Investing in Africa's Digital Future, Lexi Novitske, GP @ Norrsken22

0:00Lexi Novitske:Hello, and welcome to another episode of Riding Unicorns. Today we're joined by Lexi Novitske, General Partner at Norskin 22. Lexi, thank you so much for joining me. It's great to have you on. Maybe you could introduce yourself and Norskin 22 for our audience. Yeah, happy to. So nice to be here with you, James and all of your podcast listeners. So I have been an African investor, I guess like 20 years now, but I moved out to Nigeria about 13 years ago, really thinking that Nigeria was a market that especially Americans were not paying enough attention to, had a massive population, very young, middle class, growing.

0:46And at that time, the economy was going through a lot of real positive waves. So moved out here, started working in private equity, but soon saw that there was this whole other opportunity that I hadn't even been on my radar, where tech companies were being started by incredible founders that have maybe worked in the US at some of the tech companies, or, you know, maybe some of the traditional industries and seeing big opportunities locally that tech could solve, and moving back to start businesses. And that was kind of the early days of tech in Nigeria. And I started just getting involved as an angel investor here.

1:26But eventually that moved into me setting up a venture capital firm. Had a couple of early stage vehicles where we backed some of the companies that have now really become the tech stories and the Africa tech ecosystem overall. And let's see, back in 2021, decided to join our team with a couple of incredible partners that were looking to leave another Africa-focused shop called Actis, which was one of the leading private equity firms investing on the continent. But they were also seeing this huge opportunity to do something in more venture and tech-related. And that's how we set up Norskin 22.

2:08So just a bit on Norskin 22, were backed by the Norskin Foundation, as well as about 35 plus founders of billion dollar plus tech companies in Scandinavia, but also across Europe and the US and even some in Africa. And to invest our$205 million fund in the companies that have really shown incredible product market fit and just really need a bit of capital to scale that up and grow and hopefully become the next success stories on the continent. So that's where we've been investing. We're quite unique in that we're spread out across the major tech hubs on the continent. So I'm based here in Lego still.

2:54We have a partner in Johannesburg and a third in Nairobi. And we're covering all of those, you know, Pan-African, Sub-Sahara market ecosystems, but also cover North Africa as well. But yes, very, very commercial driven fund. I mean, I think you'll see a lot of venture funds on the continent really strive for impact mandates. We believe that you need to show strong commercial returns to really drive investment to come into the continent. Inherently, most of the business models we are investing in are quite impactful in the local markets that they operate in. But we're here to make money for our investors and for the founders that we back.

3:36Awesome.

3:37Lexi Novitske:And what stage do you guys invest at? Yeah, so we typically invest Series A through C. So a sweet spot for us would probably be a pretty mature Series A company. Our initial check sizes are usually four to ten million dollars, can go up to 15 for, you know, those later stage deals as well. So we have done a couple of early stage investments early in our fund cycle, but we're much more focused on kind of the growth stage, given we are where we are in our fund cycle at this point. Awesome. And what are the big misconceptions of African tech? Yeah, look, there's a lot. There's some that I would say are there for a reason, such as having to deal with volatile regulatory environments or corruption or difficult business operating environments.

4:34So all those problems absolutely exist in our markets, but at the same time, those are opportunities. Other misconceptions are, I would say, is that you can't make money in Africa. A lot of people see Africa as a charity case. You know, foundations, charities, non-profit organizations have been putting money into Africa for a very long time and tend to see it as a market where you send money, but you don't make money. And that absolutely isn't the case. I mean, some companies are making some of the most healthy unit economics that I think we've seen everywhere. Because even if you don't have that higher income customer, you certainly do have very large businesses.

5:19And you do have huge populations that are digital first. I mean, there's not a lot of other options for things like access to credit, even quality education or health care. And so everybody's looking to digital to solve those problems. I'm sure there's many more, but maybe one is that exits are hard to come by. I do think a lot of private equity firms have had a hard time for decades realizing strong exits, largely because they've been up against currency devaluations on companies that are driving their revenue growth in local currency. It's a little bit different in tech. I mean, a lot of our companies have hard currency revenue.

