A few weeks ago, Ido Sum of TLCOM put out an amazing Twitter thread about why, despite the opportunity, many healthcare founders he has engaged with struggle to show how they will capture a significant portion of the market share.

What do I mean? Take the health market. Huge consumer spend, but super fragmented. Insurance penetration 1-3% - so big issue with who pays, and how you secure ‘re-occurrence’ and predictability of revenues over time.

https://twitter.com/ido_sum/status/1544620707232919554

He implies that the biggest culprit is the market fragmentation, and I agree. To explain the effects of fragmentation, consider the following analogy.

Let's imagine you want to build a successful cookie business. Luckily for you, the biggest cookie market is just around the corner from your bakery. Thousands of customers come to buy cookies in that market. So it is easy to do some customer research, experiment, and figure out the kinds of cookies most likely to sell. Once you have a winning recipe, it is easy for you to sell cookies to everyone, and before you know it, you become the number 1 cookie seller. Of course, investors want a piece of your thriving cookie business.

Now let's imagine a less fortunate scenario: the cookie market around the corner only has fifty cookie customers. And there are hundreds of small cookie markets spread across the country. It is harder to figure out the right recipe given the wide range of palates across the country. To sell in all of the cookie markets you would incur significant costs that would make your margins thinner and less certain. Consequently, the segment of the market you can access is much smaller than the entire market for cookies, and it is much harder to convince investors to back your bakery.

Of course, this is a simple analogy. Fragmentation in Nigerian healthcare is much more complicated and complex. Here below are a few ways in which the sector is fragmented:

• How it is regulated: Nigerian healthcare is regulated at the state level, so you have to deal with 36 different health systems rather than one.

• The number of independent players: Nigerian healthcare is dominated by individual “mom-and-pop” health facilities rather than connected networks of facilities.

• The number of independent payers: Most of the payments are out of pocket, so you have millions of independent payers.

Fragmentation causes friction that reduces the velocity of new innovations and limits their ability to scale. It also fundamentally reduces the total obtainable market for the sector. Every health innovator must have a plan to reduce the friction of fragmentation if they truly want to scale. Tomorrow, I’ll share some tips about building in fragmented sectors.