19th May, 2021
Megan Doyle

African Prosperity: Investing in Technology, Sustainability, and Infrastructure

Article
Tags: Society, Leapfrog Economies, Smart Business Models, Ecosystem

The rising number of African entrepreneurs creating new and innovative startups is beginning to catch the world’s attention and attract millions of dollars from both local and international investors.

Over the past decade, Africa’s startup ecosystem has developed in leaps and bounds and continues on its positive trajectory from a funding perspective. 2020 was a record year for investment into the continent’s startup ecosystem with a disclosed funding amount valued at over $1 billion.

While this indicates impressive growth, a significant financial gap still exists in funding requirements. Without the necessary capital, early-stage African startups will be unable to get off the ground, let alone sustain future growth. 

The problem isn’t attributed to a lack of capital or a lack of investors, but rather because of a lack of awareness. Many African entrepreneurs who need capital are simply not aware of the range of options and possibilities available to them and vice versa where investors and VCs are often unaware of the opportunities that exist in Africa.

While many investors have overlooked the continent in the past, Africa deserves to be recognized as a key technology player in the global economy.

Assessing the African Investment Landscape

African startups are poised for growth because they often leverage innovative technologies focused on solving the continent’s greatest challenges.

Startup Funding
Over the past few years, several African countries have acquired a ‘startup hub’ status because of high startup creation and funding rates. These countries (Kenya, Nigeria, South Africa, and Egypt) have become known as the ‘Big Four’ and account for 77% of funded startups and over 89% of total investment into the continent. Nigeria (85%), Egypt (82%), and South Africa (81%) lead the pack from a venture perspective, but when it comes to total combined raised capital it is Kenya that is Africa’s leader, raising over $190 million in funding in 2020. Although these countries remain clear leaders, there are signs of growing activity elsewhere on the continent with more investment continuing to flow into Ghana, Tunisia, and Morocco.

In South Africa’s case, the country’s success is on account of its highly developed IT sector. This is compounded by the fact that South Africa has the resources and banking infrastructure needed for startups to operate, function, and succeed. Compare this with the Central African Republic, which received the majority of investment in the form of humanitarian funding, and the disparity in fundamental business architecture is obvious.

Between 2014 and 2018, 16% of foreign direct investment (FDI) in Africa originated from China, whereas the US and France held 8% of the total FDI, respectively. Of the African startups that received investment, those that obtained external funding were significantly less likely to fail, with only one in five ceasing business operations.

During 2020, around 400 startups raised over $700 million in total funding. When compared to the previous year, this shows significant growth with the number of funded startups increasing by 27% and the funding total rising over 42% from 2019.

In 2020, at least 370 active investors made investments into African startups, marking more than a 42% growth from the previous year.

Startup Failure Rates
Market insights tell us one story, however, it’s important to look beyond the figures to understand why some countries prosper while others fail. 

The most common reasons for startup failure include no real market need, difficulty fundraising, and stiff competition. However, when it comes to Africa, other factors threaten the success of new businesses beyond the reasons previously mentioned. 

Though not always directly correlated, a country’s economic health can affect startup shutdowns. Unstable African economies contribute to the number of failed startups as banks are hesitant to relinquish funds in areas associated with economic uncertainty. Another cause for concern is a lack of basic infrastructure and many African governments face rising debt-to-GDP ratios which further constrains infrastructure spending. Up until 2026, it’s estimated that $90 billion is required annually to close the infrastructure gap relative to what’s obtainable in developed countries.

It can be tough for aspiring African founders and early-stage startups to innovate when the necessary infrastructure doesn’t exist. In addition, data costs and poor connectivity continue to pose a problem. This severely impacts technology startups where a strong information and communications technology (ICT) infrastructure is necessary for customer acquisition and growth. Limited ICT infrastructure means entrepreneurs are unable to maximize the value of critical services like cloud computing which can help startups reduce costs and remain agile. Increasing usage and access to cloud computing have been linked to a nation’s level of innovation.

Closing the infrastructure gap will be crucial in stabilizing the continent's varying economic performance and supporting the growth of its business sector.

Five countries that have witnessed high shutdown rates in the past include Rwanda (75%), Ethiopia (75%), Ghana (over 73%), the Democratic Republic of Congo (over 66%), and Zimbabwe (over 66%). These failure rates are attributable to the country’s economic performance.

There’s a high casualty rate among startups building social networking platforms with shutdown rates reaching over 95%. While FoodTech and CleanTech startups faced one shutdown in every three companies, the FinTech sector experienced the lowest failure rate at precisely 32.14%.

Between 2010 and 2018, African startups failed at a rate of 54%. This is in comparison with the US, where businesses established between 2008 and 2010 had a failure rate of 67%, and businesses set up around the same time in India had a failure rate of 90%. Although influencing factors can be debated — startup definition, timeline comparison, etc. — this indicates that startup failure rates in Africa are lower than their global peers.

African Startups: Core Areas of Focus

The fastest growing and most profitable startups in Africa typically see industry challenges as a spur for innovation. Investment activity remains significantly skewed towards a few sectors and geographies.

The FinTech sector was, yet again, most attractive to investors in 2020 with more startups securing funding than any other sector and a combined total value that dwarfed all others. FinTech and financial inclusion companies retain a majority share of total funding. 

