Africa’s rapidly expanding and highly innovative technology companies are expected to attract record levels of venture capital (VC) investment in 2021, yet the sector is hamstrung by investors’ apparent reluctance to fund early-stage start-ups, which has meant that many promising business projects that might contribute to African development never get off the ground.
Some VCs specialising in seed capital are emerging, but more such funders are needed to get young, under-resourced entrepreneurs up and running. Without greater support, there is a risk of thwarting tech talent whose ideas, if allowed to incubate and develop into commercially viable companies, could provide solutions to many of Africa’s problems and challenges.
A surge in African tech start-ups
The African start-up scene has quickly evolved in the past few years, with the sum of tech start-ups receiving funding said to be growing at a faster rate than the global average. Moreover, a 2014 report by the GEM Global Entrepreneurship Monitor showed that the number of people involved in early-stage entrepreneurial activity in Africa was, at the time of publication, the highest in the world.
Many of these young, creative companies are focused on filling gaps in service provision across the continent, from digital payment services addressing limited access to banks to health apps that take the pressure off overstretched medical sectors. Some suggest that start-ups could enable the continent to leapfrog development challenges, helping to meet the increasing demands of its citizens. A 2015 UN report estimated that more than half of the global population growth between now and 2050 is expected to occur in Africa.
The ingenuity and adaptability of African start-ups was very much in evidence in 2020 at the height of the Covid-19 pandemic, which saw the rapid expansion of some e-commerce start-ups with other entrepreneurial companies developing specific, very timely services, such as monitoring the spread of Covid-19 and offering mobile testing labs.
For tech-savvy high school and university graduates, the prospect of setting up on their own is a distinctly attractive one, particularly as the scarcity of jobs for well-qualified young people, evident in the developing and developed world, is a particular area of concern in Africa. Youngsters with bright digital ideas dream of following in the footsteps of star African start-up performers such as Nigerian unicorns Flutterwave and Interswitch, both digital-payments companies. However, the prospect of emulating their success is something of a lottery.
An improving, supportive start-up ecosystem, including an expanding network of innovation hubs and Big Tech initiatives aimed at fostering local talent – such as Microsoft’s African Development Centre with sites in Lagos and Nairobi – means that budding entrepreneurs are able to draw on some degree of local and Western technical and marketing expertise when developing their products and business plans.
Getting beyond the drawing board
However, the main problem that many face is access to funds that allow them to go beyond the drawing board or proof of concept stage. In December, the business magazine Quartz Africa said a major worry in African tech start-up circles has been a drying up of early-stage funding, compounding a widening gap between seed and growth funding stages across the continent.
Amid reports that VC investment in African start-ups is projected to reach a record high this year of up to $2.8bn, the sector seems to be attracting plenty of investor attention. Yet, as Quartz Africa pointed out, the average size of seed funding rounds over the past few years has barely changed compared with later stages in the start-up development cycle.
Investors, it seems, are not prepared to risk their funds on helping wannabe entrepreneurs set down roots. You can understand why, given the multiple challenges start-ups face. These include relatively low internet penetration across the continent, sizeable digital infrastructure shortcomings, substantial gaps in electricity supply, regulatory hurdles and limited consumer purchasing power. You have to be pretty resilient and determined to achieve entrepreneurial success in Africa.
There are signs that conditions for new start-ups are improving, however. Governments are beginning to understand the importance of backing young tech talent as the economic impact and contribution of more established tech companies is better understood and recognised. In turn, some authorities are introducing supportive legislation, Tunisia notably passing a pioneering Start-up Act a few years ago, including a package of attractive incentives – a particular eye-catcher being a state-funded salary for up to three founders per company during the first year of operation.
There are also some positive developments one the financing front. There are a number of VCs dedicated to supporting fledging start-ups, two of the latest initiatives being Savannah Fund’s $25m early-stage fund, and a new Atlantic Ventures $50m fund for seed stage onwards. Earlier in 2021, Microtraction, an early-stage VC company, revealed that the 21 companies in its portfolio had so far raised more than $33m in funding.
Much more investment of this kind is needed, however. Investors may have good reason to be risk averse when it comes to supporting newly launched African tech companies given the challenging environments in which they operate. They may not see the quick, high returns they have grown accustomed to when backing US and European start-ups, but the potential for growth in Africa is huge as digital infrastructure improves, bureaucracy eases and consumers’ purchasing power rises. In short, investors need to take a long-term view in Africa.