HR tech and SME management companies in Africa
How micro, small, and medium businesses are chasing efficiency via digitisation.
Product Insights Series #2
The Product Insights Series is the 3.0 chapter of our flagship market mappings and offers context around the role played by and the growth of dozens of selected verticals across Africa’s technology ecosystem. Written articles accompany the visual #InnovationMaps to offer deeper information on each product or cluster. The second edition of the series looks at startups that build products to help improve the inner workings of companies in areas like accounting, payroll and HR.
What are HR and SME management companies in Africa?
This product cluster comprises solutions aimed at improving the backend systems, internal operations, and infrastructure of micro, small, and medium businesses (MSMEs) by:
helping SMEs to begin accounting, using the paper trail as a way to access loans and capital;
providing payroll products to help companies manage employee salaries, with extra services like ‘early wage access’ on offer, or ‘on-demand’ pay services, and;
offering tools and software for human resource needs.
The sector should be distinguished from ‘jobtech’, which was covered in previous publications, and which includes businesses aimed at creating and facilitating jobs, as opposed to managing the workforce and business structure. Some of the financial services on offer by HR and SME management startups also belong to a suite of products used by global fintechs like Revoult, blurring the lines between sectors. The space, especially in Africa, is still in its infancy and therefore exhaustive definitions are hard to come by.
This week’s contributors are:
OZÉ | https://www.oze.guru/
Floatpays | https://www.floatpays.co.za/
Workpay | https://www.myworkpay.com/
Funding to HR and SME management companies in Africa
SME management, HR solutions, payrolling, invoicing and accounting products have not been services that historically attract large amounts of funding. However, a number of startups across the continent have recently started to attract larger ticket sizes. Briter Intelligence counts over $50 million being raised over the course of 2021 and Q1 2022 alone, with Tunisia’s Expensya representing the most funded startup in the space, followed by Nigeria’s SeamlessHR, Kenya’s WorkPay, and albeit on a slightly different vertical, Ghana’s OZÉ.
What are businesses in Africa currently using for their human resources, accounting, and payroll services?
The sophistication of backend systems for companies in Africa varies dramatically from business to business, ranging from SMEs with no formal structures in place to large multinational companies using sophisticated systems and technology. We identify two product trends based on the type of customer targeted. Solutions looking to address non-digitised MSMEs and those offering Africa-focused alternatives to larger clients, such as corporates.
According to the Center for Strategic and International Studies (CSIS), in Sub-Saharan Africa alone, there are 44 million micro, small, and medium businesses, most of which with less than ten employees. Meghan McCormick, co-founder and CEO of OZÉ, a Ghana-based accounting and digital operating platform for MSMEs, explains that many of her clients are not aware of whether their businesses are profitable or not, due to a distinct lack of record-keeping. “We are typically the first digital solution they are using in their business, other than potentially Instagram or WhatsApp. It’s only now that people are getting comfortable with adopting digital operation tools. In the rare case they have something before us it would usually be Excel,” she says.
On the other hand, there are giant national and multinational corporations working in Africa that use HR and payroll software from leading companies. “If you look at the big companies, most of them are already using SAP or Oracle and the like. They already have systems, but if you move down to the lower tier of small and medium-sized companies, they do not,” says Paul Kimani, CEO of Workpay, a Kenya-based HR and payroll software provider. This can be due to accessibility issues, such as the cost of enterprise suites. This means most businesses in Africa will not be using backend-operating software, as SMEs make up around 80% of the private sector in Africa, according to the World Bank.
Diversity of business models
The sector’s nascent state in Africa means that most companies are currently operating very different business models. The similarity, however, is that most founders are still in the exploration phase and therefore business models may gradually align as companies look for secondary methods of revenue and growth.
“There will be additional banking products that we can offer so the savings account is really just the beginning of the journey,” says Simon Ward, CEO and founder of Floatpays, a South Africa-based startup that offers early wage access platform to companies.
Early wage access, pay-on-demand, or accrued income are different ways of referring to a financial tool that allows employees to access their wages before the end of the month. It is a growing product in more developed markets and the CEO of Floatpays says he has seen significant uptake in South Africa, onboarding more than 50 corporates since launching in 2020.
The firm charges employees a small fee each time they access wages early. The service is free for employers, however, as a B2B2C business model. Floatpays also offers an interest savings account, working in partnership with local banks, as part of its stated mission to improve financial wellness for employees and help employers retain talent.
Ward is keen to stress that the product should not be confused with lending or payday loans - services that companies are more familiar with Africa. “The immediate model in South Africa or in large parts of the continent is payday lending. People think we are just a cheaper version of that, so it is an important distinction to make. This is not about an interest-bearing product, we are not credit,” he says, pointing at the greater control savers can have over their finances.
