Unlocking capital for African tech startups

Unlocking capital for African tech startups

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Eight years from now, Africa would attract more than $90bn in tech startup funding, predicts a new paper published by Tony Blair Institute for Global Change.

As projections go, this is not baseless considering that the continent has been on the frontline in using technology to leapfrog traditional development paths, successfully circumventing the era of landlines to mobile phones.

With the growing rate of internet penetration in Africa (Kenya- 82.5 per cent, Nigeria- 73.0 per cent, South Africa- 57.5 per cent, Egypt- 52.5 per cent), the region is witnessing a rapid adoption of e-banking and mobile money. To what end?

Already, African startups are on a roll having ended the first quarter of 2022 with a $1.5bn cash injection. All things being equal, I posit that going by the current trajectory, the African tech ecosystem has a good chance of hitting that mark perhaps before 2030.

Restating a well-known fact, the paper, “Supercharging Africa’s Startups: The Continent’s Path to Tech Excellence”, emphasizes Africa’s position as the region with the highest rate of entrepreneurship as well as the globe’s fastest-growing economies. However, in terms of tech entrepreneurship, Africa still lags behind the rest of the world. How so?

Well, in the light of the total investments into African tech startups in 2021, it would be easy to think that the continent is holding its ground funding-wise. While that is an optimistic outlook, Africa still has some miles to cover. Consider what Crunchbase Insights data on global tech investment reveals.

The report finds that global venture investment in 2021 totalled $643bn. Breaking down venture funding continent by continent, available data indicates that Latin America’s startups surpassed themselves with close to $19.6bn in funding. For its part, North America maintained its position as the most funded region with $330bn investment (the U.S. startups alone secured $311bn) while European tech startups raked in close to $116bn. Asia recorded $165bn investment, leaving Africa with around $5.2bn.

Looking at the above, one might try to downplay the scale of Africa’s achievement. Still, that ought not to be the case. Is Africa’s tech ecosystem growing fast in multiples? Without a doubt! But I think our absolute numbers could be better.

If there’s a tune that has been sung repeatedly in the ecosystem, it is that more funding is needed to unlock the massive opportunities that Africa presents to the world. The fact still remains that many African businesses have a rough time raising capital from foreign investors, although some startups make it look easy. Despite checking all the marks or at least a good percentage based on their investment worthiness, funding still eludes many founders, leaving them to embrace bootstrapping as the only option.

Seeing that investment is critical to a startup’s success, this begs the question: what can be done to strengthen Africa’s investor ecosystem, thereby unlocking capital for startup founders?

 

 Rethinking context-based investment strategies

Foreign investors’ appetite in African startups shows no signs of waning. After all, the continent boasts a very young population which translates to a huge market size. To further sweeten the pot, the ecosystem is ripe enough for venture capitalists to invest into and reap humongous profits in return.

Where the bone of contention lies is in the funding model favoured by many tech investors. For example, the Silicon Valley funding model, due to its applicability in more developed economies such as the U.S from where it originated, has been held up as the standard to follow.

Usually, equity funding is the common option for funding high-growth, early-stage ventures. In the African reality, equity may not necessarily be the only funding option for startups. This is where flexibility comes in. So, rather than a rigid “two and twenty” model, many startups in Africa would benefit from alternative options such as asset financing, debt, and revenue sharing among others — the ultimate goal is for startups and their investors to succeed.

Another effective approach to consider is business to business investments (B2B). In this case, mature companies provide finance for young but high potential startups that are solving real and existing needs in the market.

Interestingly, more local angel investors are taking chances on the next generation of high-impact entrepreneurs. Having first-hand experience of what it means to build innovative products while struggling to get financiers, this group of former founders and current startup leaders are paying it forward, albeit with something in it for them as well.

Perhaps you are wondering if the Dangotes of Africa are investing their corporate venture capital fund into tech startups. If not, why not? Your guess is as good as mine. However, this might be a discussion for another day.

Strengthening support systems for startups

Funding, while vital, is not a cure-all medicine for all that ails startups. A strong support ecosystem in the form of incubators, accelerators, hub training, and other programmes are equally essential to startup growth.

In addition to cash, venture building support, mentorship and other complementary activities are recipes for effective investment strategies. As such, investors that take a long-term approach that includes post-investment technical assistance often get good returns from their portfolios.

African leaders are not exempted from this movement. They need to partner with ecosystem players in building a tech startup network that will have the sole aim of supporting tech startups. Grantmakers and donors also have a part to play in unlocking capital for startups. One way they can deepen entrepreneurship culture is by empowering existing entrepreneurship support organisations (ESOs) with funds and resources to execute their strategies.

Bottom line

That the startup scene in Africa is maturing is undeniable. The multiplier effects stemming from our success stories are boosting the entrepreneurial drive, particularly in the younger generation of innovators.

While we may be much younger compared to the US and Europe, Africa’s tech ecosystem growth can and is already leveraging the precedent set by these developed markets. With adequate funding and venture building support not to mention favourable regulatory policies from the government, African startups will be well-positioned to take their rightful place on the global scene.

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