African Startups: Expectation vs Reality

African Startups: Expectation vs Reality

According to Disrupt Africa, Africa is home to at least 774 startups. This growing number of African startups offers a myriad of opportunities in business for startup founders innovating in various sectors of the economy. Startup founders, therefore, are constantly seeking innovative solutions to diverse challenges on the continent. With the general character of fast-paced startup growth, and the impetus to continue innovating, startups are continually in need of funding, and this is what spurs the need for venture capital.  

Venture Capital for African startups: A Meteoric Rise

Solving some of the continent’s major challenges requires access to funding. And worthy of attention is that some of the continent’s brightest entrepreneurs brimming with innovative ideas have been bedeviled by a paucity of access to capital. With conventional capital sources such as bank loans and government grants inaccessible for tech startups as well, the challenge in the nascent ecosystem appears broader. 

However, tech startups have an edge in that they are high-growth and offer great rewards when they flourish. It is why the possibility of early investors getting juicy returns on investment is not farfetched. 

At the core of venture capital is furnishing startups with funding. We can, therefore, reckon that the African tech startup ecosystem is a fusion of the inadequate funding for African tech businesses and the inclination for risk of venture capitalists.  

The remarkable strides recorded by venture capital in shaping the African tech startup ecosystem have been made possible with the presence of certain key players. These key players, we reckon, have ensured a consistent increase in the amount of funding made available to tech startups across the continent. Case in point, startups in Africa raised $2.25 billion in the first four months of 2022 alone compared to raising a meager $185,785,500 combined in 2015. 

Key Venture Capital Players for African Startups

Funding for African startups leaped over the past year, enabling four startups to attain unicorn status in 2021 alone. However, Collins Onuegbu, the founder of Nigerian IT service, Signal Alliance in his 2018 article African Startup: Of Unicorns, Gazelles and Corporate Breakfasts, argues that the term ‘unicorn’ is not befitting for African startups. 

Aileen Lee, Founder of Cowboy Ventures, had utilized the term ‘unicorn’ to describe the rarity of these companies. African startups are rather characterized as gazelles.
Aileen Lee, Founder of Cowboy Ventures, had utilized the term ‘unicorn’ to describe the rarity of billion-dollar companies. Image Credit: SovaeArt, 2018.

He notes that the term ‘Gazelle’ is a more realistic representation of the continent as it refers to a sleek, stable creature adapted to the harsh terrain of Africa. Onuegbu further questions Africa’s dependence on America’s benchmark in the recognition of our unicorns, citing the immaturity of our economic system across the continent as a crucial factor to be considered.

The present subject of discourse does not, however, extend to a debate on the appropriate term for tech startups that have hit the $1 billion valuation. As such, whether as unicorns or gazelles, the significant impact of venture capital in the African tech ecosystem remains undisputed and takes the forefront at this juncture. 

Venture capital has evolved globally – from the days of the likes of Arthur Rock, Tommy Davis, Tom Perkins, and other early venture capitalists contributing to the advancement of the modern computer industry in the United States with not just capital but also funding expertise and administration background – to now that it is a form of private equity that finances startups with considerable prospects for success.

In Africa, the venture capital terrain has soared since 2014. The salad days of African venture capital pursuits had the most active funds based on the continent. At the time, reports had it that American venture capital firms placed startups in Africa with white founders above those without white (co)founders. In an interview with The Guardian, Ghanaian entrepreneur Jesse Ghansah laments the discrimination he and his co-founder encountered in Silicon Valley’s prestigious startup development program Y Combinator. “There are a lot of systemic issues as a black founder (sic) raising money abroad,” he tells Larry Madowo. And this was in 2020.

It is later revealed in the same article, according to their review of public data, that of the top 10 African-based startups that received the highest amount of venture capital in Africa in 2019, eight were led by foreigners. Also, Carlos Mureithi in his piece for Quartz Africa Do white founders in Africa have an easier time getting capital? avers that while funding for African startups continues to proliferate, the reality is that most of it goes to startups led by white people. Mureithi further cites the case of French citizen Robin Reecht who incurred the wrath of Kenyans on social media when TechCrunch reported that his food startup, Kune, had raised $1 million to launch an on-demand food service. 

Kenyans went into a frenzy, stressing the place of white privilege in startup funding in Africa. Reecht did not make matters any better with his attempt at rationalizing the grounds for the funding which included points such as Kenya having neither “great food at a cheap price” nor “a strong food culture” and that he realized the “market gap” in just three days of being in Kenya.  

However, notwithstanding the discrimination of black founders by Silicon Valley investors, it is without a doubt valid that African tech startups have benefited from global VC firms committed to accelerating the ecosystem. Notable names include Partech partners with startups such as Kudi, RelianceHMO, and Terrapay in their portfolio; AfricInvest which was established in 1994 with a portfolio of startups such as Boomplay, Palmpay, and InstaDeep; and Quona Capital founded in 2015 which has Cowrywise, Sokowatch, and Luleland in their portfolio.

At this juncture, credit also goes to 2018 Forbes 30 Under 30 honoree Maya Morgan Famodu who has helped to accelerate the growth of African startups through her venture capital firm Ingressive Capital. Born to a white American mother and a Nigerian father, Minnesota-bred Maya has invested in successful startups such as genomics company 54gene and fintech giant Paystack which has risen to unicorn status after crossing the $1 billion valuation. The 31-year-old, who started her career in private equity, has been able to achieve this from a desire to witness the African tech startup scene snowball into what it is today.

