Y Combinator’s Michael Seibel: How African Founders Can Build Global Tech Companies

Summary

The speaker discusses the challenges and strategies for investing in software companies, particularly in Africa, where borders and regulations can limit growth. They explore funding enterprises insulated from global competition, like banking, and those providing essential, region-specific services. The conversation delves into the unique nature of African markets, the role of banks, and the shift from consumer to enterprise focus in fintech. The speaker emphasizes the importance of understanding local needs and navigating the physical infrastructure challenges inherent in African markets.

Takeaways

• 🌐 Borders can limit software companies, but the speaker is considering two strategies: investing in regulated industries like banking, which are insulated from global competition, and finding software companies that can cross borders effectively.
• 🏦 The speaker has recently funded an enterprise software company in central Africa that sells banking software, highlighting the gap in the market for locally relevant features.
• 💡 The speaker is interested in companies that solve real-world problems rather than invented ones, and are capable of crossing borders to expand their reach.
• 📍 Being on the ground is crucial for certain businesses, such as auto parts distribution, which cannot be effectively managed from the cloud.
• 🔍 The speaker is looking for areas insulated from global competition, focusing on solving tangible issues in the local context.
• 🔄 The speaker envisions a future with more consolidation in the industry, where companies that have established themselves in specific regions can be consolidated by larger entities.
• 🚀 The speaker acknowledges that understanding and navigating the map of different regions and markets is a competitive advantage for founders.
• 🛑 The speaker advises against copying the US model in other markets, especially when it involves physical elements, and emphasizes the importance of understanding local markets.
• 🤔 The speaker discusses the nature of African markets, many of which are analog, and the challenges of investing in companies that need to solve physical problems versus the traditional software business model.
• 🏛 The speaker has shifted from a consumer fintech focus to enterprise, realizing that banks are not going away and may need to work with them rather than against them.
• 💼 The speaker has found that business use cases, such as payroll processing in regions without bank branches, are more compelling for banks than consumer-focused solutions.

Q & A

How does the speaker view the challenges faced by software companies due to geographical borders?

The speaker sees the challenges from two perspectives: funding companies regulated by governments to be insulated from global competition, and finding ways to fund software companies that can overcome these borders, such as those selling enterprise software to specific industries in regions like central Africa.

What is an example of a company the speaker has funded that operates in a cross-border context?

The speaker has funded an enterprise software company that sells to banks in central Africa, which are typically served by French banking software but lack relevant features for their region.

Why does the speaker believe that being on the ground matters for certain businesses?

The speaker believes that being on the ground is crucial for businesses like auto parts distribution, which require physical presence to hand over parts to customers and cannot be effectively managed from the cloud.

What is the speaker's strategy for identifying areas that are insulated from global competition?

The speaker looks for areas that solve real-world problems, are not just invented for the sake of innovation, and can cross borders, such as companies that serve specific needs of local markets that global competitors overlook.

How does the speaker view the role of banks in the fintech ecosystem?

The speaker initially believed banks would be disrupted, but has come to understand that banks are not going anywhere and play a different, yet crucial, role in the ecosystem, often serving as a customer base for fintech solutions.

What is the speaker's approach to investing in companies that solve physical problems in African markets?

The speaker pivots from consumer to enterprise fintech, focusing on business use cases that solve real problems for large institutions, such as payroll processing in regions without bank branches.

What is the speaker's view on the potential for consolidation in the African fintech space in the next 10 years?

The speaker foresees a significant consolidation, where companies that have successfully navigated and established themselves in specific regions could be acquired by consolidators looking to expand their reach.

How does the speaker address the issue of market saturation in countries like Nigeria?

The speaker suggests that instead of trying to dominate the top 10 to 25 markets in Nigeria, it might be more strategic to focus on a few key cities and then expand to international markets.

What is the speaker's advice to founders who want to replicate successful US models in African markets?

The speaker advises against copying the US model directly, as what works in the US may not work in African markets due to different market dynamics and consumer behaviors.

