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Startups are between the devil and the deep blue sea
And Never has the devil been scarier.
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Friday’s newsletter was the first time we published a contribution from a reader. It was an interesting perspective from someone who has experience working across Nigerian multinationals and startups. So, if you’ve got an interesting view on anything we publish, please send me an email at email@example.com
That said, Adedeji Olowe, who we quoted in Friday’s newsletter offered a response (lightly edited) that’s worth publishing everyday and two times on Sunday.
Startups are between the devil and the deep blue sea
“We all live in constant fear that our foreign bankers would just wake up one day and block the hell out of us. Unfortunately, the alternatives to these foreign banks are few and far in between. There are reasons startups use foreign banks, one of which is that our banks aren’t the greatest. So, I quite understand the outrage and the inconveniences, which may even mean life and death scenarios for startups caught in the crossfire.
But my experience in banking, KYC, and fraud management have shown me that you sometimes can’t jump to an immediate conclusion without understanding the details and nuances of what went down. Most ‘fintech banks’ we hear about, Mercury, Brex, etc. are not licensed. And there is nothing wrong with that; most digital banks use the license of other commercial banks until they can get theirs.
Mercury bank, which is at the center of the brouhaha, uses the license of Evolve Bank and Trust Bank in the US. And like any typical digital bank would tell, you are forever at the mercy of your host. If the Compliance team of the host bank isn’t comfortable with some transactions, you either do something drastic or get shut down. The devil has never been scarier or the blue sea deeper.
And this isn’t a US thing—it is a banking thing across the globe. For example, TeamApt had to find alternatives to their virtual account products because Providus bank shut them down abruptly. The legend of how they survived this madness should be told.
Furthermore, while this may have happened to a lot of “African startups” nobody knows the limit of it. For a more holistic story, was this against African startups all, or does it include other non-African startups whose cries we haven’t heard? Did they suspend all African startups on their books or just some? Or was it some types of startups that got shut down? If you don’t know, you don’t know.
And lastly, even if we ran our own banks but the regulators come because of issues regarding certain clients, the bankers would always choose their franchise over a customer. We have seen licensed fintechs in Nigeria cut off errant customers on their platforms.”
With $513 million, Jumia’s future is all about customer acquisition
Jumia’s earnings report for the Q4 2021 was released two weeks ago, and it is a testament to how much people have moved on from Jumia that it was not a big talking point. In the early years, the Jumia narrative was tantalising and the “Amazon of Africa” leaned into the narrative. These days, Jumia doesn’t care a ton about storytelling and news features; for two years, the mandate has been crystal clear: the e-commerce company needs to turn a profit.
The pandemic gave a lift to many e-commerce businesses. For Jumia, triggered price rally, and at one time, Jumia was trading at $65. The company did the sensible thing, selling additional shares, and over the course of 2020 to 2021, raised over $400 million. It was a smart decision, when you consider that Jumia is sort of in a make or break mode with what seems like a 10-year runway.
As a publicly listed company, the luxury of raising piles of cash from VCs while making losses is not on the table. It has to come down to the business being profitable by acquiring customers and being the number 1 online stop for people to shop. Basically, Jumia is back in startup mode, and this means spending piles of money on trying to acquire new customers.
On the evidence of Q4 2021, all the numbers point to progress. Annual active users are up, number of orders are at an all-time high and an interesting metric, which Jumia is calling “Gross profits incentives” is also up. But you don’t acquire a ton of new customers without spending cold hard cash; the company spent $11 million in Q4 2021 compared to $3 million in Q4 2020.
Aside: Jumia is prioritising the sales of everyday items over more expensive items like phones because it believes that customers who buy things like groceries easily become repeat customers. For 2021, Jumia said each customer ordered from its platform an average of three times per quarter; it will be looking to push this number up.
For 2022, Jumia expects to keep spending, with plans to invest between $50 and $55 million in sales and advertising expenses in the H1 2022. The key questions are: will Jumia have become sticky enough by the time its done with all its spending to start making a profit, and will its alternative streams of income (JumiaPay, third-party logistics, advertising) be substantial enough to take pressure off its e-commerce business? We will find some of those answers when Jumia releases its Q1 result for 2022.
See you on Friday!