Can African startups scale using VC subsidies?
VC Subsidies

I was born, bred and buttered in Kampala, the capital city of Uganda. Like any other poorly planned city, we have insane morning and evening traffic jams. Although not as legendary as Lagos’, it’s just as frustrating. To beat the traffic, I turn to Safeboda, a ride-hailing app.

Safeboda is arguably Uganda’s most prominent startup, and in Nigeria, it has made inroads in Ibadan, a southwestern city in Oyo state.
 

Key takeaways:

  • In the nascent stage, startups typically choose growth over profits. So they run freebies or lower prices of their products/services, essentially making losses to attract more users. 

  • But sacrificing profits means the startup is unsustainable and needs significant upfront investment to pursue such a strategy. VC firms are often willing to provide this investment for scalable startups. 

  • Africa's small consumer market poses problems to this strategy. If there is no market, then freebies may not work. So African startups have to get creative to make user acquisition costs sustainable.


Not only is it convenient crisscrossing through traffic on a Safeboda, but it also has some of the lowest prices per trip. To sweeten the deal, Safeboda has been running promotions for a few months now where users get free trips sporadically. Ugandans have been excited and have taken to social media to share their joy. 

This is not an experience reserved for Safeboda users only. In Nigeria, if you have taken a Bolt or Uber trip in the past, you might have enjoyed the trip, and the price shown was so low that it surprised you. Again, if you’re a regular shopper on Jumia or Konga, you might have purchased a heavily discounted product or gotten free delivery on a food order.

How can these startups afford to give away freebies when the cardinal rule of doing business is to make profits? Are these startups even making money? The straightforward answer is that someone else is covering the difference if you’re not paying full price.

Ranjan Roy, the author of the Read Margins newsletter, explains this perfectly in the context of food delivery. Doordash, a US

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Jonathan Ntege Lubwama

Jonathan Ntege Lubwama

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