TLDR: The market in Ghana is far smaller making it a not so viable tech venture for investors

The message below is an answer from @bubu in response to this question from @StarLet on DevCongress Slack

Question was:
Do you think western tech companies expanding their services to Africa, is a good thing and why?

Is it because of capital, or Ghanaian developers aren’t entrepreneurial or skillful enough to create tech startups?

@bubu’s answer:

TLDR: the market in ghana is far smaller making it a not-so-viable tech venture for investors compared to markets like Nigeria and Kenya.

Whenever a decision has to be made, to part with money, it always comes down to one thing - Economics. And more so especially for business.

That is the big picture. Now economics will determine, if it makes financial sense to part with the monies. Mind you investors are not doing it out of the goodness of their heart. They want a return.

The difference between local and foreign investors is that, for local investors, the risk of turning their monies around in other markets, especially FMCG [Fast-moving consumer goods] is way lower than investing it in a startup.

Compare the number of FMCGs that spring up each day to the number of exit you have for startups in Ghana. For foreign investors the risk scheme is different, because they have a much bigger pool and distributing the risk evenly among other start ups minimizes loss, especially if one of the investment yields, unlike the smaller pool of local investors.

Now that we know that investment is about profitability, the next question is, what is the potential profitability of a product/company/local startup?

We do well to predict that. Just because a founder comes on to show you a graph and show you some hockey stick growth, it doesn’t mean anything. In fact they are all lies. I know because I used to do them. Investors also know that they are all lies but the idea is not what those numbers are.

The numbers are about 2 main things, namely, how you think about the numbers and how well you are executing. Are you making realistic assumptions. Making a realistic assumption is about how grounded you are in reality. What your historically numbers are is about how committed you are to hitting the ground and doing to work and not jumping from investor to investor and conference to conference while your business suffers.

And before I even go on to explain markets, let me say this, no matter how brilliant your idea/execution/numbers if the market is not big enough there is no way, you are getting an investment.

The market determines what the entire potential success of a business can be. Let me give you 2 examples using Ghana and Nigeria.

The average investor wants to make at least 10x their investment, your ability to do that is what makes you a viable investment. Keeping this at the back of you head lets continue.

The population of Ghana is 30 million. There are two types of internet users. Heavy users, ie. people who buy more than 25 MB a week and lite users, people who buy less than 25 MB a week. (This group of people, the reason they buy the less than 25 MB is so that their Facebook and WhatsApp will work)

Heavy users in Ghana are not more than 2 million based on the numbers I have seen from MTN (I used to work with them). So the true ceiling to growth of a tech business in Ghana alone cannot be more than that. a business will always capture a percentage. That is why the most successful app business in ghana cannot cross more than 150 million downloads. (Express pay, Slide pay, etc)

Let’s just say you capture 10% of the entire market, that is 200,000 people. That is when you have achieved peak growth. Now lets say a further 20% of these are paying users/customers. That brings your paying customers to 40,000. Now if all 40,000 pay 1 Cedi a month to use your service, that is 480,000 GHC a year, ie roughly 87,000 dollars.

Mind you, that is for 1 year and these numbers are optimistic. How do you justify taking $500,000 in funding to make $87k a year? Not to talk about the monies that goes into operations. Even if you save 50% of your monies it will take you 11 years to make your initial investment back not to talk about the 10x return an investor wants. Investors dont want a payout, they want an exit.

Using the same logic let’s start with their population: 190 million. Using the trickle down economics above, we realize, by the virtue of their population which is 6x that of Ghana, all their figures will jump 6x, its potential revenue of $500K in for 1 year. You see where this is going, don’t you?

Apply diminishing returns to the cost of ops to all of this and you get a true picture.
Bear in mind, this a gross oversimplification of the subject. and the numbers are much worse than put forth.

End of Message