How does the speaker perceive the nature of African markets in terms of technology adoption?

The speaker notes that many African markets are analog, with technologies like mobile money built on top of a physical infrastructure, requiring a different approach to solving problems compared to purely digital solutions.

What is the speaker's perspective on the role of banks in the African financial landscape?

The speaker sees African banks as primarily mobilizing deposits from large enterprises and governments and deploying them in treasury bills and federal debt, rather than focusing on consumer lending or technology innovation.

Outlines

00:00

🌐 Cross-Border Software Solutions and Banking Challenges

The speaker discusses the challenges faced by software companies due to geographical limitations and government regulations, particularly in the banking sector. They explore two strategies for funding: one is investing in companies that are regulated and thus insulated from global competition, and the other is funding software companies that can overcome these barriers, such as an enterprise software company in central Africa that caters to the banking sector's unique regional needs. The speaker emphasizes the importance of understanding and navigating these challenges to successfully cross borders and the potential for consolidation in the future. They also touch on the importance of being present on the ground and solving real-world problems, rather than inventing them, in the context of African markets, which are often analog and require a physical presence for certain services.

05:02

🏦 African Banking Models and Fintech Collaboration

This paragraph delves into the business model of African banks, which primarily involves mobilizing deposits from large enterprises, governments, and wealthy individuals and investing these in government securities. The speaker explains that these banks are not interested in consumer lending or building consumer-facing technology, which creates a gap for fintech companies to fill. The speaker discusses the potential for fintech companies to work with banks, leveraging their existing customer base and infrastructure. They also highlight the importance of understanding the banks' needs and tailoring fintech solutions to meet those needs. The speaker shares insights on how fintech companies can navigate the African market by focusing on business use cases rather than consumer ones, such as payroll processing for regions without bank branches or card issuing for employees, and the potential for fintech to compete in enterprise software against Western companies by addressing unique African challenges.

Keywords

💡Borders

Borders refer to the geographical and political boundaries that separate different countries or regions. In the context of the video, they pose a challenge for software companies looking to expand globally, as they can limit market access and create regulatory hurdles. The speaker mentions this in relation to funding companies that are insulated from global competition due to being regulated by governments.

💡Global competition

Global competition is the rivalry among businesses across the world for market share and customers. The script discusses the idea of funding companies that are less affected by this competition, such as those operating in regulated industries like banking, where they are somewhat protected from international market pressures.

💡Enterprise software

Enterprise software refers to the category of software that is designed to meet the needs of large organizations, typically involving complex systems for managing business operations. The video mentions an enterprise software company that sells to banks in central Africa, highlighting the unique opportunities for such companies to cater to regional needs that are not met by existing foreign solutions.

💡Cross-border

Cross-border in the script refers to the ability of a company or its products to operate and be successful across different countries' borders. The speaker is interested in funding software companies that can transcend national boundaries, which is a significant challenge given the regulatory and cultural differences between markets.

💡On the ground

Being 'on the ground' implies having a physical presence in a particular location, which is essential for certain businesses like auto parts distribution mentioned in the video. This concept is important because it suggests that some business models require local operations and cannot be effectively managed remotely or through cloud services.

💡Consolidation

Consolidation in a business context refers to the process where companies combine or merge to become more efficient or gain a larger market share. The speaker predicts that in 10 years, there will be significant consolidation in the African market, as companies that have established strong regional presences can be attractive targets for consolidators.

💡Navigating the map

The phrase 'navigating the map' is a metaphor used in the script to describe the challenge of understanding and working within the complex regulatory and market landscapes of different regions. It emphasizes the importance for founders to be adept at operating within these environments, which can provide a competitive advantage.

💡Fintex

Fintex, a blend of 'finance' and 'textile' or 'text', is not a standard term but seems to refer to financial technology or services related to the banking industry in the context of the video. The speaker discusses pivoting from a consumer to an enterprise focus in fintech, indicating a strategic shift to work more closely with established banks rather than trying to disrupt them.

