The Unsexy Business We Are Bullish About

Following the acquisition news of Expensya, the Tunisian expense management company by Medius, announced in June 2023, we were inspired to write a short article about this space!

Selma, our co-founder & Managing Partner backed this company in 2018 and this is certainly one of more prominent exits in African VC story, given that this acquisition is part of a plan to create a global CFO automation giant by two most prominent Tech PE investors in Europe, and Expensya was the African business they picked among many global competitors! If you want to know more about Expensya story, tune in to Karim Jouini’s podcast here.

CFO Automation in the African context

By mid-2022, there were close to 2,500 fintech companies in Africa, according to a report by McKinsey&Co. Africans today access financial services through multiple channels: traditional banks, informal community cooperatives, fintechs, or mobile money services run by MNOs. And 95% of consumer and business payments still happen in cash (Mastercard) - cash is still king! This fragmentation makes the collection of payments extremely complex.

As a result of this fragmentation, African businesses face a major problem in collecting, reconciling and managing the payments they receive through any of the channels regularly used by a typical middle class African consumer: cash, bank transfer, in-app, mobile money. Based on First Circle Capital portfolio company Credrails’ data: an estimated 40% of transactions among their customers need manual intervention to be reconciled. Finance departments of large and small businesses alike (especially the fast-growing ones!) struggle with account payables and receivables, and related problems such as leakages, inefficient liquidity, gaps in working capital, revenue loss due to poor FX management and operations etc. Poor finance operations eventually reduce the overall credit worthiness of African businesses and tamper their growth prospects.

Technology has great potential to solve the automation and streamlining of finance operations for African businesses, and this is why we, at First Circle Capital, are particularly excited about one particular subsegment of B2B fintech infra, which is widely known in fintech circles as “Office of the CFO”. Sometimes, the driest-sounding businesses are the most lucrative and this is definitely one of those gems!  

WHAT IS OFFICE OF THE CFO?

Office of the CFO, by definition, are fintech businesses addressing various aspects of CFO or finance department operations. They typically help automate various tasks the finance departments deal with daily, monthly, quarterly and annually such as account payables, receivables, expense management, optimization of working capital, liquidity, cross-border revenue booking, pre-funding and many more. They typically charge as a SaaS business model with some potential additional revenue streams from payments, FX, credit enablement.

We divide Office of the CFO into three sub-sub-segments:

1.     Pureplay SaaS – CFO Automation

Typically automating tasks like accounts payables, receivables, expenses and targeting small and medium enterprises. While we see solid adoption trends of these solutions by African enterprises, and particularly financial services players, key risk here is willingness to pay/adopt a SaaS charging model by African SMEs.

2.     Fintech Infrastructure/ APIs for Open Banking

Given the nascency of the African tech ecosystem, we have seen these models struggle to scale and to provide quality service. Open banking regulation has been announced in Kenya and Nigeria but the timing is unclear.

3.     Treasury Management

Target customers are large enterprises with heavy balance sheets, international presence, etc. Key challenge is building an effective enterprise sales team and shortening sales cycles. Big opportunity in Africa lies in FX and working capital optimization.

In the diagram below, we mapped a few key players in Africa as well as corresponding models that managed to scale in other parts of the world.

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While there are still challenges to define the right pricing models that African enterprises and SMEs will be willing to accept, the sheer scope of the opportunities such as reconciliation, FX and working capital optimization make us bullish that the monetization will come. At First Circle Capital we are keen to back more companies and African leaders in the CFO Office automation space. And Expensya's recent exit is yet more proof that African companies can compete and win on the global scene!