Not long after we published our season three podcast episode on B2B commerce, Problem Solving for Fragmented Retail, I was introduced to Sabi’s co-founders, Anu Adedoyin Adasolum, its CEO, and Ademola "Demmy" Adesina. While Sabi, like the companies we spoke to in that episode, is also building in the B2B commerce space, Anu and Demmy told me that Sabi is different - and shouldn’t necessarily be compared.

Much of what I learned in our prior episode involved vertical integration and a capex-intensive approach to servicing last-mile retail. Asset-light is the dream but it’s not necessarily possible, I was told, due to the level of fragmentation across the value chain and at the last mile. Marketplaces typically solve an information asymmetry problem, but if the products can’t reliably get to where they’re supposed to go, then the wrong problem is being solved.

Sabi is challenging that conventionally held wisdom by taking an asset-light approach (though this isn’t necessarily a story about asset-heavy vs. asset-light, as we’ll see, and Sabi isn’t necessarily taking an explicitly asset-light approach). From a deep understanding of offline retail, they’ve built a platform on which a variety of pertinent services are offered across value chains, to wholesalers, aggregators and distributors.

Their goal is to provide access to services in an environment of infrastructure constraints. On one hand, Sabi is a B2B marketplace in which distributors list the sale of goods with minimum order quantities, and from which wholesalers, aggregators and re-sellers purchase goods. On the other hand, Sabi builds free tools to help merchants run their business - a mini-ERP - as well as software tools for other parts of the value chain, like logistics and warehousing, to help with the facilitation of logistics services. And on top of all of that Sabi layers various types of financing onto the platform.

Sabi, therefore, views itself not strictly as a marketplace, but as a platform to aggregate service providers that offer products to best help the businesses solve their problems.

This model has, in Demmy’s words, been “a runaway success” so far. After launching its pilot in Nigeria in January 2021, they were garnering 60 percent month-on-month growth, and have experienced comparable initial growth after expanding to Kenya, as well. Their annualized GMV is over $400 million - of which approximately one-third is finance transactions. They have recently launched in South Africa, as well, through a partnership with Vumele. And they have raised a $15 million Series A in the first quarter of 2022 - led by the New York-based FinTech Collective, with participation from CRE, Norrsken, and others - as a result of and to support such steep traction.

In today’s partner edition, we’ll tell Sabi’s story across a few different dimensions:

  • Rensource and COVID’s Creative Destruction
  • Understanding Value Chains
  • The Product
  • Platforms and The Bill Gates Line
  • The Risks
  • The Opportunity

The story starts not with Sabi, though, but with another company: Rensource Energy.

Rensource and COVID’s Creative Destruction

In 2015, Demmy founded Rensource Energy and, in 2018, hired Anu - with her background in offline sales, having run Jumia’s JForce program in Nigeria - as General Manager, and later, COO. Rensource’s primary business was providing power to large urban marketplaces. The original vision of Rensource - which raised $20 million in 2019 - was not just to provide energy but to layer other services on top of their energy provision. So, there was always ideation at Rensource around the best way to do that. 

COVID, and the hard lockdowns, in particular, brought a lot of uncertainty around Rensource’s core business model in early 2020. During the lockdown, the markets Rensource served were shut down, but as an infrastructure company, Rensource had police permission to move around. They were wondering, as a team, how they could help during the shutdown.

Rensource had previously built a listings platform for merchants that was never rolled out, and during lockdown repurposed the product into a consumer-facing platform to order food. Without many other food delivery services in Lagos, the service quickly took off. And to fulfill these orders, Rensource staff, from the executives to the engineering team, used their own personal vehicles to make deliveries.

“And that’s what put physical goods on our mind,” Anu recalled.

