Neither of these companies are fully African, but both have a track record of loss-making. Neither will be making a profit any time soon.
Shares in Jumia, billed as Africa’s Amazon during its 2019 IPO in New York, now trade at $8.30, compared with their initial level of $14.50. Having expanded quickly, Jumia pulled out of countries including Tanzania, Rwanda and Cameroon. The company is still losing money, with no sign of when the losses will stop.
Mdundo, which this month listed on Denmark’s Nasdaq First North Growth Market after an IPO, risks replicating that scenario as it chases the dream of becoming Africa’s Spotify.
“It costs money to become Africa’s leading music platform,” says Mdundo CEO Martin Nielsen. He says he doesn’t know when the company will make a profit. “We want to invest in new markets.”
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Nielsen says he has five million users now and aims to raise this to 18 million in two years. At that point, he says, the company is likely to target another quantum leap in users to 50 million rather than seek to achieve profitability. The company has enough capital for the next two to three years, but after this, growth will need further financing, he says.
- Nielsen doesn’t know what form this fundraising will take, but selling more shares on the stock market is one option. “Raising capital will create shareholder value,” he says.
- Fresh investment, then, will in itself create value in a context of continuing losses.
- That’s about as likely as making money out of fresh air.
Mdundo operates in 15 African countries and plans to raise this to 21 in the next two years. Its biggest markets are Kenya, Tanzania, Uganda, Zambia, Nigeria and Ghana. The company is close to breakeven in Kenya, but expansion is more important than consolidation, with Cameroon among priority countries, says Nielsen.
Music is provided to users for free, with revenue coming from advertisers. These include Coca-Cola, Diageo and Unilever as well as banks and telephone companies, says Nielsen.
Nielsen has been based in Kenya since 2012. In the early 2000s, he recalls, most music in Denmark was consumed illegally. Spotify changed the game by making music legally available for free. “People stopped listening to illegal music because they got a better option.” The provision of a free music service in Africa which makes money from corporate advertisers can replicate Spotify’s feat, he argues.
The original funding for Mdundo came from a group of “angel investors” in Denmark who put money into start-ups. Along with the company’s executives, those investors are locked in to holding their shares for a year after the IPO.
So far, so good: too many corporate insiders use IPOs to rapidly unload stock as soon as a public market is available.
The catch is that most of the company’s small shareholders are also locked in for six months after buying their shares.
- That’s right: small investors with shares which trade on a public stock exchange are being restricted in when they can sell them.
- “We want to give the market some security,” says Nielsen.
- In other words, the company is holding the price up and will keep doing so by stopping investors from selling.
There’s no reason to assume that brands will keep coming to Mdundo. It already has a wide range of music platform competitors including Boomplay, Spinlet, Smubu and Udux. There’s nothing to stop a further stream of new entrants if there is enough advertising revenue to justify it.
Future demand for digital advertising is unclear. As Havas CEO for Southern Africa Lynn Madeley told The Africa Report in August, it’s possible to overstate the importance of digital advertising channels.
- Billboard advertising is still alive and well, she said.
- And the number of digital users has not increased during COVID 19, Madeley said. It’s just that the same people are using digital channels more.
The corporate advertisers on which Mdundo’s model depends have a plethora of digital channels to reach their audiences. Shareholders should get out when they have the chance.
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