May 8, 2017    5 minute read

What’s in Store for the African Startup Scene?

Venture to Africa    May 8, 2017    5 minute read

What’s in Store for the African Startup Scene?

The African startup ecosytem presents a very interesting scene in the form of very fantastic and promising companies, like Jumia, Jobberman, Andela, Cobi Interactive, Bandekai, Pesapal, Bongo Live, Ushahidi, Sembuse, Dropifi, MXit and many others. These are trend-setting  enterprises well-known across the continent, and may of these new businesses represent the future of enterprise development on the African continent.

African Ventures

Research conducted by Venture Capital for Africa (VC4Africa) in 2016 shows a huge variation in the constitution of African startups and the nature of their financial investments across the continent. Nigeria has the continent’s only unicorn (a startup valued over $1bn) and an array of promising companies to watch, as well as the highest number of startups. South Africa has the largest total financial investments in startups, and Kenya has the highest average amount invested in individual startups on the continent. The report also reveals that the startup sector is growing rapidly in Tanzania, Ghana, Uganda, Namibia and Egypt.

The Unleashing Africa report release earlier this year notes that a lot of promising African startups are still early-stage enterprises that require an initial investment of about $1m, make smart use of recent technology, are capable of rapid expansion, and have the ability to disrupt  their particular sector while solving local problems.

Overcoming Obstacles

The future challenge for these enterprises is how or whether they can expand their operations outside the relative comfort of their local markets and become competitive in the global market.

$326.9m Financial capital invested in Africa in 2016

This can be a realistic proposition for those that are willing and able to scale, especially as the financial investments in startups on the continent continues to increase geometrically. The total amount of financial capital invested in Africa has more than doubled every year from 2010 to a gross total of $326.9m in 2016, with the average amount invested per startup increasing to $400,000.

The Tony Elumelu Foundation published research this year finding that 49% of funded startup ventures in Africa start generating net revenue in their first year of operation, after a short period of successful incubation and refinement of business strategies. The idea of afro-capitalism is beginning to yield early dividends.

Industry Trends

The top investment categories for startups are related mainly to the technology sector, followed by agriculture, health, mobile money, energy, education and entertainment (especially mobile games, online stores, fashion and movies). But African startups have to be proactive in order to benefit from the investment that is on offer. For example, startups that participate in sector events and pitch to potential investors, such as iROKOtv, Jumia and MXit, have secured on average 33% more funding than their counterparts who did not participate in such programs.

A new trend that is emerging is that of growing interest from the African diaspora in investing in startups, especially those from their country of origin. Furthermore local businesses and government are increasingly coming together to invest, partnering the public with the private sector to fund promising and successful startup entrepreneurs. This is beginning to stimulate interest and increasing appetite among the wider global venture capital community for investment in viable startups in Africa.

Rise to the Challenge

Despite these trends in the startup ecosystem across the continent, however, many serious challenges remain.  The barriers and risks to starting and operating a profitable startup, the process of moving from business concept to concrete business product and the ability to attract the interest of potential inventors are still very daunting across the continent.

Also, the success of the African startup ecosystem is still very embryonic (less than 7 years old), and successful startup ecosystems are clustered in a very small number of African cities and, indeed, countries.

Moreover, some governments’ continuous efforts to replicate successful startup ecosystems across the continent have met with very little success. The process of creating new employment opportunities for the young population (and all the societal benefits that go with it) remains a priority – but so far, government efforts appear to have fallen well short of the hoped for outcomes.

Necessary Remedies

There is now an urgent need to ensure regional integration across the continent so as to form the necessary African market, which covers more than a billion people, and which these successful startup enterprises could harness to grow and scale very rapidly.

Also, the long-term financial incentives, which could lure new entrepreneurs to leverage their ideas and the ability to access startup grants and venture capital funds all need to be greatly improved across the continent.

The continent must encourage the development of a plethora of networks of successful business mentors from within and outside the continent for aspiring and startup entrepreneurs. In addition, subsidies, tax breaks and regulatory waivers for startups enterprises, including towards the cost and availability of fast broadband and internet access, as well as other critical infrastructure necessary for scaling successful startup enterprises, need to be more effectively managed.

The long-term importance of enterprise development, a culture of risk-taking and the promotion of knowledge dissemination must be introduced more widely into the mainstream educational curriculum and taught from an early age, including the establishment of neighbourhood learning hubs for virtual training and development. Indeed, these challenges are numerous – but Africa needs to make it happen.

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