One practical implication of Rensource’s core energy service was that installing infrastructure and servicing customers meant mapping entire markets and metering every shop to electrify markets with tens of thousands of merchants. Through the process, the Rensource team spent a lot of time in merchants’ shops, trying to understand how to collect payments, what part of the energy service processes were convenient or inconvenient for merchants, and so on. This invariably gave the company deep insights into the day-to-day pain points of merchants.

Often, the way people think around informal markets tends to be very prescriptive. However, at the time, Rensource wasn’t layering other services on top of their energy provision. They had the freedom and flexibility to solve for the pain points they saw across the retail value chain, as opposed to building with a specific aim related to their core energy business.

And so after the lockdown was over, they shut down their ad hoc delivery business, spun Sabi out of Rensource, issued a one-time dividend of Sabi shares pro rata to Rensource investors, and named Anu its CEO.

Understanding Value Chains

A key lesson Anu and Demmy learned at Rensource was how poor infrastructure manifests in problems for merchants. Here’s Anu,

You have a bunch of businesses basically trying to survive in environments that are very infrastructure poor. And so it means that instead of executing their core functions, they spend a ridiculous amount of time getting or managing the infrastructure they need around them to be able to do day-to-day business.

That could mean having to go around to all their friends and family to borrow money to be able to scale because they're not going to be able to access funds from a traditional institution. That could mean dealing with anything from 10 to 20 distributors or wholesalers and then arranging the transport from those guys if they're not big players. It means tracking things in books because your margins are low, so you don't have enough money to pay for a SaaS.

But it’s not just merchants who have these problems. There are similar pain points all along the value chain, and across different value chains - like FMCG, health and beauty, agricultural products, and electronics - as well. Here’s Demmy,

The demand for support and resourcing wasn't only coming from the last-mile consumer-facing merchants. As we interacted with our user base, it was clear it this wasn't only the last mile guys, but also wholesalers, aggregators, distributors who were buying from manufacturers all had different kinds of services which they weren't getting adequately covered, and different types of resourcing needs which left a gap to be filled.

Bridging the gap between these different types of users was a better starting point for the opportunity Sabi saw and, in Nigeria where there are a lot of asset owners, it didn’t necessitate owning all of the infrastructure. Whereas the asset-heavy approach effectively disintermediates existing distributors, the team saw an existing value chain to be enhanced and augmented. Said Anu,

I think you need to respect the market… Especially on a macro level, markets generally have rational reasons for the way they’ve evolved. On a micro level, you can find lots of inefficiencies, but in terms of the macro solutions that have evolved, they tend to be good fits for infrastructure gaps - not perfect fits. So the point is, why has this market evolved this way? There's a reason this business exists. It's adding some kind of value.

How do we make that value a lot more optimized? We're not trying to basically sit down and be this huge central distributor that everybody buys from. No, what we're trying to do is be a platform that is enabling businesses across the value chain, get to the next level and be more efficient in what they do so that everybody has a better net benefit.

It’s a common theme we’ve seen in our exploration of informal markets: the utility of existing value chains - even if not maximally efficient - and the opportunity to build interoperable solutions using technology. Rather than “disrupting” these markets, technology is enabling the bottom-up transformation of existing, complex retail structures.

Whereas a traditional value chain is linear - manufacturer → distributor → wholesaler → retailer → customer - emerging market value chains look more like an organic, interwoven network, in which traders across the value chain sometimes take on multiple roles, and sometimes interact horizontally with others at the same level of the supply chain.

The biggest difference between these actors is scale. But sometimes a re-seller flush with cash and with access to a few trucks kind of looks like a wholesaler. A distributor that needs to liquidate inventory today and doesn't have immediate access to their assets kind of looks like an agent. Sometimes buyers don't have the working capital needed to buy as much supply as they themselves can sell. Sometimes buyers have to figure out fulfillment on their own because a seller's truck is in the shop. All of that idiosyncratic activity in aggregate and at scale makes up the market.