6:05They are structured in international jurisdictions. They're, of course, much more capital efficient and scaling much quicker. They don't have those hard assets. So, you know, the exit potential for these companies, I think, is a lot more attractive, especially as you see global companies kind of run into growth headwinds in their own markets. they are looking to expand into Africa to drive some of that growth. Awesome.

6:35Lexi Novitske:Well, it's a great topic, the art of also selling your portfolio. And DPI is not talked about enough, really, within the industry. The elusive DPI. It's obviously the most important thing. And to what extent are you seeing companies that are creating completely new business models versus maybe the temptation to sort of do Uber for Africa, you know, Nico Health for Africa, like just replicating business models in the local market. How do you see that? And how do you kind of try and judge those comparisons? And are you looking for completely unique or are you happy to take models that have proven to be successful and kind of apply them to the local market?

7:26Yeah, well, I think that there is kind of this latecomer advantage. I mean, Africa has legged almost every other market globally. One of the benefits for us as investors is we can see how those models have scaled in other markets, understand what economics should be, understand the learnings that they might have had, and apply those lessons to companies that we're looking at. I think it's more interesting though, to look at other emerging markets for copycat models rather than Silicon Valley. I mean, living daily life in emerging markets is very different than in any cities in the US. So I would say we absolutely love to look at models that have been success stories elsewhere, but tackling hyper-local problem set.

8:19And usually, you know, there's a shift in that model that'll work locally. I mean, for example, we've been looking at a company in Egypt in a market where there really is no mortgage for secondary properties, but most Egyptians invest their money into gold and property just as a store of value. So even in shelves of property where they won't live, it's become an investment class. But there's only financing available to buy brand new properties off of developers. So this company is looking to take that sort of model that customers are already familiar with, but package it as more of a mortgage product to allow financing for secondary purchase of properties.

9:05So these sorts of problems, you know, there's definitely uniqueness in each market on how things work. And look, there's a difference in how a Nigerian consumer might see a product versus a Moroccan customer. So there's even nuances in our own market. But I think we'd absolutely love to take learnings that we've seen in other ecosystems and compare them with what we're seeing on the ground here.

9:32Lexi Novitske:yeah and um europe is often sort of challenged by the fact that we have multiple languages across the continent how does that play out in africa is there a you know if it's english and french you're pretty much good or do you compete with the same sort of language barrier challenges across such a big market i think that the harder challenge rather than language barrier is currency barrier and just the ability to flow funds and trade across markets. I mean, Africa trades heavily with markets across the continent, whether that's oil and gas to retail, to even workforce. But it's still extremely inefficient to move capital, deal with regulation, everything across these borders.

10:27another solution that certainly tech companies are looking to solve. But we have seen a lot of success stories that originate in one of the major Anglophone markets, like Nigeria expands successfully to Kenya and South Africa. And likewise, we've seen the kind of Francophone West Africa block. There's been many companies that operate across the region. And I think really just this last couple of years, you're starting to see a lot more of that overlap now where African companies are looking to North Africa as an expansion market. Those companies are looking southward. There's a lot of cross-pollination in West Africa between the Anglophone and the Francophone markets.

11:11But still, there's a lot of difficulty that I think some of these digital solutions, again, are trying to solve, whether that's enabling capital flows across borders through stablecoin rather than having to convert CIFAT to dollar and then dollar to Naira, for example, if you're trading within these markets. there's a lot of those companies, I think, that are gaining a lot of speed and really understanding now how to operate in these much more complex regulatory environments that are bringing all those markets together. And look, actually, that's one of the themes that we're really watching is kind of this integration across the African continent, whether that's trade or workforce, but also the integration of Africa into a more global economy and a huge trend that we're

11:58Lexi Novitske:investing on right now yeah yeah and obviously you guys do sort of series abc so more of a growth fund are there enough sort of pre-seed and seed funds to really get the companies going like how's that part of the funding chain working are we seeing more have you seen more since you started pop up that have now become good feeder funds to you yeah i mean actually i think we're quite lucky in that there are a lot of early stage funds and a lot of early stage funds that have been pretty well capitalized by investors, whether it's the development finance institutions or foundations that are kind of regional specific.

