FACTORS THAT HINDER THE GROWTH OF TECH START-UP’S IN AFRICA
By Lesedi Masoko
“While Africa is punching below its weight in the international competition to develop technology, the continent has the potential to become a start-up superpower in the African tech industry as it is home to a fintech scene where more than half of the world’s mobile-money users reside.” This is according to the Tony Blair Institute for Global Change https://institute.global/sites/default/files/articles/Supercharging-Africa-s-Startups-The-Continent-s-Path-to-Tech-Excellence.pdf. Recently, Africa has made notably impressive strides in becoming a launch pad for high tech start-ups, as the number of tech start-up companies who were able to receive financial backing increased greatly from the year 2015 to 2020 by 46% – according to the 2021 Africa Venture Capital report 2021 AFRICA TECH VENTURE CAPITAL | Partech (partechpartners.com).
Africa is a pioneering space for entrepreneurial innovation and the tech industry particular, is growing rapidly, considering the historic and present socio-economic condition of Africa. As we know, Africa has experienced detrimental effects from the strain of colonialism and further being underestimated by the western world. However, the African economy is improving and with development heightened in the tech industry, supporting the rise of more tech companies, many socio-economic issues can be solved.
The development of technology and tech start-ups can address issues of, for instance, inequality in the educational sector, unemployment issues within the youth, and issues of food wastage across the continent. For example, Egypt’s female-owned tech company, Tekeya App, serves to address the issue of food wastage as the online platform promotes a culture of food sustainability by allowing food retails to sell their surplus food to the public at a cheaper price – this way, they can avoid unnecessary food wastage while simultaneously sustaining the well-being of the environment, while contributing to the improvement of the economy.
Tech start-ups are exploding the African economy as since their uprising, they have been found to have raised explosive funds as mentioned on Disrupt Africa, that according to the African Tech Startups Funding Report 2021 (disrupt-africa.com), it was found that 564 African tech start-ups raised a combined US$2, 148, 517, 500 in the year 2021. However, “these records have dropped in the first half of 2022, where 303 start-ups banked US$2, 275 billion, opening a good window for investors to invest in the ecosystem. This means that, “the sector is on course to increase total funding raised by 100 per cent year-on-year” Funding Report 2021 (disrupt-africa.com).
There are notable improvements in Africa that deserve an applause however, Africa is still in a battlefield to fulfil its dream of becoming developed in the business industry. Unfortunately, a 2021 report stated that, Africa has only 3 unicorns (unicorns – a term used in the venture capital industry to refer to private start-ups with a value of over $1 billion) that are flourishing with the Nigerian fintech, Flutterwave in the lead. According to Statista, Nigeria has approximately 3, 300 start-ups as of the year 2020, which is the highest number in Africa. South Africa and Kenya account for approximately 660 and 600 tech start-ups. Additionally, the number of tech start-ups in Africa have improved as doubled in countries like Morocco, Ghana, Rwanda, and Tunisia. The concern is however, why are these start-ups not reaching unicorn level?
In comparison, the European Union (EU) has more than 50 unicorns, 100 in China, and 200 in the United States (US). The issue is said to be that the majority of “African start-ups rarely survive beyond the series B funding stage and as a result, the returns on venture capital are weak,” according to BCG Strategic Management Consulting | Boston Consulting Group (bcg.com).
There are a number of contributing factors that hinder the growth of African tech start-ups, and these structural barriers include, low consumer purchasing power, complex and inconsistent regulations, minimal assistance from the government and, inadequate data communications infrastructure. Some argue that even though African tech start-ups may attempt to navigate through these obstacles, they may run into challenging realities Africa’s competitive playing field. “Key sectors, especially business-consumer sectors such as retail, financial services, and energy are controlled by major business groups and state monopolies that are considered to be national champions” – an argument presented by BCG Strategic Management Consulting | Boston Consulting Group (bcg.com).
Instead of these enterprises using their prosperous position to advance the national interest, they often use their power to cause stagnation for new entrants with disruptive business models. This type of hostile environment for start-ups contribute the socio-economic issues of unemployment and poor economic value as these inhospitable trends block the process of job-creation and it stunts economic development. As mentioned earlier, there is much potential for Africa to become a superpower however, certain structural changes need to be made in the African business economy.
Ironically, Africa’s national champions’ competitiveness is threatened as they are depriving themselves from gaining crucial sources of innovative technologies and new business modules as argued, “Africa’s inhospitable start-up environment not only stunts job creation and economic development. It also threatens the competitiveness of Africa’s national champions themselves by depriving them from crucial sources of innovative technologies, products, and business modules” Overcoming Africa’s Tech Startup Obstacles | BCG.
But there is no need for despair because Africa will always be fertile ground for innovative seeds that will thrive. The tech industry continues to grow, even though it can be limited but with factors such as artificial intelligence and more emerging technologies helping to improve the quality of education for instance, there is hope.
There has to be a change of strategy in the manner in which the tech start-ups operate. African governments have to work together to overcome the weighty obstacles that the continent faces. Tech companies have the potential to eradicate issues related to poverty on the continent, but they do need considerable assistance from governing bodies because the factors that hinder the growth of tech start-ups in Africa are largely due to the socio-economic issues that African government are slow to solve due to many factors, a major one being corruption.