Sabi isn't solving every problem for everyone, but they're solving similar problems for the same type of actor. They’re bringing all of these “middlemen” onto its platform, encompassing all of that activity, and in an effort to better optimize the value chains in question by layering third-party logistics and financing on top of the inventory supply.

And while the second-order benefits of an asset-light approach are scalability and capital efficiency, Sabi is not explicitly employing this model to benefit from scalability and capital efficiency. Rather, it’s the model that works well for these market dynamics and interwoven value chains - but if they have to build infrastructure to better service specific markets or value chains, they will.

The Product

As a marketplace, wholesalers list their products on Sabi with minimum order quantities and distributors, agents or re-sellers place orders. Whereas a linear value chain says “come buy from us and we’ll give you financing”, it doesn’t entirely solve the problem for an agent, for example, who’s working with 10 or 20 distributors. Instead, Sabi is saying to its users “come buy from everyone you’re already buying from through our marketplace and we’ll give you both access to financing across multiple wholesalers and connect you to third-party logistics providers, as well”.

The combination of marketplace breadth plus supplier-agnostic financing plus logistics is Sabi’s differentiation relative to centralized value chains, and it’s what has driven its growth to date.

In gaining visibility across value chains - in seeing who a user is buying goods from, who they are (planning on) selling to, and how that good is being transported - there becomes even more opportunities to build products and services for these users. This is a particularly acute opportunity considering two primary characteristics of African retail markets are supply constraints and a dearth of financing. Providing a platform for a decentralized network of wholesalers and distributors ensures more consistent supply from a wider set of distributors. And in providing digital services across value chains, Sabi gains the requisite visibility to facilitate financial services on its platform. 

They have visibility into both sales recorded with the app’s ERP tools - to date, over $5 billion worth of sales have been recorded - as well as the B2B orders placed through the marketplace, which totals over $400 million in GMV. And while they don’t at present monetize the sales logged on (but not ordered from) Sabi, the company has recently been issued a Payment Service Solution Provider (PSSP) license in Nigeria to process payments going forward.

For lenders, Sabi’s heavy lifting comes in the form of profiling and credit scoring. Like their approach to physical goods, Sabi isn’t lending itself, but instead is layering third-party financing partners onto their platform. Their B2B marketplace is a data-generating entry point into loan origination for their wholesalers and distributors.

In working with regulated financial institutions (mostly microfinance banks, but also some commercial banks), Sabi is able to inform them how to structure their financing in the ways that are the most effective. Whereas the most common type of credit in the B2B commerce space is inventory financing - and that certainly is a big need, particularly for consumer-facing retailers - there are different financing needs across the value chain.

A distributor may need working capital to aggregate from a manufacturer, or an aggregator of agricultural produce may need commodity finance to have time to buy from small farmers before selling to an exporter. Accounting for the different needs and risk profiles of these different stakeholders across the value chain ensures the borrower is best served in a way that makes them more likely to pay back.

As a result of this customization, there’s both a lower threshold to accessing credit because of the increased risk mitigants as compared to a commercial bank, as well as a lower rate of nonperforming loans among its borrowers.

And this modularity, in working with third-party partners, is precisely why Sabi’s model is scalable. Launching into a new market entails localization - partnering with local financial institutions, onboarding local wholesalers and logistics providers - on top of which word of mouth and network effects grows the platform.

Platforms and The Bill Gates Line

It’s tempting to juxtapose Sabi’s asset-light approach with an asset-heavy one. It’s not that one is better than the other; they are different models with different benefits and tradeoffs, and the bet is that African markets are deep enough for both. The difference between Sabi and its asset-heavy counterparts is similar to the difference in strategy between Shopify and Amazon, or the difference between platforms and aggregators.

There’s an apocryphal story about Bill Gates’ definition of a platform, as told by Chamath Palihapitiya, from his time at Facebook, in an interview with Semil Shah:

Semil: Do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform?