However, investors are becoming more interested in emerging technologies and areas of digitalization, impact, and sustainability. Interest and investment in CleanTech, healthcare, data infrastructure, and agriculture startups continue to increase.

The following areas were among the most appealing to investors in 2020.

Uplifting The Continent: Areas of Business Opportunity

Africa is experiencing an increasing global trend towards more meaningful, purpose-led investment — otherwise known as impact investing. 

Impact investing aims to create opportunities in Africa through:

  • Enhancing entrepreneurship and innovation
  • Creating new jobs and strengthening local expertise
  • Contributing to the development of entrepreneurial ecosystems
  • Addressing the finance gap at the earliest and riskiest stages of enterprise creation

Boosting the entrepreneurial power of Africa’s younger generation will:

  • Create new business models
  • Increase regional and global competitiveness
  • Attract both domestic and foreign investment
  • Contribute to job creation and economic growth

The 2015 creation of the Sustainable Development Goals (SDGs) played a major role in changing the conversation for investors interested in Africa. However, the continent still needs an extra $256 billion in financing each year until 2030 to achieve the SDGs.

In 2019, the Global Impact Investing Network estimated that the impact market was already at $502 billion, but that this figure was going to increase significantly in the coming years. However, a more recent 2020 survey indicates that 43% of impact investors have funds already allocated to Africa — more than any other emerging market region. Also, 52% of investors have plans to increase their exposure in Africa within the next five years. 

Africa’s fast-growing population and rapid market expansion present significant opportunities for investors to make their mark in business by transforming each opportunity into a profitable and sustainable enterprise:

Opportunity 1: Africa’s population is growing and urbanizing
More than 80% of Africa’s population growth will occur in cities, making it the fastest-urbanizing region in the world. This rapid growth will place even more strain on current infrastructure and dependency on markets that include: F&B, pharmaceuticals, financial services, healthcare, and education.

Opportunity 2: Africa is becoming more industrial
The continent is ramping up its production output. The revenue output of the manufacturing industry in Africa is projected to reach $930 billion by 2025. African industries have the opportunity to double production to nearly $1 trillion within a decade. Three-quarters of that growth is likely to come from manufacturing to substitute imports and meet growing local demand. There’s also a significant opportunity to make Africa the world’s next great manufacturing center and exporter as industries shift away from China to lower-cost regions.

Opportunity 3: Africa’s solutions are working towards closing the infrastructure gap
Africa’s infrastructure investment needs have increased over time. Currently, around 600 million Africans don’t have access to electricity. Bridging Africa’s financial and infrastructure gap would produce positive national and global spillover effects by spurring growth in the manufacturing and services sector. Although Africa's infrastructure still lags behind that of other developing regions, annual investment in infrastructure has doubled to around $80 billion a year since the beginning of this century. This presents a great opportunity for investors and entrepreneurs to help solve Africa’s infrastructure challenges.

Opportunity 4: Africa’s sustainable innovations aim to protect the natural environment
Africa has a rich abundance of natural resources. However, the continent has difficulty in translating these resources into shared wealth and sustained economic development. Innovations and investments have the potential to change this narrative by creating exciting growth opportunities for new businesses.

Opportunity 5: Africa is becoming more connected with internet access
Between 2008 and 2015, Sub-Saharan Africa saw the world’s fastest rate of new broadband connections. Africa has more than 120 million active mobile money accounts which equate to more than 50% of the global total. This has leapfrogged many people over traditional banking products. This trend will allow companies to improve productivity, speed up transactions, access wider markets, and could add $300 billion to the continent’s GDP by 2025.

Startup Support Systems in Africa

Across the continent, a promising number of early-stage venture capital funds and investors support ecosystem syndicates, venture builders, and technology hubs with resources. These support services play a significant role in determining a startup’s success. 

The financing and support landscape is much more diverse than it seems with a growing number of coworking spaces, incubators/accelerators, venture capitalists (VC), and high-net-worth individuals (HNWI).

These support systems provide African entrepreneurs with the required skills, mentorship services, access to technology, and financial support to launch a new company.

Accelerating Africa’s Economy and Business Environment

Developing Africa’s infrastructure — transport, energy, water, and e-connectivity — will be critical for countries to ensure sustainable economic development.

By 2035, Africa’s working population is expected to grow by 450 million people or close to 70%. If this growing workforce is sufficiently supported with the necessary educational resources, technology, and development infrastructure, this will build the foundation for sustainable economic growth.

However, one barrier that still needs to be overcome is changing the mindset of several African governments that remain skeptical of technologies that could replace existing jobs, especially those with lower skill requirements or that threaten their governance.

Africa’s startup success widely differs based on geography and sector focus, however, they have one thing in common — they all aim to develop a solution to the continent’s unmet needs as opportunities for entrepreneurship.

Today’s impact investors are driven by a deeper purpose to reinvigorate the continent. They view Africa’s gaps in infrastructure, education, and healthcare as compelling areas of impactful opportunity and real needs that require solving.

Africa is still in the early stages of an incredible growth story — one that is set to be powered by the innovation and tenacity of African entrepreneurs and the sustained confidence and support of the continent's growing ecosystem of investors.

About the author

Megan Doyle

Business Content Specialist at Next Big Thing AG