Unlocking capital for African tech startups

Eight In a few years, Africa would attract more than $90 billion in funding for tech startups, predicts a new paper published by the Tony Blair Institute for Global Change.

This is predicted to be not unfounded, considering the continent has been at the forefront of using technology to leapfrog traditional development paths and successfully bypass the fixed-line era.

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

African startups are already on the right track after ending the first quarter of 2022 with a $1.5 billion cash injection. All in all, I assume that with the current development, the African tech ecosystem has a good chance of possibly reaching this mark before 2030.

The paper Supercharging Africa’s Startups: The Continent’s Path to Tech Excellence reiterates a well-known fact, emphasizing Africa’s position as the region with the highest rate of entrepreneurship as well as the fastest growing economy in the world. However, Africa still lags behind the rest of the world when it comes to tech entrepreneurship. How so?

Well, given the overall investment in African tech startups in 2021, it would be easy to think that the continent would hold its own in terms of funding. While that’s an optimistic outlook, Africa still has some miles to go. Consider what Crunchbase Insights data reveals about global technology investments.

The report finds that global venture investments totaled $643 billion in 2021. Available data shows that when risk funding is broken down continent-by-continent, Latin American startups have outdone themselves with almost $19.6 billion in funding. For its part, North America maintained its position as the best-funded region with $330 billion in investments (US startups alone secured $311 billion), while European tech startups brought in almost $116 billion. Asia saw $165 billion in investments, leaving Africa around $5.2 billion.

Considering the above, one might try to downplay the magnitude of Africa’s achievements. Nevertheless, that should not be the case. Is Africa’s tech ecosystem rapidly multiplying? Without doubt! But I think our absolute numbers could be better.

If there’s a tune that’s been sung repeatedly throughout the ecosystem, it’s that more resources are needed to unlock the tremendous opportunities Africa offers the world. The fact remains that many African companies find it difficult to raise capital from foreign investors, although some startups make it look easy. Despite screening all brands, or at least a good percentage, based on their investment merits, many founders still elude funding, so they embrace bootstrapping as the only option.

Given that investment is critical to a startup’s success, what can be done to strengthen Africa’s investor ecosystem and thereby free up capital for startup founders?

Rethinking context-based investment strategies

Foreign investors’ appetite for African start-ups is not fading. Finally, the continent has a very young population, resulting in a huge market size. To sweeten the pot further, the ecosystem is mature enough for venture capitalists to invest in and reap huge profits in return.

The stumbling block lies in the funding model favored by many tech investors. For example, the Silicon Valley financing model has been held up as the standard to follow due to its applicability in more developed economies like the US, where it originated.

Typically, equity financing is the usual option for financing early-stage, high-growth companies. In the African reality, equity is not necessarily the only financing option for startups. This is where flexibility comes into play. So instead of a rigid “twenty-two” model, many startups in Africa would benefit from alternative options such as asset financing, debt and revenue sharing – the ultimate goal for startups and their investors is success.

Another effective approach is business-to-business (B2B) investments. In this case, mature companies provide financing to young but promising startups that solve real and existing needs in the market.

Interestingly, more local angel investors are taking risks with the next generation of high-impact entrepreneurs. This group of former founders and current startup executives have seen first-hand what it takes to create innovative products while struggling to find funding.

You might be wondering if the Dangotes of Africa invest their corporate venture capital fund in technology startups. If no, why not? Your guess is as good as mine. However, that could be a discussion for another day.

Strengthen support systems for startups

While funding is essential, it is not a panacea for all startups. A strong support ecosystem in the form of incubators, accelerators, hub training and other programs is equally important for startup growth.

In addition to cash, venture capital building support, mentoring and other ancillary activities are recipes for effective investment strategies. Therefore, investors who take a long-term approach that includes post-investment technical support often achieve good returns from their portfolios.

African leaders are not exempt from this movement. You need to work with ecosystem players to build a tech startup network with the sole purpose of supporting tech startups. Grantees and donors also play a role in raising capital for startups. One way to deepen the culture of entrepreneurship is to provide existing entrepreneurship support organizations (ESOs) with the means and resources to implement their strategies.

bottom line

There is no denying that the startup scene in Africa is maturing. The multiplier effects of our success stories strengthen the entrepreneurial drive, especially among the younger generation of innovators.

While we may be much younger compared to the US and Europe, the growth of Africa’s tech ecosystem can and is already capitalizing on the precedent that these developed markets have set. With adequate funding and support to set up businesses, not to mention favorable government regulatory policies, African startups will be well-positioned to take their rightful place on the global stage.

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