Chamath: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after.. like our funding history was $5M, $83M, $500M, and then $15B. When that 15B happened around literally a few months after Facebook platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

A company is a platform - and clears the Bill Gates Line - if it captures a minority of the value in the ecosystem it has created. As Stratechery’s Ben Thompson writes,

This is ultimately the most important distinction between platforms and Aggregators: platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; Aggregators, on the other hand, intermediate and control it.

What platforms do best is act as an interface between two (or more) modularized pieces of a value chain. So rather than a distributor having to interface with 10 different wholesalers and negotiate logistics arrangements with various third parties and try to secure financing from multiple financial institutions, it can interface with Sabi for all of the above.

Crucially, this model creates incentive alignment amongst the various stakeholders. If Sabi succeeds, the pie grows bigger for everyone. It is no surprise, therefore, that Sabi’s acquisition is largely referral based.

The Risks

The story of many other B2B commerce platforms, however, also starts with an endeavor to build an asset-light business. Anu and Demmy readily admit that they will build infrastructure if they have to. So does this model break down at scale? Is centralizing logistics an inevitable outcome? And if so, do they lose some of the benefits of the asset-light model they currently employ? The asset-light strategy makes certain assumptions about the maturity of markets and third-party logistics providers, and becomes an even more important question as Sabi grows beyond major markets like Lagos and Nairobi.

In cases of supply constraints - which are largely a function of cashflow problems - financing is seen to drive up average order values in the short term, but will it drive up consumption over the long term? A discussion of African retail markets needs to include this one vital statistic: Africans, on average, spend a greater share of wallet on food and essential goods than anyone else in the world, with comparatively smaller purchasing power. There will always be last-mile demand for these goods, but because of low discretionary income, the price needs to be as low as possible (and therefore margins are slim).

Sabi is a well-funded startup, having raised around $25 million to date, which gives the company additional ammunition to experiment with acquisition and retention levers. Whereas in the US market, consumption was largely subsidized in an effort to blitzscale and garner lock-in from network effects, that model has largely been proven difficult in such a price sensitive environment as African markets (and even in higher income environments, more companies are pushing towards the profitable growth approach). Will the access to financing, in particular, lead to greater retention rates for Sabi?

Meanwhile, for those B2B commerce players to have come before Sabi, we can see how vertical expansion has started to play out. Wasoko and Twiga Foods, for example, are investing upstream at the manufacturer and commercial farm level, respectively, to both ensure steady supply and, presumably, to improve margins through vertical integration. Both companies, it’s worth noting, are post-Series B growth-stage companies, where profitability is of even greater concern.

Sabi’s modular and partnership-driven approach means they will largely be pursuing a horizontal expansion strategy. But if doing so requires the build-out of infrastructure, their expansion options may be constrained to the markets mature enough to support their asset-light model.

The Opportunity

There are a few things we know about “informal” markets in Africa: they provide the majority of access to goods and services for consumers; they provide a majority of employment or revenue-generating opportunities for its residents; they contribute meaningfully to its country’s GDP; and, because of their analog and cash-based nature, though they are hard to measure, they are often found to be deeper than previously thought. All that’s to say that these markets are a vitally important part of the African growth story, and there will inevitably be big winners building in the B2B commerce and retail space.

The northstar for any startup working here is either to help reduce the price of essential goods and/or to help traders to grow their businesses. To what extent will wholesalers, distributors, retailers, logistics providers, and lenders be able to grow their businesses on top of Sabi’s coordination? The perpetual hope is that digitization and access to finance, in particular, can unlock latent growth potential and that the benefits to more efficient value chains may ultimately accrue to consumers at the last mile. 

Meanwhile, as its platform grows, and as it gets deeper into the lives of its users, from a product perspective, it opens the box for the platform to provide even more ways to service its users and create revenue-generating opportunities, beyond the sale of physical goods. With the right combination of product knowhow, offline market expertise, local partners, and post-COVID momentum, Sabi appears poised to execute on a vision to platform trade in Africa at scale.

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