💡Product Market Fit

Product Market Fit is a term used to describe a situation where a product or service meets the needs of a particular market effectively. The speaker mentions that it's better to serve a customer (like a bank) who has customers wanting a particular service rather than trying to serve a customer who themselves may not have found the right market fit.

💡Marginal cost

Marginal cost is the cost of producing one additional unit of a good or service. The script contrasts investing in fintech companies, which often have low or zero marginal costs, with the more offline, physical nature of African markets, where the costs of serving customers can be higher due to the need for physical infrastructure and presence.

💡Agent networks

Agent networks refer to a system of intermediaries or agents who facilitate transactions or services on behalf of a company. In the context of African markets discussed in the video, agent networks are the physical infrastructure that supports mobile money services, acting as human ATMs for cash-in and cash-out services.

Highlights

Software companies are limited by borders, affecting their growth and competition.

Investment strategies focus on companies regulated by governments, such as in banking, for insulation from global competition.

Funding software companies that sell to banks in regions lacking relevant banking software is a new approach.

The challenge of crossing borders is central to the investment strategy in software companies.

On-ground presence is crucial for certain businesses, such as auto parts distribution, which can't be managed from the cloud.

The importance of solving real-world problems rather than inventing new ones for cross-border business success.

The potential for consolidation in the future as companies establish strong regional presence.

The competitive advantage of founders who can navigate the complexities of different regional markets.

The advice against copying the US model in Nigeria, emphasizing the need for a different approach to market expansion.

The significance of understanding the first 10 cities that matter for a business, particularly in terms of in-country presence.

The nature of African markets being largely analog, with physical infrastructure underlying digital services like mobile money.

The shift in investment focus from consumer to enterprise fintech due to the resilience of banks and their role in the ecosystem.

The realization that banks are not going away and may need to be worked with rather than disrupted.

African banks' business model revolves around mobilizing deposits and investing in government papers rather than consumer lending.

The potential for fintech companies to work with banks by addressing their needs and solving problems they can't.

The counterintuitive approach of competing in enterprise software against Western companies by solving unique African problems.

The interesting navigation of business use cases, such as payroll processing in regions without bank branches, for enterprise software.

The strategic pivot of fintech companies from serving consumers directly to serving banks, which have established customer bases.

