In our contemporary time, there is one fundamental element that early stage investors look for as they evaluate companies: leverageable growth. Leverageable growth, unlike linear growth, is a type of growth that is largely infinite because the nexus upon which it happens is unbounded and unconstrained by marginal cost. In other words, this is the type of growth that when it begins nothing can stop it because the cost of growth is practically and marginally zero. It is the type of growth that can reach any part of the world!

For that environment to happen, the company needs to operate in a largely big sector with a lot of upscale which will allow the company to scale and grow. If the market is not big, even if the company has the necessary mechanics for growth, it cannot, because a ceiling exists which limits it. For example, making electric bulbs that can last for ten years but cost N200,000 per unit in Nigeria may be a great product but the size of the market for that type of bulb will limit its demand in Nigeria.

Yet growth goes beyond just selling products. It is about the way that product can sell after the initial fixed cost. Fixed cost is the core cost invested to create the product. After that, what matters is the marginal cost [yes, the variable cost is muted here] when growth models are developed. Marginal cost is the cost of producing an additional unit of a product. When that is close to near zero, it means the product can scale massively and can attract leverageable growth.

Interestingly, it is technology companies that exhibit this nature of having close to near zero marginal cost, and that is why they can grow exceedingly fast. Take some examples:

• Once Uber app was created and the infrastructure running, the core fixed cost has been spent. What follows is marginal cost (i.e. distribution and transaction cost). That marginal cost is very low as Uber begins to add new customers to its ecosystems. Because that cost is very low, Uber can scale provided the market has room for it to scale.
• Facebook connects people across the globe. The cost of this connection is close to zero at marginal cost level. The transaction cost is close to zero and because this connection happens on the web, the distribution cost is zero. Yes, Facebook marginal cost is zero and that means it is exceedingly scalable. I have put the scalable advantage of Facebook to be close to perfect because its product makes it unbounded by anything for growth.

It is important to understand that it is not only software companies that can exhibit this inherent scalability of near zero marginal cost. A company that makes very great microchips can indeed have a different domain of marginal cost. NVIDIA which makes exceedingly high-grade graphic processing microprocessors that power gaming, AI processing units and high-intense processing systems is a scalable company. Once the R&D on the chip has been done, the additional cost of making additional unit of the chip is practically zero. Silicon is largely free – it is sand. The real deal is building the intellectual property of that design. Mass producing it is not a problem.

The Basis of this Thinking

When Naspers, a South African company, made one of the most successful venture investments ever, it took a clear risk: invest in Tencent and hope it works out. And it did work out, generating billions of dollars for about $34 million the company had invested. Broadly, investors are looking at massive return and not linear return because the risk they are taking is also huge. These are people that know they can get linear returns in Treasury Bills or real estate but yet go ahead  to seek leverageable growth that can bring in multiples if things work out.

So when South Africa’s Naspers invested in China-based Tencent $34 million, it was making a huge call, in 2001. Today, that $34m berth is now worth $170 billion (with b), based on Tencent’s current market capitalization. Magically, Naspers is the 65th most valuable company in the world. That berth is perhaps the greatest investment in Africa.

All Together

So when you meet early stage investors, here are two questions you need to be ready to answer:

• Do I have a business model that can generate leverageable growth? In other words, do I have a company that can scale with near-zero marginal cost?
• Do I have a market that is big enough to enable that growth and scale to happen without a ceiling?

If your answers are YES and you can demonstrate that you can have the capabilities to execute the playbook, you will likely get the funding. Capabilities include technical, operational and other necessary skills required to run a business. Those capabilities do not need to be only you – here, investors will be looking at your team.

As South Africa resumes xenophobic attacks today, it has become evident that diplomacy may add only marginal value. While leaders may speak grammar and sign papers, changing the trajectory the South Africans attackers want to pursue may be hard. Simply, they want to control their 100% even though the “individual pieces” are getting smaller [youth unemployment in South Africa for blacks is high, and economic growth has not effectively compensated for population growth]. Largely, in their minds, they have one choice since the alternative is doom: if the foreigners leave, we could thrive, but if they stay here we are sure of economic extinction. So, they march with violence to expunge those foreigners out of South Africa. Already, 400 Nigerians are ready to depart South Africa.

At least one fatality has been recorded and five people receiving treatment at the hospital after a xenophobic march in South Africa turned violent on Sunday, local media reported.

The violence broke out on Sunday afternoon when hostel residents across the commercial hub of Johannesburg took to the streets to demand immediate deportation of foreigners, eNCA television reported.

The private broadcaster cited the police as confirming one person had been killed and five hospitalised. The deceased was reportedly stabbed to death

Their thinking of using violence is wrong, but you do not need to go to South Africa to see that within nations, nano-conflicts are emerging. I used the word “nano-conflicts” for Africa first in 2009, in a print article in Harvard Business Review. I later used it again in 2011 for the dislocations that technology would enable. This was my conclusion:

Sub-Saharan Africa could witness major crises fueled by job losses and reduced incomes. Lack of capability to transition to new industries or markets will make these crises prolonged with effects that will affect their political and economic stability. The world will potentially see clusters of nano-conflicts across African cities and villages when mining and extraction offer little economic values unless Africa develops a knowledge strategy and transforms itself to a knowledge-power.

The South African conflict is at inter-border level, but within borders, economic turbulence is clearly evident across ethnic groups in most countries. Yet, Africa has not even started seeing conflicts. My personal model is that by 2027 when nanomaterials will go mainstream replacing rubber, cotton and other commodities, and in the process displacing most people from their means of livelihoods, Africa will experience severe conflicts [I pray I am wrong!].

I do not share this lightly but as I noted in 2011 in that piece – Clusters of Nano-Conflicts, we have less than 10 years to save this continent from ruin: “There are possibilities that new nanomaterials will become good alternatives for many existing commodities (eg, rubber, copper, cotton, platinum, etc) and incrementally, the commodity markets and industries could be disrupted, or even demised. The implication is massive trade and unemployment dislocations that could pose serious security implications in commodity-dependent nations.”

America now eats meatless burger (meat not made from animals but from plants), and milk that does not come from animals. They are close to getting tons of cotton, rubber, etc from labs. We may be eating our commodity very soon. When that happens, we will see that what South Africans are doing now is a child’s play. 

Yet, Africa can avert this; Ozioma has a roadmap for South Africa. Other African countries can use that playbook too.

Clusters of Nano-Conflicts: Security Implications of Disruption of Africa’s Commodity Market by Nanotechnology