12:47So some of them, you know, focus just on Nigeria, West Africa, South Africa focused ones, East Africa focused ones, but really plenty of seed stage investment capital to really catalyze some of these early stage stories. But then we're also in an interesting spot that there's not a lot of growth stage capital. There was a lot more before the venture ecosystem pulled back quite a bit from 2021 levels. but since then international investors have mostly retrenched and looked more towards their you know local u.s or european markets so it's actually been a great space for for us i think it's you know kind of a buyer's market in the growth stage landscape right now and now you're kind of slowly seeing some of those international come investors come back but wanting to work with local players on the ground and just again kind of dipping their toes in so yeah i think there There absolutely is fantastic deal flow.

13:51I would say more so than we, you know, we see great companies that maybe just are not, you know, quite there yet in terms of scalability that we pass on. But definitely no shortage of deal flow. We're very active, especially this year. And I've seen a lot of pretty incredible companies come through the pipeline.

14:14Lexi Novitske:Yeah, yeah, that's great. And I just wanted to double click on the bit about international investors coming in and get your opinion really on how that is perceived and how it works for you commercially. Because I guess there could be a lot of positives to international investment flowing in at growth stage. but there could also be a sort of negative connotation of sort of vulturing off the hard work of you know the early stage investors and founders getting the business to that point and then coming in late quite heavy maybe with aggressive terms or preferences or whatever and and kind of coming in and sort of muscling in you know when all the hard work sort of been done so how do you see all of that and how has it played out in reality when when working with local investors versus internationals that kind of dip in closer to maybe an IPO?

15:12I mean, look, one of my greatest frustrations is that even though, you know, our local economies couldn't be more separate from what's happening in the US, you know, generally not very related whatsoever how much that the local African venture ecosystem reacts or has to react because our valuations inherently are driven by what's happening over in the US. But in terms of international investors coming in, I mean, I think it's hard to generalize. I think that there is some international investors that have domain expertise in a certain sector like fintech or payments that have seen this play out in markets all around the world that are hugely valuable investors and you would love to have them on the cap table or maybe even investors that lend their brand to kind of driving some of these success stories.

16:10But I do think that international investors also just have a very different view on risk and return profiles and then what that means for valuation. I mean, they're valuing companies in a Silicon Valley landscape and taking those valuation metrics to lay over on some of these Africa deals, which, you know, have incredible revenue growth. Top line is looking good, but maybe don't deserve the 10 to 15 X revenue multiples that they would put on U.S. sort of companies. So I think that's the biggest challenge is really educating them, especially if they're co-investing with us on the appropriateness of valuation, just given where we have seen currency fluctuations, again, where we see the real exit profiles and the need to really make those 10x returns, what things need to be priced at in this market.

17:15Lexi Novitske:Yeah, yeah, I can see both sides there, positives and negatives um and then you know we talked a little bit about you know the the opportunity to exit the companies obviously one of the avenues that that can come through is through an IPO in the UK and Europe we're often a little bit conflicted about where we want our companies to go public because it feels like the right thing to go public in the UK or in our local market but But the reality is that you probably have a better outcome and prognosis if you go to the US. Is that the same challenge for African companies? Is kind of the ideal that they go public in the US?

18:01It is. And most of our companies that we're investing in are structured in the US. I would say we're probably, when we're thinking about exit profile, we mostly think about international strategics acquiring them. and had those conversations with some of the potential acquirers on what they're looking for, what they would price things at. So I have a pretty strong idea. There are some cases where we do think our exits will come through IPO. We have a portfolio company called TimeBank, for example, which we're actually expecting probably them to look at a listing in another non-US market, but more likely Dubai or Singapore.

