May 18, 2017    5 minute read

African Tech Start-Ups and the Fourth Industrial Revolution

A New Dawn    May 18, 2017    5 minute read

African Tech Start-Ups and the Fourth Industrial Revolution

A Fourth Industrial Revolution is underway. African tech start-ups are part of a digital revolution that has the power to transform employment, industries, economies and relationships.

The First and Second Industrial Revolutions swept the Western world. The Second Industrial Revolution was driven by the diffusion of electricity, steel, petroleum and urbanisation. Yet, Africa lagged behind. It was not until the Third Industrial Revolution expanded information technology that African lives were truly changed and reliance on traditional employment started to decline. In contrast to its predecessors, the Fourth Industrial Revolution is unfolding at an exponential rather than a linear pace.

Today, the transformative power of technology should be viewed as an opportunity for innovation and the development of skills for enabling wide scale change rather than a ‘magic bullet’ for a nation’s problems. Nonetheless, this shift will support Africa’s transition from the margins to the mainstream of the global economy and lead to the emergence of a blossoming ecosystem of entrepreneurs, tech ventures and innovation hubs.

The Rise of Silicon Savannah

It is widely accepted that Africa’s tech movement has its origins in Kenya, hence the moniker ‘Silicon Savannah’ for Nairobi. This is due to a dynamic combination of factors and coincidences, namely, the emergence of mobile money and a global crowdsourcing app, Africa’s tech incubator model and a genuine government commitment to ICT policy.

In 2007, Safaricom launched the M-Pesa mobile money product which expanded quickly to become a great example of technological leapfrogging: it introduced citizens to the digital economy and bypassed traditional banking. Later, the Ushahidi crowdsourcing app was created. It digitally maps demographic events around the world and has since become a global venture.

The Emerging African Tech Landscape

As notorious as it has become, Silicon Savannah only represents a share of Sub-Saharan Africa’s tech scene. Research led by the authors of ‘The Next Africa’ highlight the existence of over 200 African innovation hubs, 3,500 new tech-related ventures and over $1bn in Venture Capital towards a pan-African development of start-up entrepreneurs.

As an illustration, Nigeria is becoming a centre for technology investment. Despite the country’s various challenges, investors and entrepreneurs remain enticed by the promise of scaling applications to Africa’s largest economy. Its tech sector is a positive account of the potential of brain gain (and reversal of brain drain) through the extension and return of social and human capital as well as the reshaping of the continents’ global linkages.

Venture Capital Funding

The African Development Bank (AfDB) estimated that around 55% of the sub-Saharan African economy is informal. This illustrates the scope of business without access to formal banking or internet services.

As a result, VC-backed start-ups might intend to extend their reach throughout Africa’s informal economy. Helping to solve enduring African socio-economic problems is increasingly becoming a tech opportunity. For instance, aid-agency grants often targeted at NGO’s are increasingly being redirected to social venture-focused tech organisations.

Venture capitalists willing to tap into the recent waves of technological advances on the back of the spread of mobile phones are pouring millions of dollars into local and international Africa-focused start-ups.

The opportunity is particularly compelling given the pressure African economies are under due to the falling prices of commodity exports and the slowdown in the growth of China, their biggest trading partner. VC funding raised by African tech start-ups in 2016 totalled US$ 366.8m, which was up 33% from 2015. Financial inclusion and consumer services drew most of this investment.

Nonetheless, the market is far its full potential. Despite impressive flows of capital to the continent, access to funds remains a challenge for African entrepreneurs. The issue for these start-ups is that they are often too large for microfinance but too small to receive loans from traditional banks.

Moreover, it is important to acknowledge that many sub-Saharan ventures will not succeed, due to a lack of robust ICT environments and baseline infrastructure needed for their smooth operation. On the other hand, despite these difficulties, the existing commitment (specifically from investors) portrays the optimism and hope for the continent.

Venture capital will not only create economic sustainability but also the technological and managerial support required for strategic and operational decision-making, which often cause new businesses to fail.

A Bright Future

According to a survey by the Emerging Markets Private Equity Association, Sub-Saharan Africa has become the most appealing emerging market for investors. The overall narrative overrides the belief that Africa is disconnected from the global economy, mired in conflict or corruption and heavily dependent on foreign direct investment.

The forthcoming revolution is driven by business, innovation and a new class of highly talented entrepreneurs. The significance of Africa’s markets, in conjunction with its savvy entrepreneurs, will mark an era in which its potential will take precedence over its challenges, and thus transform the developing continent into an entrepreneurial global powerhouse and reshape its relationship with the world.

The real economy and the digital economy are not mutually exclusive. The two have become one as technology blurs the barriers between the physical and digital spheres. The future of African tech appears bright but, ultimately, African governments hold the responsibility of realising its potential.

 

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