On scapegoating the “Silicon Valley model”
The “Silicon Valley model” is not responsible for the death of African tech darlings
Hey friends!
I wanted this sentence to be a short introduction to aperçu, a new take on learning about Africa’s ever-evolving informal-to-digital market space, aperçu will be a smorgasbord of data, essays, and client research projects, and it would be a pleasure to collaborate with you, my fellow student, and perhaps work together.
With that said, welcome!
I have just seen yet another complaint about how the mythical Silicon Valley model in Africa is responsible for startup deaths. Critics have offered this theory as a proverbial sin offering in talks, podcasts, conference panels, news articles, research papers, and the perenially negative comments from LinkedIn high priests. I’ve seen it enough to be repelled by this rather simplistic notion that awards outsize blame on “borrowed models from Silicon Valley” for the failure of African technology businesses.
I can think of at least two reasons why this is frankly not a “Silicon Valley model” problem.
1. Borrowing is common everywhere. Adapting is commonsense
China is still trying to dispel the notion that its economic success was built on top of broad corporate espionage. It was (and is still) regarded as a well-oiled, vertically integrated industrial-scale photocopy machine.
This culture did not only apply to hardware but also software services and products. Some of today’s leading Chinese software businesses took direct inspiration from and, in some cases, blatantly copied (at least initially) from existing applications elsewhere. Kik, the Canadian chat app, inspired Weibo; Youku was the Chinese version of YouTube; RenRen looked like Facebook with literal Mandarin characters, and WeChat was essentially China’s remake of WhatsApp.
One of Ma Yun’s (better known as Jack Ma) earliest ventures was the China Yellow Pages product, inspired by a 1995 visit to the US. However, it suffered a quick death after only two years. During that visit, the Chinese visitor caught the Internet business bug in America, and even though China Yellow Pages failed, Alibaba was born four years later. This time, Ma’s eBay shanzhai (or imitation) proved it could succeed and challenge the biggest e-commerce players in the world.
Twenty-five years later, the tables have turned. Instagram’s Reels is Zuckerberg’s sampling of TikTok, even as Douyin, the China-only precursor of TikTok, likely found some inspiration from Vine. I love the way this CNN piece from 2018 puts it. “Ten years ago, Shenzhen was 90% about copycatting and 10% innovation… Now, it's 70% innovation and 30% copycatting.”
An American famously memorised (stole) the design plan of Edmund Cartwright’s power loom, and another American hired an ambitious Brit who replicated Richard Arkwright’s spinning frame technology to create the first water-powered cotton mills in young America. For his trouble, Samuel Slater, the ambitious Brit, was christened the “Father of American Manufactures” by US president Andrew Jackson.
The point is that borrowing ideas is nothing new. Borrowing funding models is nothing new. Samuel Slater (or Slater the Traitor, if you were a Brit in the 1800s) did not only make copies of British technology; according to Tom Nichols, author of VC: An American History, Slater created one of the earliest forms of risk financing that resembles modern day venture capital. If you stretch the logic to irrational points, I suppose you could even claim that venture capital as a form of risk capital has its roots in copycats.
The second point is that adaptation is common sense. If WeChat was essentially China’s remake of WhatsApp, the chat app didn’t stop at being a cheap imitation. Beginning in the early 2010s, WeChat started releasing a stream of features that tapped into the local nuances, evolving digital habits, and the general political economy of China under Hu Jintao and Xi Jinping’s first term. WeChat did not simply sit on initial insight from WhatsApp’s success and hope to win. It took the photocopy and made a lot of extensive edits.
We’re now seeing WhatsApp under Meta Inc. begin to play around with features like payments that have long been part of the WeChat ecosystem. More recently, Amazon has been trimming its sails to hopefully capture some Temu and Shein energy. As Louise Matsakis put it, writing for The Atlantic, “Amazon Decides Speed Isn’t Everything”. The American logistics giant is learning from the Chinese e-commerce sensations that while Americans may like two-day deliveries, “they like cheap stuff even more.”
Lebanese businessmen, Chinese business people, and even Africans from other countries move across borders, taking copies of what they are familiar with and reshaping those copies for new markets, supply chains, and new value addition and value derivation processes.
Does it work? It often does.
If common sense is lacking in the earliest stages of product design, it is not the fault of some vague Silicon Valley model.
2. Silicon Valley is not a real place
Roughly fifty years ago, Silicon Valley was a nickname for the area around the Santa Clara Valley in northern California, so named because of Fairchild Semiconductor and its spawns. Today, it is still a nickname for some 50-odd towns, suburbs, cities and counties in northern California. But it doesn’t officially exist other than as an informal naming convention.