18:42You'll also see a lot of North Africa companies look to expand to Saudi for a growth market. And that's actually a pretty attractive listing destination for them as well. But we have had, you know, limited companies exit pretty successfully in the US. And there's more that are planning their listing, but it'll probably take a couple years until we see more of those come through any sort of volumes.

19:11Lexi Novitske:yeah yeah makes sense and we all evolve as investors over time the more deals we do the more experience we gain what is one thing that you've really changed your mind about since you started investing um maybe you used to do one thing one way and now you do it a different way or maybe you perceive something that you used to see as a positive or negative and you now see it the other way yeah um i mean i can talk a little bit about i mean when i initially started investing here i kind of came with my well you know my lens of being a u.s investor and really understanding that thing that consumers behave differently it was a very low trust environment, you know, with that is quite capital constrained, that success stories are, you know, largely driven on the stage at which you're, you know, you can't, for example, when I was first investing, I was looking at some gaming companies and ad tech companies, without really realizing that you needed to have the solid infrastructure for payments or KYC and digital identity in place for those to really work properly.

20:37And so I think that that has shifted my view a lot is first invest in the infrastructure, even if the margins are slimmer, because that infrastructure at scale can control 70 % plus of the market and the kind of nice to have layered on top will come later

20:59Lexi Novitske:let's see I so is that sort of a sort of I don't know respecting the maturity of the market that you're in and it's kind of like taking the context of where you're investing not just what you're investing into. That's absolutely a great way to say it. I mean, understanding it not just from the numbers, but actually being embedded in it, understanding the real stories and why consumers and businesses behave the way they do. A lot of times it's not because they're not digitally savvy, but it can mean a whole bunch more other things. It's kind of a catch-22 in this market where sometimes you have to build out the physical rails to make digital work as well.

21:48A lot of B2B commerce platforms have had to build their own logistics networks and warehouse networks to be able to properly serve their customer base. You can't just build a marketplace like you'd be able to do in the US that rides off of everybody else's hard infrastructure. So those sorts of things, I think you really have to understand on a local market level, before you can start investing in all of those sexy things, you know, like AI solutions or gaming or, you know, any model that seems a no-brainer. I think there's lots of pieces that you have to make sure are in place for that to work appropriately there.

22:31Lexi Novitske:Yeah, and we, as sort of local investors, we often have an eye on larger companies entering our market. But we don't always see companies from our own market, how they're expanding and going to different territories. So which are the companies from the US and Europe that have actually been really successful at growing through Africa as well, that you're maybe not an investor in, but have seen kind of their proliferation through the market? Yeah, I mean, an easy one is a lot of cross-border companies. I mean, Wave has done an incredible job here, TapTapSend. These companies, for obvious reasons, have done a lot of work in opening up some of these markets and are very aggressive on acquiring companies as well, by the way.

23:24Other companies like Stripe has been active doing some acquisitions. I would say largely, like you've seen a lot of international companies in the financial services and payment space, but you've also seen, you know, some software providers like SumSup and KYC and digital identity space of where other SaaS providers certainly have rolled out a lot in Africa. Yeah. The problem always is, besides sales and the price point, because a lot of the customers are a bit more price sensitive here, is how you build your tech solutions into local rails to be able to really collect payments and do business locally.

24:08um so a lot of them will you know opt for a buy strategy rather than build it out on their own and you know that's what we're also expecting with a lot of our investee companies

24:22Lexi Novitske:yeah makes sense and and so you mentioned payments there is a as it can be a challenge but how else does sort of go to market differ in africa i mean are there are there localized like social platforms and things like that that that have a greater significance in your local market than we would expect look that there's less so social networks i think most uh africans are kind of on you know twitter instagram all of the the normal platforms but i but users do who consumers do tend to still get a lot of their information and content from things like TV and radio outlets. So while, you know, I think Nigeria and Zambia are some of the most mobilized countries in the world, where people are getting, spending hours on their phones and getting most of their information, entertainment, commerce, everything just from their mobile devices.

