/ scale-up in your board), instead of adding investors to the board every new investment round, and diminishing the added value of earlier-stage investors.

We asked investors whether sitting on a scale-up board is sufficient to retain oversight, and whether more can be done at operational levels. The answer strongly depends on the fund's DNA and the management style of each investor. Some funds/ investors are paternalistic, others more distant. Some are actively engaged, coaching and supporting management. Much will depend on the relationship that the founding team allows others to build with them.

“In Nigeria, we were told that if you don't have a close relationship [with the leadership team of the scale-up], you'll be informed very late (or hear it from outside). The perception of the founding team of the investors/ board is important. If they know they have people willing to help, they would share more.” - interviewee

There is some helpful guidance on why stronger corporate governance is a must have for a successful capital raise. Our discussions indicated that a number of founders need more bespoke advice and guidance (beyond what is already being provided for by investors). Questions might include whether and how ventures:

• Put in place formal recruitment processes;

• Appoint independent directors (if so, who, and when);

• Decide how diverse should the composition of the board be;

• Consider the optimal size; and

• Articulate appropriate reporting requirements.

The composition of a venture’s non-executive board should be optimised for the stage of the company. As maturity happens, other regulatory aspects need to be considered, such as codes of conduct, upweighting investor relation functions, corporate responsibility obligations, as well as HR planning (e.g. succession planning, stock option pool programmes, etc.).

Flutterwave, an early African unicorn, was recently embroiled in a scandal involving serious financial and personal misconduct accusations levelled against its CEO. We do not comment on the veracity of these claims; we do however believe that greater knowledge of the benefits of strong corporate governance will help both startup and scale-up firms on their forward paths.  

Diversity in the boardroom - not just of gender, culture and ethnicity, but also of thinking - is more important than ever to trigger new ways of looking at the organisation and new ways of thinking about trends in the external market and applying them most appropriately. 

Boards need to move away from review and concur approaches towards one in which strategy discussions are continuous. Boards should spend less time talking about the routine execution of existing plans; instead spend more time discussing whether the organisation is focused on doing the right thing to adequately prepare for the future.

Organisations and their boards need in-depth understanding of a wider set of trends as a way to spot potential disruptions, and receive non-traditional inputs to capitalise on - rather than suffer from - disruption. More imaginative organisations have leveraged the power of unconventional talent, crowding-in bold ideas and experience-led conceptualisation, but this remains the exception, not the norm.

Going beyond what’s acceptable into the unimaginable is the only true means of innovating; this precisely identifies the mythical ‘innovation limit', allowing for a throttling-back of experimentation to produce concepts palatable to traditional organisational stakeholders and management decision-makers. The power of the serendipity of coalescing diverse viewpoints and talents leads to leaps of originality and unexpected, transformative outcomes that could never arise otherwise. Engaging risk-positive non-conformists, off-topic specialisms, and unfettered imagination allows new creativity to flourish. The result: more ambitious innovation; more impactful real-world solutions.

At senior levels, organisations often receive limited and episodic strategic direction. As a result the decisions made tend to be inward-looking, narrow in focus, and conservative in ambition. In times of significant and unexpected disruption, this model simply does not provide bang for the buck. Diverse, radical, high-quality perspectives have transformative potential, allowing organisations to better navigate uncertainty. And these inputs need to be iterative, ongoing, and unfettered, translated for relevance and applicability to drive change.

For fast-growing ventures regulatory complexity and risk are becoming the determining factors in the choice between fast and slow scaling. Leadership teams need to explicitly decide whether to scale their user base applying either fast or slow scaling strategies. 

Scaling ventures need to navigate highly complex regulatory factors. An MIT study - albeit focused on global platform businesses - found that regulatory complexity and regulatory risk are two significant but often neglected factors in scaling decisions.

Regulatory risk refers to the probability of an increase in legal and regulatory costs and complexity in the future. It includes a higher degree of uncertainty than regulatory complexity. Regulatory voids exist - that is, a context without established and powerful regulatory authorities, a tight net of rules, and strict barriers to entry. Accordingly, there is a high degree of uncertainty regarding how regulators may react, which makes it difficult for these businesses to develop discrete policy scenarios, attribute probabilities, and make robust assumptions on timing. We contend that scaling ventures need to reflect deeply on their appropriate regulatory strategies to win. Leaving regulators to decide your fate comes with risk.

Self-regulatory models are often also mistakenly overlooked. Strong corporate governance requires internal efforts to establish codes of conducts to guide future activities. Scaling ventures have roles to play in setting new rules, raising industry standards, initiating collaboration to further develop and spread their solutions, and influencing public policy to propel solutions. Those that do this successfully, can often reap rewards. 

Intuitively one may think African ventures hold broad alignment to SDGs and the 2030 U.N Agenda. SDG disclosure by the large firms in Africa is still at a very low level (except for South African firms, where other legal reporting obligations are required). Studies have argued that business leaders require a mind-set change to help them recognise the need for the triple bottom line measure of performance.

The evidence appears somewhat mixed. Sadly many firms show little or no concern to report on SDG activities. Voluntary disclosure, lack of management commitment and/or capacity, lack of regulatory enforcement, and perceived cost implications are cited as implementation barriers. Other studies examining SME reporting found, unsurprisingly, that those firms which were listed on a reporting framework database were more likely to address the SDGs. 

Unquestionably, greater attention to how scaling ventures formalise (or not) their societal obligations will be increasingly important in the future, especially as this remains a vastly under-explored arena for research and innovation.