Nigeria's new Banks and Other Financial Institutions Act (BOFIA) 2020, took nearly 30 years in the making. While criticised for being a 'mixed bag', some argue its presence could provide opportunities to investors in Africa.
Japan, US investors get in on the African start-up scene
In 2018, investments in African start-ups crossed the $1bn mark and many are seeking to expand beyond their borders in order to attract more venture capital and funding from multinationals.
Start-ups in Africa enjoyed buoyant growth in 2018. According to a study conducted by the US-based venture capital (VC) firm Partech Ventures published at the end of March, start-ups across the continent attracted a total of $1.16bn in investments in 2018, double the amount raised in 2017.
- “We didn’t expect to hit the symbolic $1bn mark before 2020, it’s going faster than we expected,” says Cyril Collon, the study coordinator, who co-leads the Partech African branch.
- In January, the Partech Africa II fund raised $143m, targeting equity investments in some some 30 digital start-ups.
“Nowhere else in the world is there such a wealth of ideas, driven by a generation that can, through innovation, tackle structural problems such as mobility, distribution and payment,” says Collon. He estimates that there are now more than 500 technology hubs on the continent, compared to only a few dozen five years ago.
Out of the bubble
“The start-up ecosystem has become highly structured over the past two years. Entrepreneurs have emerged from their bubble. They no longer ask for inconsistent amounts, they are well supported, they know how to better prepare and pitch their business ideas and they have learnt how to effectively deal with investors,” notes Karim Sy, founder of Dakar-based Jokkolabs, the first French-speaking coworking space for start-ups.
African start-ups raised a total of $1.16bn funds in 2018, double the amount raised in 2017
“The arrival of large specialised funds such as Partech has played a positive educational role, both for entrepreneurs and the financial sector. International donors and major private groups now have a much better understanding of the world of innovation,” adds Sy, a French-Malian who is also head of the Digital Africa initiative, a platform for innovation support in Africa supported by the French Development Agency.
And the reason for increasing investment is obvious. The first start-ups that emerged five or 10 years ago were until recently mainly attracting venture capital funds, but they have now expanded across the continent and beyond, gaining the attention of big foreign companies.
- Last year, US investment giant The Carlyle Group invested $40m in Nigeria’s Wakanow, an online travel agency launched in 2008.
- Silicon Valley-based Revolution invested $50m in Kenya’s Tala, a mobile microcredit firm founded in 2014.
Strong fundraising results
Young start-ups that have a fairly solid proof of concept but are in need of fresh funds to expand, are on the rise. An example is Nigeria-based trucking logistics startup Kobo360, which in 2018 raised $7.2m from the International Finance Corporation and private funds in the US and Nigeria. The Lagos-based start-up is now targeting another $15m-$20m by the end of April to finance its expansion in East Africa.
Francophone Africa is also showing promising signs of growth. In 2017, Senegalese fintech startup InTouch, with has operations in seven African countries, received €8m ($9m) in a first round of funding and has plans to raise about $15m by the end of 2019 to fund its expansion to 10 other African countries, including South Africa and Nigeria.
More and more major foreign companies are eyeing up Africa and that has also boosted investment. India’s Bharti Airtel, French giants Total, Orange and insurer Axa as well as Japanese insurance holding company Mitsui Sumitomo, are a few that have invested heavily in start-ups across the continent.
- “In the past, large companies and start-ups had nothing in common. But the revolution in the telecoms and financial sector – with banking and mobile payment – has completely changed the situation, and has shown the need for the former to take an interest in the latter,” says Amine Sebti, a strategy consultant at PwC.
Japan gets in on the act
According to Masa Sugano, Africa representative at the Japan External Trade Organization (JETRO), major Japanese trading companies, known as the “Sogo shosha“, are seeking to invest in start-ups that have reached an advanced stage of development, to the tune of about $20m.
Recent investments by Japanese companies in Kenya include:
- Sumitomo Bank in solar energy firm M-Kopa;
- Toyota Tsusho Corporation in tech start-up Sendy;
- Sompo Holdings in digital foreign exchange and payment platform BitPesa.
“For these Japanese groups, these investments are considered more attractive than those they could make back home. […] For the same amount they would only get a tiny fraction of the capital and as a result very little influence on the company’s strategy,” Sugano says.
Nairobi and Lagos, major African tech hubs
Silicon Savannah, Kenya’s $1bn technology hub, leads the Partech study’s country rankings, having raised $348m in 44 funding rounds in 2018 – nearly $100m more than that of South Africa.
Nigeria ranks second in terms of fundraising by country, with $306m raised in 2018, buoyed by a dynamic entrepreneurial spirit prevailing across Lagos, where entrepreneurs must nevertheless overcome enormous challenges in order to jump start their business. “We don’t have the same 3G and 4G infrastructure and coverage as in Kenya, so it’s more difficult here. But despite these pitfalls, if a start-up is able to succeed in Nigeria, then it will be able to go anywhere and seduce investors […],” says Ife Oyedele II, co-founder of Kobo360.
If a start-up can make it in Nigeria, it can succeed anywhere
While some analysts have claimed that start-ups in Francophone Africa lag behind those based in English-speaking, Collon says that cultural and linguistic differences alone cannot explain the gap. “Senegal managed to raise $22m in 2018, well ahead of Ghana and Uganda,” he notes. He acknowledges however, that several start-ups in French-speaking countries were late in coming on the scene and are still in the early stages of development. “Their fundraising efforts are in the tens of thousands rather than millions of dollars,” he adds.
“The most advanced countries are clearly those that have large populations, allowing them to scale up quickly, albeit it is not the only important factor,” adds PwC’s Sebti. “They must also offer excellent 3G or 4G coverage with a high internet penetration rate. Their performance in the digital economy also depends on their economic weight and the more or less open attitude telecoms operators and banks have with their respective regulators,” he says.
From this point of view, Rwanda is an example to follow. The East African country ranks 29 out of 190 in the latest World Bank’s Doing Business – it is possible to register a business there in a few hours. The Rwandan government is determined to make Kigali a regional tech hub, and despite the population size of about 12 million its start-ups managed to raise $19m in 2018 – ahead of Ethiopia, with a population of 105 million, which generated $11m in that same year.
Tech giants waiting to pounce
At the moment, the two main sectors on the top of investor’s list are fintech, with one-third of fundraising in 2018, and business services, which accounted for 29% of the total amount raised. “The ability to offer financial services – payment, credit, insurance – to people with a smartphone who do not have a bank account continues to drive many start-ups,” says Collon.
But irrespective of their sector of activity, start-ups in Africa had better take advantage of the room they have to manoeuvre, free of the global digital industry giants. For now the four tech industry behemoths known as GAFA – Google, Amazon, Facebook and Apple – are watching closely and, although they remain relatively inactive, their increasing presence on the continent is inevitable.
“In a few years’ time, they will either seek to buy out or partner with mature start-ups that have a well-established continental presence and a well-developed technological and economic model,” says Collon.
“We know that eventually they will get more aggressive and our best protection is to grow and provide world-class service,” adds Kobo360’s Oyedele II. For him and other digital entrepreneurs, the possibility of becoming Africa’s first unicorn is no longer a pipe dream.
This article was first published in Jeune Afrique