Kimani, CEO of Workpay, operates a different model, i.e. software provider helping companies increase human resources and payroll efficiency. The startup, which has operations in Kenya and Nigeria, sells its platform directly to companies with differing levels of access. The platform helps businesses manage employees’ payments, track working hours, centralise and digitise expenses claims, and provide data-reports to increase performance.
Workpay also helps companies navigate complex hiring regulations in Africa by allowing them to ride on its corporate license to hire employees in other countries, rather than having to set up a local entity. Workpay’s solution allows customers to do business in the country without incorporating, by leveraging its infrastructure and services,” he says. However, echoing Ward’s point on the inevitable broadening of these companies’ product suite, as the model involves disbursing salaries in different markets, Kimani adds that the business is slowly moving towards “embedding finance” by moving into activities such as early wage access. This is a prime example of how companies working in the space might end up offering similar products, despite a high level of initial segmentation. In other words, there is the significant market potential for these types of management solutions, yet there are few companies that have managed to come up with a consolidated model that meets the varied needs of their clients in the long term.
OZÉ, on the other hand, has built a smartphone app to help small businesses in Africa manage cash flows and make data-informed decisions. Its flagship product, OZÉ Pay, allows users to send and receive invoices and track finances. The app trail also allows users to access commercial loans at a much lower interest rate than would-be possible. Indeed, OZÉ’s secondary service is partnering with banks to facilitate SME loans at 24-26% annual percentage rate (APR) - i.e. the total cost of a loan including interest and fees - compared to the 60%-120% APR typically offered in countries like Ghana, says CEO McCormick. Among the companies we engaged with, OZÉ is the most leant towards fintech solutions.
The nascent state of the market sets the stage for massive early-mover growth
All the founders we spoke to agreed that the nascent state of the products in Africa means that early-movers have plenty of opportunities to grow. Companies are dotted from region to region and market to market, but there are not yet pan-African giants as in some of the more mature products offered by payments companies.
“Nobody has really gone through Africa as a whole with these products. There are definitely local players starting to pop up but we haven’t seen any of the big international companies, or a dominating player in Africa,” says Floatpays’s Ward.
The limits to expansion depend on the different business models. For companies that rely on established businesses with digital systems in place, like Workpay and Floatpays, for example, the size of the market is very much tied to the size of Africa’s formal sector - as it will take a few years until digital literacy rates among the vast pool of merchants still operating through ‘pen and paper’ will significantly increase.
That said, Africa’s corporate sector is growing rapidly and there should be ground for companies with clear value propositions at this early stage. “It is pretty big and it is pretty early. I think the market size is in the tens of billions of dollars. I say this because this is not a market that is heavily automated and so there is so much room to grow,” says Kimani.
Although most early wage access tools are intended for salaried jobs, Floatpays’s CEO says that he is sure products will soon be built for the informal sector – by far the largest in Africa. OZÉ’s product is more applicable to Africa’s informal sector, but the downside is that this demographic typically has low levels of financial and digital literacy. CEO McCormick says that a major challenge is helping users form habits to keep using the products.
Establishing proof of concept
This speaks to a larger problem for all companies working in the sector: customers’ digital training and onboarding costs, namely, the need to explain the product and convince potential customers of its worth. Compared to other sectors, the problems are less obvious and therefore the solutions are harder to justify. Most of these firms will have to invest more time and capital on educating customers and clients, to reinforce product adoption, than in other sectors. This is especially true across Africa, where formalised payment systems and digitally enhanced solutions are not commonly used by micro and small businesses.
Despite this, most founders believe that the sector will grow rapidly as global investors give the green light to business models that have been tried and tested outside Africa. “In other markets beyond the African continent, investors have learnt to understand the value and impact of these solutions. In the local market, for local investors, there is still a lot of education needed because they haven’t done much investing in the space before,” says Ward.
The space begins to attract more attention with some multi-million dollar rounds in the past few months, suggesting that 2022 could be a knockout year for HR and SME management startups. OZÉ raised $3m in a pre-Series A round in January led by major venture capital fund Speedinvest. Floatpays raised just under $4m in an oversubscribed seed funding round from investors including Global Founders Capital, Base Capital, Finca Ventures, Raba Partnership and 4DX Ventures. Both firms have said they will use the finance to expand into other African markets. Companies active in the space also benefit from being early-movers. They have the advantage of pursuing a ‘volume’ model by expanding into other markets or verticalisation into specific industries – or both. The growth in funding towards these areas, especially in countries outside of the typical Big 4, see Ghana’s OZÉ and Tunisia’s Expensya, may be a sign of increased trust and willingness to bet on entrepreneurs working to disrupt this industry. Time will tell.
Written by Tom Collins | Edited by Lisa With, Dario Giuliani
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