Transcripts

it hurts software companies to be

limited by borders and so I think I kind

of think about this problem two

different ways one way is like okay I'm

going to fund companies that are

regulated by governments um because like

they're insulated from Global

competition banking is a big example on

the other side I'm thinking how do I

fund software companies that are immune

to that I most recently funded an

Enterprise software company that sells

to banks these guys are in central

Africa all the banking software from the

local bank comes from France basic

banking stuff but none of the relevant

features for the region and it's crazy

to sell a big Bank software when you're

a twers startup but the 5% bet is that

like we can cross the

borders a lot of what I'm trying to

figure out is how to cross borders and

the second thing I think about a lot is

other areas where you can go cross

border we being on the ground matters

right so like we funded a company that

does auto parts distribution yeah and

it's just like you can't do that from

the cloud like some has to

hand people parts

right and so I'm just looking at all of

these areas where it's insulated from

Global competition it's solving a real

world problem not inventing a problem

and it can move crossborder yeah but man

that pres I mean like that map that's my

problem yeah yeah I'd love to I'd love

to pretend like that map doesn't

matter right I get to do that you know

what I mean like but it does you know

what it just means is that for example

in 10 years I see much bigger

consolidation place right because if

somebody has worked really hard to get

frankophone right and somebody has

worked really hard to get East Africa

right and somebody you can then just

come in as a consolidator and kind of

take St and get creative right yes but

but the reality is also it's also

sometimes a competitive Advantage for

Founders who work how to navigate that

map and they are waves you know it just

means it's a bit slower well what's

interesting is often I find myself to

telling the Nigerian Founders like you

can't

copy the US right like in the US if

you're doing something that has on the

ground physical element you know it

probably makes sense to take over the

top 10 to 25 markets in the US before

you get one international market yeah

does it make sense to take the top 25

cities in Nigeria before before you

moved to your first non- Nigerian City

probably not yeah and so there's a lot

of areas where like people want to copy

the thing that worked here and I'm like

I they look at me like you're saying

some really crazy and I'm just like

yeah I'm saying the thing that works in

America won't work in West Africa like

yeah and you know often times I'm I ask

folks what are the 10 cities that matter

to you like what are your first 10

cities and how many of them are going to

be in country yeah and that's a very

different conversation and I think an

added layer of complexity that I want to

address in in in the context of this

conversation also is the nature of

African markets many of them being

analog right so we talk about mobile

money but mobile money is built on top

of a physical infrastructure of agent

networks and physical cash in cash out

human ATMs and you talked about Auto

Parts um you know this idea also as

Venture investors right traditionally

investing in zero marginal cost software

businesses versus the very offline

nature of African markets how do you

guys think about you know investing in

companies that have to solve problems

that are physical in nature versus the

yeah the I guess deal investment case in

software businesses I would say the way

that

I'm trying to attempt to solve that

problem is pivoting my fintex from

consumer at Enterprise I think the thing

that I wanted to believe was that the

banks would be

disrupted and like that was the very

naive American thing but it was weird

because what all the founders wanted to

believe too right the banks play a

different role I just think the banks

aren't going anywhere yes they're not

going anywh and their role is different

well yeah and so I've been you know for

example we have a a card issuing company

with a deal with MasterCard right and

they were originally trying to serve a

bunch of Fint tags

and eventually I said to them you know

why don't you just try to sell this to a

bank and they're like oh Enterprise

sales blah BL blah and I'm like yeah but

like Nigerian Banks Bank the whole

country like you know like they

actually have the problem and they

actually have a hard time building good

technology like like you don't have to

serve a customer who themselves doesn't

have product Market fit you can serve a

customer who has customers who want this

thing and they just can't provide it and

I I've been surprised that how my mind

is kind of changed on that because it

just seems like the banks aren't going

away I mean we just had crypto infinite

investment in consumer

fintech and mobile phones and the banks

are still there yeah and so it's like

okay like I'm I'm like process imination

maybe we have to work with them yeah

definitely I mean at a macro level

simplistically just so you understand

African banks for for everybody here

African Banks mobilize deposits from Big

Enterprises governments and high net

worth individuals and deploy those

deposits in treasury bills and federal

debt that's their business model they're

not interested in lending the consumer

they're not interested in building they

mobilize deposits and

buy um government paper that's their

Core Business in a nutshell so they

won't go anywhere because the space you

are disrupting as a fintech they are

frankly not interested but everyone has

bank account yes so what do you deal

with like so and that's where they get

paid they're just using it to mobilize

deposits yes yes yeah exactly bu TS

right so so they they frankly so when

you're trying to like create a credit

card for the customer and Bank them and

you know Cool Tools they are not

interested they want you to do it so you

work with them yeah you do it and then

when it's big enough they like huh okay

this is big enough maybe now we acquired

well what's interesting is like the

Dirty Little Secret of both of the

companies I'm pushing towards Banks is

that the use cases are business use

cases not consumer like one is a uh a

Payroll use case where like how do you

process payroll in regions of the

country where there aren't Bank branches

and like you know how and it's a big

problem it's for government like how do

you pay the Army and then the other one

was um card issuing for employees for

workers and

so it's been interesting to navigate

that because like you have a bunch of

Founders who are like oh like to your

point who are like oh consumers are

getting screwed and you've got Banks

being like I literally don't

care and like you've got companies and

what do you tell them to do and you're

like well you know if the bank's your

customer maybe you should figure out

what the bank wants yeah and do that and

I think um it's going to be interesting

because I think it's counterintuitive to

think that you could compete in

Enterprise software against the Western

companies but those large institutions

in Africa have different problems yeah

and like the Western software companies

are not addressing so we'll see we'll

see but it's been tricky man