I suppose that when the Silicon Valley model is invoked, it does not typically refer to the geographic nickname but to venture capital. So, let’s talk about venture capital.
The so-called Silicon Valley venture capital model is not a real scapegoat for the apparent sluggishness of Africa’s tech businesses simply because it represents an approach to financing companies that might otherwise not be financed, especially at an early stage. As an asset class, it is typically very niche and commands a minute fragment of the overall capital in the financial system. In other words, its risk profile relative to the economic system is pretty tiny. However, the potential payoffs for the investor and the economy are left to the imagination in the best times.
These are the three most important things to remember about venture capital. Big, risk, and reward. All three are relative, and this relativity is crucial because it is how to pre-measure or assess the viability of a VC asset and, eventually, how success is judged.
The question is whether, as a matter of pure principle, Africa (generally speaking) is a suitable environment for taking big bets with limited downsides and huge (relatively speaking) upsides. What do you think? Are the potential payoffs in Africa’s large and varied market problem sets too small? If you think so, why do you think so?
The answer for me is “Yes in general,” but also “Yes because we have seen this happen outside the specific parameters of venture capital.” I have more yeses, but those are tied to narrow situations and geographies, so I will leave it at that. Venture capital applies this broad principle narrowly but loosely enough to try to capture more reward than systemic risk.
Notice that I have tied my general yeses to the venture capital principle of limited risk and inordinate reward, not to overall economic development. Venture capital, especially with its relatively short timelines, is not what develops economies. That said, those investments, by their very nature (of outsize returns), may turn out to be positive catalysts for economic development overall in the long run.
In other words, venture capital investments are never typically a significant portion of gross domestic product. However, revenues from the companies they helped bring to life may account for substantial portions of GDP in the long run. For example, between the 1970s and 2008 (when the world of private equity (of which VC is a subset) descended into the pits of the global financial crisis), venture capital investments in the US accounted for just about 0.2% of American gross domestic output, a.k.a the “big risk”. But revenues from VC-backed businesses ultimately accounted for 21% of GDP, a.k.a the “big reward.”1
The above example is a generous assessment of venture capital's role in bringing these companies to 21% of GDP from the 1970s to 2008. The point is that the economic impact of outsize returns is visible over the long run—often aided by other positive economic events and processes. So, while you cannot do development finance with venture capital (it is too tiny and concentrated), you can undoubtedly catalyse entities suitable for other forms of capital. The challenge is how to do this so that limited partner returns do not take forever, limiting their appetite for taking this type of risk and further curtailing this catalyst process. That is the need for speed.
Very few people would think about using buyout funds, a.k.a. private equity, to develop economies, and almost no one would judge traditional private equity by its capacity to do so. So why do we make these sorts of demands from venture capital, which is a subset of private equity?
The truth is that alternative asset classes like traditional buyout funds and venture capital have always walked a tightrope that required extreme balance, occasional re-evaluation and often (ill-advised) complexity.
For example, venture capital as an asset class is undergoing one of those fundamental transformations even in Silicon Valley despite the AI exuberance/cover-up. That transformation is showing up in American venture capital funds that are shutting down or morphing into traditional private equity funds. It also shows up in secondary-only funds that buy up stakes from other investors for cents on the dollar. It is showing up as “tertiary funds” that buy stakes in venture capital fund portfolios or purchase secondary shares in private tech companies wrapped in and funded by publicly traded pots of money—professionally known as closed-end mutual funds (CEFs).
In the case of Africa, this private equitisation manifests more as an uptick in issuing “venture debt”. It is showing up in funds that are designing small and midcap mergers and Acquisitions-as-an-Exit into their strategy books. It is also showing up in funds that talk like venture capitalists but move like private equity firms as they look for already profitable “idea-stage” companies to invest in.
This private equitisation of venture capital (something I wrote about more than a year ago in a Next Wave newsletter) seems to be a dubious strategy, given that private equity firms are facing their struggles with more than $1 trillion of illiquid assets and the rise of continuation fund contraptions as the search for exit liquidity becomes ever more desperate.
The madness of 2020 to early 2022 was not unique to Silicon Valley, venture capital, or private equity markets. The peak funding year broke something fundamental to the venture capital model. That something was the concept of Big Risk. And it was diluted, even as the prospects of big rewards remained, and humans reacted naturally to unchecked greed across public markets, private markets and crypto markets. Venture capitalists may have driven the bus some of the time, but very few of us did not cheer as the adrenaline surged.
That is not a Silicon Valley problem or model. At least it was not built that way.
Annaleena Parhankangas, “The Economic Impact of Venture Capital” (Chicago: University of Illinois at Chicago, 2012). https://doi.org/10.4337/9781781009116.00014.
Accessed 30 June 2024.