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African start-ups: Slow-motion revolution
Africa has the talent, but the continent's start-ups are scrabbling for a tiny fraction of the global venture capital pie. Governments and local investors need to step up so that funding can keep pace with the ideas
Separating fact from hype is hard enough at the best of times, even harder in this ‘post-truth’ era. But the winds of disruption blowing from Silicon Valley have not filled all sails equally.
For all the talk of incubators and angel investors, Africa remains a very quiet backwater of the global tech scene. But that can change. When investors met at the Africa CEO Forum in Abidjan in March to discuss how to support the increasing number of start-ups across the continent, one thing became clear: fundraising is on the rise. But looking at the exponential growth of start-up ecosystems, mainly in the tech sector, there is still a long way to go.
“Last time I counted there were about 173 innovation hubs across Africa, at least one in every country, so that’s very encouraging. Secondly, the number of start-ups that are being funded is growing gradually […] so there is steady growth and the ecosystem is slowing taking shape,” says Mthuli Ncube, who was then head of the research lab for Quantum Global, a Switzerland-based investment fund and asset manager largely focused on Africa.
According to the latest report by US-based venture capital (VC) firm Partech Ventures, there was a huge jump in start-up investment in Africa in 2018, reaching $1.16bn, up from about $560m in 2017. But looking at the high levels of VC investment globally in recent years – a record $254bn was invested worldwide in 2018, according to KPMG – Africa’s share remains microscopic.
Grab the potential
The consultants at McKinsey & Company report that the digital economy in Africa has the potential to contribute $300bn to the continent’s gross domestic product – about 20% – within the next seven years, making the need for investment even more crucial.
Investment in African start-ups hit $1.16bn in 2018, a 108% increase compared to 2017
Wale Ayeni, regional head of the International Financial Corporation (IFC)’s VC practice focused on Africa, explains: “If you look at the amount of VC coming into Africa, per capita, it is the lowest on any continent, despite the fact that there are going to be 500 million people with smartphones, [and] despite the fact that more smartphones are being shipped into Africa than into Europe today.”
In the past few years, the majority of start-up funding has been channelled into three countries in Anglophone Africa: Kenya, Nigeria and South Africa. Ameya Upadhyay, a principal at a high-impact social-investment fund at the Omidyar Network, says different market sizes and regulations are the main reasons it is difficult to launch start-ups of size outside those countries.
Upadhyay’s fund has invested in Nairobi-based Twiga Foods, one of the five companies that participated in a start-up ‘pitch deck’ presentation at the Africa CEO Forum. The others were Omniup, InTouch, Africa’s Talking and Thrive Agric. Twiga won the Most Promising Company of the Year prize.
According to technology and entrepreneurship portal Disrupt Africa, Nigeria had the highest number of start-ups to raise funds in 2018, ahead of Kenya and South Africa, with 58 startups raising close to US$95m in equity. The West African country has been an attractive destination for VC funding in recent years, with over $180m having been injected into Facebook founder Mark Zuckerberg-backed tech start-up Andela since 2014.
“Nigeria is probably the only market where you can invest in a company and expect it to scale domestically to give you the returns that justify that 90% [start-up] failure rate,” says Upadhyay, who was previously a consultant at US-based investment firm Bain Capital.
But investor interest in countries outside the top three markets is increasing and according to Partech, Egypt is experiencing a surge in startup funding, having raised $58.9m in 2018.
So what might accelerate growth? The continental free-trade agreement which in April 2019 received it’s 22nd ratification holds great promise for start-ups as they build solid regional expansion models. “You will not see a company based in Kenya that does not have a Kenya-Tanzania-Uganda roadmap. But it’s harder to achieve than it seems on a PowerPoint presentation,” says Upadhyay.
Seeds and growth
Boosting local seed funding is also a challenge. Start-ups sometimes struggle to even get the first few thousand dollars to hire an employee, and Upadhyay says that VC funding, which is typically between $50,000 to $300,000, is what is most lacking.
Omobola Johnson, a Nigerian technocrat and senior partner at TLcom Capital, has a slightly different view. She says that while it is not enough, there is much more seed capital available than there is growth capital.
She says companies that need between $2m and $5m can spend up to a year globetrotting in search of capital, and that is significant time that is taken away from developing their businesses. “That’s really where the valley of death is,” she says of the stage where promising firms will either collapse or stagnate because they have to keep bootstrapping or running on their profits to keep afloat.
“So there are missing pieces in all parts of the ecosystem […] but I think the real challenge that we have in scaling up to get the first billion-dollar company or unicorn, is really around that growth-capital stage. And that’s where many of those good companies can die,” Johnson says.
According to the IFC’s Ayeni, it is surprising that the onus has been left squarely on foreign capital due to a lack of local funds. “Africa is the youngest continent and more than 60% of the population is below the age of 24. Who is betting on the local youth?” he asks.
He says the IFC wants to help, and in January 2018 it announced the launch of a €100m ($123m) fund focused on digital technology start-ups in sub-Saharan Africa in partnership with the largest Africa-focused VC fund, US-based Partech Ventures. The fund aims to provide early-stage growth funding, ranging from €500,000 to €5m, to start-ups in various sectors.
The dominance of foreign capital on the investment scene in Africa is set to continue because tech is a young sector on the continent and investments are usually focused on infrastructure.
Foreign investors are also not fazed when it comes to risk, according to Johnson: “The truth is that a lot of the money is going to come from outside the continent because they are more used to that VC risk that we’re still trying to get used to in this part of the world”. But as more investments and more successful companies spring up, she says they will validate the need for more domestic capital.
Johnson’s firm recently raised $40m towards growth capital for start-ups in Africa in sectors including e-commerce, energy, health and fintech. Foreign investors contributed the bulk of that amount, with the African Development Bank (AfDB) and Nigerian bank FBNQuest Capital chipping in about a quarter of the total.
164: Number of funding rounds by 146 African start-ups in 2018, up from 128 rounds in 2017
Ncube, who was appointed Zimbabwe’s minister of finance in September 2018, says that the lack of a strong angel investment culture in Africa could also be the missing link between domestic capital and start-up funding. In 2017, he spearheaded the launch of the annual Africa Investment Index, a ranking of all African countries based on short- to medium-term investment attractiveness to provide investors with more information to help them make decisions.
Fintech leads the pack
Despite the challenges, many venture capitalists see the potential of African start-ups. Several key sectors, including fintech, hold promising futures. In 2017, fintech start-ups jointly raised more than $195m and accounted for nearly a third of all African VC investments. The success of mobile-money technology has no doubt contributed to investor confidence.
And as more and more unbanked consumers turn to more formal financial services, funding is set to increase. Senegal-based fintech start-up InTouch recently raised $7m and has partnered with French multinational Total to expand its business. The e-commerce and agri-tech sectors have also been high on investors’ lists.
In 2017, start-up funding for the latter quadrupled compared to the previous year. Johnson points out that the business-to-business sector is one potential gap often overlooked by investors. There are more than 20m small and medium-sized enterprises in Nigeria alone, and TLcom Capital has chosen to focus its attention on this area.
“Understanding the consumer and being able to better target your product and services and your pricing to actually acquire those customers – we focus quite a lot on that because the business-to-small-business, that is where we see the bigger opportunity,” she says.