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Africa’s First Billion Dollar Start Up Is A Bet On The Rise Of The Continent’s Middle Class. But Is It A Smart Bet?

By Jacob Weindling

For decades, the narrative around African business has been pretty negative. But things are changing as demonstrated by the recent achievement by the Africa Internet Group– as it became the first ever African based “Unicorn” start up company.

Africa Internet Group just received an $85 million investment, valuing the company at over $1 billion, and making it a “Unicorn”.

AIG is essentially Silicon Valley, but all packed into one business.

They invest in and help manage over 30 African companies like Easy Taxi, Jumia, and Lamudi, which mimic the Uber’s, Amazon’s, and Zillow’s of the world.

Glassdoor reviews from former employees of AIG give it a 3.2 rating out of 5 with 21 reviews. The pros largely coalesced around the work: always busy and challenging.

The cons all focused on the same issues surrounding management, with every negative review either highlighting a lack of communication or unrealistic expectations for their subordinates.

These complaints about management seemed to be shared by ownership, as last December, the company began to lay off upper level staff left and right, with one of its largest companies, Jumia, firing over 300 workers in Nigeria, its largest market.

It is not unusual for one startup to go through upheaval like this, but when many companies all operating under the same umbrella go through the same issues, it is a bit worrisome.

However, AXA and Orange would not have invested in AIG at the valuation they did unless it was satisfied with its executive team, so one would think that this massive shakeup is largely a good thing for the company.

Given the timing of the overhaul and the subsequent transaction, this management purge was most likely a contingency for these large firms’ financing, because ultimately, they are not investing in AIG, but in the rising African middle class.

The common theme amongst AIG’s portfolio is e-commerce, as they have laid the foundation of their company on the emerging proletariat.

The size and the economic maturity of the middle class is the subject of fierce debate, as companies like Nestle serve as cautionary tales; their billion dollar expansion hit a rut and was forced to scale back its African workforce by 15% once returns proved to be smaller than expected.

WATCH: Inside a Africa Internet Group Office in Lagos, Nigeria. 

Much of the investment in Africa has been based around the notion that one third of Africans are “middle class,” which emerged from a 2011 paper from the African Development Bank Group which stated that the middle class had tripled over the last 30 years.

However, the AfDB defined it as Africans living off of $2 to $20 in purchasing power per day, with it divided into three separate tiers which further muddied the certainty surrounding the definition of “middle class.”

Standard Bank released a study last September that looked at 11 African countries which account for over half the continent’s GDP, and found the size of their middle class to be 15 million people, or about 300 million less than AfDB estimated for the entire continent.

The middle class of the largest African country by GDP, Nigeria, is estimated at 11%, with 86% of all Africans reportedly falling under “low income.”

The Pew Research Center provides extra support to this assertion as they estimate that just 6% of Africans qualify as “middle class,” which they define as living off of $10 to $20 per day.

90% of Africans are estimated to still live off of less than $10 per day according to Pew.

However, even though the data seems to hint that investors may be too bullish, it does not mean that they should reverse course and become bearish on the many different African economies.

Capital is still flowing into the continent, as foreign direct investment is up over 12% since 2008.

Additionally, some of the struggles companies like Nestle experienced could be due more to cultural misunderstandings than a lack of disposable income across Africa.

“There was no presumption [from the AfDB] that this middle class would exhibit Western modes in terms of consumption of food formula for middle-class babies [Nestlé] nor for whisky [Diaego],” Kayizzi-Mugerwa, one of the chief economists for the AfDB said. “In the latter case, Africans have always had a partiality for beer − irrespective of class – and the beer companies are doing roaring business.”

Many African countries are still dealing with structural issues that go back centuries, as Egypt’s inflation is 210th in the world due to the instability that has arisen over the last 5 years.

Nigeria needs to modernize its workforce as 70% work in agriculture, yet farming accounts for just 20% of its GDP.

South Africa, which remains the model for many African countries, has 66% of its workforce comprising the services industry, which accounts for 67.4% of its GDP, yet the rest of the continent’s labor pool is much closer to Nigeria than its most modernized nation at its southernmost tip.

The historic investment in Africa Internet Group must be seen as a larger investment in Africa as a whole, because without a modernized Africa, the e-commerce that AIG provides would have no market for buyers or sellers.

Africa is still an emerging economy, but it has shed many of the 3rd world caricatures that the West has forced upon it over the years, with Sacha Poignonnec, CEO of Africa Internet Group providing a mission statement for the company that could be construed as one for the entire continent as well:

“We want to be profitable but we are very long-term oriented. Amazon is a great model to look at. They have a great valuation, they have a great customer base. Everyone one is confident that Amazon has a great future but they are still yet to make money.”

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About the Author
Jacob Weindling grew up in Denver, Colorado and graduated from UMass Amherst with a political science degree in 2009. He lives in Boston now, spending most of his time outside of work either reading, writing, or yelling at one of his teams on TV, as sports and politics are his true passions. The most sage advice he can provide comes from hall of fame college basketball coach Bobby Knight: "Stupid loses more games than smart wins."
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