Discover more from Thomas Otter's Acadian Ventures newsletter and blog
Acadian Ventures: Into Africa with Workpay.
Innovation is everywhere, if you look for it.
We are thrilled to be investing in Workpay. See Techcrunch for round details.
Where thesis meets opportunity
Last summer, Jason hired an intern called Jason. Jason Burke is wicked smart and eager to learn. He will go on to great things. One of the projects we asked him to do was to research the African HR Tech market. He didn’t just google stuff, he got on the phone and talked to investors and founders across the continent. He found Workpay for us. Thanks Jason B, and the founders and investors that talked with him.
VC in Africa
I grew up in South Africa, and I have followed the development of the African technology industry and the growth of VC in Africa for some time. Over the last year, I connected with several incubators, angel investors and venture capitalists investing in Africa. The world is small, in that it turns out that my wife’s cousin, Jono Hart, works at a thriving incubator, The Delta. I went to the same high school (some years before they did) as Joshin Raghubar from iKineo Ventures and Will Green, who leads the aptly named Grindstone XL. Another cousin of my wife (she has many cousins) introduced me to other investors, including Zachariah George, from Launch Africa, he is the managing GP there. Launch Africa is a thriving seed /early stage fund.
There is a relatively small, but growing VC community now, so the infrastructure for co-investing is now established. VC investment in Africa is growing. Max Cuvellier has some robust research on VC investment in Africa, broken down by region. More reporting here. In 2022, roughly 6 Billion US$ was invested by VC in Africa, up from 2021, and way up from 2018. See also the research from Partech.
Partech has also recently raised a 245 million US$ fund focused on growth in Africa. So, later stage funding is on the way.
Last year, we went out to raise fund two, and we did it in a very different market. Everything has changed; the deal flow in Africa, especially for Series A and B, has been multiplied by 14 over the last five years.
Emerging markets and our core HR thesis
We have always held the view that innovation can come from anywhere. We have invested in companies in Mexico, Malaysia, Belgium, Netherlands, Canada, France, Germany and the US. We expect to do 50% of fund II outside the US.
We have a specific thesis for SME core HR and Payroll. To quote an almost famous South African marketing slogan, Local is lekker. While large global companies tend to buy global products for core HR, when it comes to SME, companies buy at a local or regional level. In almost every country in the world, there is a local champion that beats out the “global” players.
This is especially the case in emerging markets. Local regulations require local knowledge, and international vendors aren’t that interested in understanding the nuances of the Zambian tax code. International vendors tend not to hire local sales and support teams, so the local players can out-sell and out-support the international competition. This is also why we invested in Brio HR in Malaysia/Singapore and Worky in Mexico.
There is an untapped market, and a massive long term TAM. While in many African countries, there is high unemployment, there is also high growth. For instance there are over 20 Million people employed in Tanzania. There are over 500 million people in formal employment in sub-saharan Africa, and this number is will grow robustly over time.
Governments are digitizing, and that will mean digitization of tax. This will create long term, powerful demand for payroll software. The growth of remote work in tech will demand stronger local compliance solutions. Local businesses will seek to modernise business processes.
Payroll software also plays a role in reducing exploitation, in that it creates an audit trail for employees, aids governments to correctly collect tax revenue, and helps employers too. Access to robust payroll software will help SMEs be more compliant. Done right, HR and payroll software has a positive social impact.
Cloud technology and SaaS are now global.
A decade ago, the infrastructure made SaaS in Africa really hard to do. Now, almost all the major cloud infrastructure players have multiple regional data centres, and these companies are also helping to educate a generation of African software developers, and there is more to do.
The methods to develop effective SaaS products are now well known, so many of the barriers that existed a decade ago are no longer there. It is not to say that building a software business in Africa is easy, just that the local skills and opportunities are greater than almost all VCs without Africa exposure understand. After all, there are more mobile phone users in Africa than in the US.
As the Economist notes:
The potential gains from offering better connectivity and faster internet services in Africa outweigh the difficulties. Microsoft and Amazon are bringing their cloud services to the region, and have opened data centres of their own in South Africa. Huawei has helped build one for the government of Senegal. Google and Facebook are both involved in projects to lay new cables around Africa’s coasts. These investments are a sign that the world’s biggest companies are starting to take Africa seriously—and a reminder that the digital economy, for all its airy promise, will be grounded in fibre, steel and concrete
In early stage investing, the team is usually the most important factor when making an investment decision. So too with Workpay. We spent multiple calls talking to Paul Kimani and Jackson Kibigo about the market, their customers and how they build product. They had been through Y combinator, so they had a lot of the core SaaS concepts nailed. We were very impressed with how they had thought about the payroll data model for multiple countries, and the product demoed well. The team gels well together.
Jason Corsello spent time going through the numbers, and Workpay has excellent operational and financial metrics, in terms of NNC, CAC, MRR growth and capital efficiency.
Africa is not a country, it is a continent. Workpay has strong continental ambitions, having started in Kenya, it is built payroll for Nigeria too, with several others in the works. It has core HR customers in many other countries, and a growing EOR offering. We are also excited about the synergies with fintech. Kenya is more advanced in mobile payments than pretty much anywhere in the world. A great example of Frugal Innovation.
We are thrilled to have invested in Workpay. We recently we got to hang with Paul and Jackson in Stratton, Vermont.
We also look forward to collaborating with Launch Africa. I suspect over the course of this fund and the next one we will be making more investments in Africa.
As my habit, I end with some music: Sauti Sol from Kenya.
Thanks for reading Thomas Otter's Acadian Ventures newsletter and blog! Subscribe for free to receive new posts.