Therefore, as venture capital activities in Africa continued to spiral through the years, the African tech ecosystem doubled down leading to the emergence of unicorns, a few acquisitions, and several shutdowns. This has led to a case of the expectation viz a viz the reality of startups across the continent.

The Expectation: Bottlenecks, Bootstrap, Shutdowns 

It is without a doubt that African tech entrepreneurs have innovative ideas and solutions to the challenges in Africa. However, the expectation has been that startups in Africa cannot survive beyond the growth stage owing to several bottlenecks that hinder progress within the ecosystem.

Some of these bottlenecks include limited access to financing, poor infrastructure, inconsistent government regulations, and minimal government assistance. It is also believed that startups bootstrap in their early stages which makes it difficult for them to deliver top-notch service. 

It is expected that these concerns will lead to the untimely shutdown of startups across the continent notwithstanding the innovative ideas that tech entrepreneurs put forward.

It is also believed that notwithstanding the reality of startups growing into unicorns and soonicorns, there is a funding downtrend for growth-stage startups across the globe which will also trickle down to Africa. The expectation is that more startups will adjust to the venture funding reality.

The Reality: Seven Unicorns, Acquisitions, Shutdowns, Funding Fluctuations

The reality for startups across the globe has been exceptional, with 2021 witnessing a surge in venture capital investments. In only the first half of the year, startups globally raised more than $300 billion in investments. This is in addition to the emergence of 800 unicorns.

CBInsights also released a report in February 2022 revealing that the total number of startups globally reached 1,000. Chinese Bytedace and American Space X are leaders of the pack, each valued at over $100 billion. Decacorn status (over $10 billion valuations) has also become a reality for 46 other companies while roughly 31% of unicorns are valued at exactly $1 billion.

In Africa, the reality is no different – as opposed to the expectation that startups in the continent do not have access to funding – with the continent serving as a fertile ground for the tech startup ecosystem to thrive. Per data from Venture capital firm Partech Partners, the number of African tech startups receiving financial backing grew at an annual rate of 46% from 2015 through 2020. In 2021, several growth-stage startups across the continent profited from the finance payout that swept over venture markets thus making the first nine months of the year witness the emergence of four out of the present seven unicorns. Opay’s recent $400 million raise has also made the continent witness the first $2 billion valued African startup. 

Going by the data in 2015 during which TechCrunch reported that the total amount of startup venture funding for the entire continent was $400 million, there is a clear record of advancement in the African tech ecosystem. 

Also, the amount of venture capital deals in the continent continued to soar in the same year, with the number of years it takes to become a unicorn for an African startup reducing considerably. Case in point, it took Interswitch and Fawry – regarded as the oldest unicorns in the continent – 17 and 12 years to attain unicorn status; whereas, the remaining five African unicorns took five years or less to accomplish a similar feat. In 2021, TechCrunch reported that Flutterwave’s Series C raise was $170 million as Wave and Andela raised $200 million each. For Chipper Cash, the case was a $100 million Series C and a $150 million extension for its unicorn round months later.

TechCrunch further reports that 2021 saw some prominent acquisitions that shook the ecosystem. There was Flutterwave’s acquisition of Disha thus venturing into the creator economy space; Jiji’s acquisition of Cars45; and Cheki selling its businesses in Kenya and Uganda to Nigeria’s Autochek. Worthy of mention also is Africa’s largest fintech acquisition: the Stripe-Paystack acquisition deal of 2020.

The reality of startups in the African tech startup ecosystem cannot be completely analyzed without a review of the shutdowns. Across the continent, there was a shutdown rate of 54.20% between 2010-2018 according to The Better Africa report published by Weetracker in partnership with GreenTec Capital Africa Foundation. The report further revealed that the African countries with the highest shutdown rates include: Ethiopia (75%), Rwanda (75%), and Ghana (73.91%). Nigeria, home to at least 270 startups, had a maximum shutdown rate of 61.05%, followed closely by Kenya at 58.73% and South Africa with 54.39%.

According to Business Insider Africa, some of the startups in Africa that have failed include SuperGeeks, ORide, Afrostream, and Wala. Only recently, Kune Food had to shut down amidst challenges in securing funds to manage its business. This is amidst global downtrends in the funding of startups, in the wake of market shakes. The major reasons cited for the shutdowns of these startups are lack of adequate funding, harsh business environment, difficult terms and conditions for investors, and poor internet infrastructure.  

Emmanuel Otori in his piece for The Nation also highlights some of the reasons for the failure of startups in Africa. Some early-stage entrepreneurs, Otori posits, can gain access to funding due to their network within the ecosystem for ideas that have not been properly researched thus leading to failure. He further adds that due to some startups having to bootstrap at their early stage, they tend to work with incompetent hands as opposed to skilled and competent professionals that are capable of delivering the required expectations. On the funding downtrend looming for growth-stage startups, Stephen Deng, a partner at San Francisco-based venture capital firm DFS Lab, shares with TechCabal in a cellphone interview that his firm invests in “businesses that are fit for the continent and do not require a very capital-rich environment to succeed.”

According to Deng, African startups need to “look more (sic) like African businesses and not vehicles created to be sold to the highest bidders in the PE and stock markets.”

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