25:28Some other markets are still quite analog. And another interesting nuance also is literacy is also quite low. I mean, you'll see a lot of people engage with platforms that will provide education just through voice, for example, because they can't read, but they're trying to learn how to make their crops more efficient and what sort of fertilizer to use. etc so that's an interesting nuance i mean certainly the all of the normal ease of doing business aspects are quite a barrier i think to understand whether that's tax how you have to actually be structured locally uh employment standards all of that it's boring but it's it's certainly probably one of the biggest struggles that I think companies have.

26:28Yeah. And again, different markets have different nuances. I mean, Nigeria, for example, has a real interest in trying new platforms. They're very adventurous. They'd love anything that kind of comes across their radar. They're willing to try at least once. Whereas you go to Kenya and it's much more conservative usually you have to have referrals from other people they trust in their network co-ops are quite big for example so yeah there's different dynamics in each of these just

27:03Lexi Novitske:sounds like there is a bit of nuance to each individual market which i guess is is um the same for european you know founders who are growing into different territories as well And then is there a company from your portfolio, maybe one of your more recent investments that you can tell us a little bit about and tell us kind of the rationale behind investing? Yeah. So one company that we are closing a deal in now, I'm sure it'll be closed by the time you launch this episode, is a company that does termination in very difficult to reach countries for remittance companies. So the likes of World Remit, Wave, all of these that are collecting remits capital from senders in Europe and the US, but don't have a way to get them into the hands of users on the ground in markets like Gambia, Sierra Leone, DRC, some of these much more difficult markets to reach.

28:04So it seems like an easy problem to fix, but actually managing the agent network to make sure that this capital is able to flow into the hands of all these people that need it is a pretty complicated problem. And this company is unlocking that at some super attractive margins. I also mentioned TimeBank earlier. So I think one of the success stories in our portfolio that has expanded from an African market in South Africa to an Asian market. So they're now expanding. They've successfully had expansion into Indonesia and Philippines and are growing extremely rapidly. there really doing agent-led retail banking so acquiring customers at the point of retail and doing a deposit first neobank but they've done incredibly well also

28:58Lexi Novitske:yeah and do the founders of those companies share any similarities they're obviously you know both you know hopefully successful companies in your portfolio is there any like common thread between the founders or the businesses that you can sort of pin your hat on and say yeah actually maybe we invest in people like that or businesses like that I mean I think that the common theme between businesses like these two and many of the others in our portfolio is their growth is hugely dependent on a large mass market population in kind of an underserved communities. So where traditional banks don't look to bank retail because it's not a profitable segment for them, but where they can't properly KYC the users or can't do anything as scalable as some of these digital solutions can, that's, I think, where the big opportunity is.

29:57Lexi Novitske:I mean, certainly the tenacity and resilience is a huge factor. I mean, operating in some of these markets is not for the faint heart and you have to really get your hands dirty, you know, coming out of nothing against any of the consulting shops, but coming out of McKinsey and trying to do something on the ground in some of these markets could be, you know, very mismatched skillset. So I think we love founders that are really deeply integrated, know the problem very well, maybe from corporate experience, or maybe even built a tech company before this, and this is their second go around. Yeah, and maybe a bit of an abstract one, bit of fun, but if you could only invest in one African country that wasn't one of the ones where you have a partner in for the rest of your fund, which which country would you be putting your chips on and obviously this is not financial advice to anyone but just like which country are you really excited about which maybe isn't one of the sort of three main hubs that you're in so i'll give you an easy one that i think most people would agree with but where we don't yet have a partner and that's egypt uh we've all been spending quite a bit of time there but it's an interesting very interesting time for egypt they've just gotten out of a wave of currency devaluations, which means there hasn't been a lot of investment capital coming in, but some incredible companies now in a very stable economic environment.