Entrepreneurship

IsEverything
Your Startup It Doing
Can to Capture
Value?
by Ndubuisi Ekekwe
February 01, 2021

HBR Staff/Stockbyte

Summary.   More and more startups are popping up, offering customers new
services and products that save them money. And while their offerings are
attractive, they have one shortfall: They don’t capture value for the company.
Fortunately, there is a strategic model that... more
From the freemium business model to an aggregation business model,
the 21st century digital economy has shown that serving customers
well may not necessarily provide sustainability for a company unless
the firms actively find ways to capture value in the process. It sounds
obvious, but many media and e-commerce companies have gone
bankrupt, despite improving customer experiences through digital
channels, simply because they neglected to capture value.
For instance, many startups emerged and provided cheaper or
completely free means of making national and international calls via
the web, but later collapsed when they struggled to capture value. A
direct 30-minute traditional phone call from Lagos to New York may
cost $10, but using an app, the same call may cost an equivalent of $1,
where that dollar is the cost of mobile internet services spent on the
call. If the app is free (and most are), it has destroyed a value of $9 for
the traditional phone operator, even though the app maker has not
captured any for itself.
This illustration is typical in many sectors where startups are
providing services to customers to save them money, but are then
unable to capture value for themselves, both in the short and long
term. The overriding motivation is capturing market share, but much
of the time the path to profitability becomes convoluted and the
sustainability of the business is threatened.
Some companies, however, manage to pull it off. Looking at these
examples, we can see how they are capturing value in what I will call
double play. Double play posits that firms mix market positioning of
products to maximize strategic competitiveness: A company could be
delivering service in one sector while capturing value in another. And
most times, what is helping the firm to thrive goes beyond what many
people associate with it. If Amazon decimates many brick-and-mortar
stores via low margin retail sales, it would capture value as many
retailers go digital, by selling to them cloud computing services via its
Amazon Web Services (AWS). The profit margin from Amazon AWS,
well ahead of the e-commerce business, is a critical component of
Amazon’s high market capitalization. Yet, without the e-commerce
unit, Amazon would not have built the massive cloud computing
infrastructure required for AWS in the first place.
Startups, too, are using this playbook as they build and grow. In
Africa, many generations of e-commerce companies have struggled,
starting with the first clone of Amazon called Kalahari. Most of these
companies focused exclusively on e-commerce, and with competition
from open markets and other alternatives, most went bankrupt. But
recently, players are adopting the double-play model. That model is
repositioning some of them like Jumia, an e-commerce company,
which launched Jumia Pay and a gaming service, and Konga which
also launched Konga Pay. Largely, through the fintech operations,
they can monetize the immense low-margin transactions which
happen on their platforms via payment-processing commissions
captured in the fintech unit.
Building a double play into a startup operation should not necessarily
be dependent on the availability of funds and resources. The most
important thing is for a startup to understand the current positioning
it has — for example, processing many e-commerce transactions, as
Jumia does — and then find ways to capture extra value in that
process. For a company that was building warehouses, distribution
networks, and buying vehicles, adding a payment layer on its
operation is certainly not out of order, financially. In double play,
there is a high level of dependency within the business units, making
it possible to create a virtuoso circle of value capture within a
symbiotic relationship. Simply, it goes beyond having multiple
revenue streams in a business.
There are different variants of capturing value. Transportation startup
ORide in West Africa was known to be undercutting its competitors
on pricing. Many customers flocked to its platform because of the
massively discounted rates. But what many did not know was that
ORide had built its own payment layer, making it possible to take a
commission from any transaction that was passing through its
network. Competitors which matched its transportation rates, but
without the fintech unit to capture the processing commissions, were
nearly imperiled.
In the automobile industry, Africa’s largest indigenous automobile
manufacturing company, Innoson Motors, has launched a ride-hailing
unit, as it works to grow market share from dominant brands like
Honda and Toyota. Many expect this ride-hailing unit to be a loss-
making business. But what Innoson Motors is doing is a strategic part
of the double play-model: It can lose money on the ride-hailing hire
purchase agreements with many of its independent drivers, but it
would capture value as the ubiquity of the vehicles on the roads will
stimulate people to consider its brands. In other words, even if it loses
money on the ride-hailing, value is captured through extra sales of its
vehicles.
In these companies, one thing is evident: There is an investment
which anchors the capturing of value through other ways. In my
small family fund, which has invested in more than 30 startups in
Africa, Germany, United Kingdom, and United States, we use the
double play in our investing thesis, especially for digital companies.
Our process has three core phases:
Discover and deepen the one oasis: Just as in physical geography
where the oasis is the area in a desert that sustains lives of the
inhabitants, the “one oasis” is the best product in a business, defined
by many variables which could be market share, brand equity, or
profitability. Other products depend on that one oasis to thrive within
the firm. For example, in Amazon, the e-commerce unit is the one
oasis, as that is what most know Amazon for. Our model is to
accelerate investments around this main product, to make it the best
possible, in a world where few are dominant in business categories. In
Zido Logistics, a Lagos-based digital logistics startup, the one oasis is
helping customers move their goods as that is what the company is
known for.
Identify the value: Once the best service or product has been
identified, the next phase is defining the possible value points in the
company. In Zenvus, a Nigeria-based agtech, the value is the farm
data, not selling precision soil sensors. In Krozu, a Florida-based SaaS
startup, the value is productivity advisory, not the collaborations. In
our Dubai-based uber-for-helicopter, Vetifly, the value is on
infrastructure ground services, not just on tickets.
Monetize the value: Finally, we find ways to capture value. But this
capture does not have to be on the one oasis. In Zido Logistics, we
make more money on invoice financing of supply chain than in
transportation, which is what everyone knows the business for. The
invoice financing unit is the double play which would not have been
possible without the logistics arm.
For any company, understanding how to capture value in any
business playbook is particularly important and it does not have to be
on the most popular product of the company. For startups,
specifically, the optimistic attitude of “If we provide the best services
to customers, value will come” may not be evident in a world where
platform businesses like Google and Facebook are dominant and most
things are already free. So, at the early phase of the business, defining
how value would be captured is especially critical, even as users are
added. But even for mature companies, there is need to assess your
operations and find if there could be a double play around your one
oasis.

Ndubuisi Ekekwe is a founder of the non-

profit African Institution of Technology and
Chairman of Fasmicro Group with interests in
technology, finance, and real estate.