Startups in Africa continue to play a vital role in economic development by providing innovative solutions and creating jobs.
And due to the advances in digital technology and innovation, African Tech Startups are becoming increasingly prevalent and changing the landscape for individuals and societies. Beyond the traditional business models, start-ups contribute to inclusion by granting their users access to financial services and products, consumables, healthcare, and other services that have the potential to revolutionize lives.
Nonetheless, the potential for start-ups to foster disruptive technological innovation and promote economic development does not exist in a vacuum and must always be unlocked to realize their full potential – a growth that has remained largely untapped.
Therefore, the purpose of this article is to explore the state of the African start-up ecosystem and identify growth enablers that can help unlock the full potential of these businesses.
THE STATE OF THE AFRICAN START-UP ECOSYSTEM
The African start-up ecosystem has been growing steadily in recent years, as startups across the continent continue to attract huge funding for their innovations. The significant expansion and high valuation that many start-ups have attained are a testament to the immense potential, scale, and urgency of needs that these start-ups are tackling.
Start-up activity in Africa
According to a report by Disrupt Africa in 2023, South Africa, Nigeria, Kenya, and Egypt have established themselves over the last few years, by various criteria, as the “big four” African tech startup ecosystems. Although when it comes to issues such as funding, other countries are catching up, the vast majority of activity and investment on the continent from a startup perspective comes from those four markets.
A 2021 report placed Egypt at the top of the list of the African countries with the most start-ups with 562 active startups as of then. Reports on South Africa, Nigeria, and Kenya released this year found 490, 481, and 308 active startups respectively. Additionally, Ghana is becoming one of the most vibrant and developing startup havens on the continent and is catching up fast with the continental leaders – with over 100 active tech start-ups this year.
The failure rate of start-ups in Africa
Starting a business is never easy, and the reality is that many African start-ups fail within their first few years of operation. According to a report by the World Bank, the overall start-up failure rate in Africa is estimated to be between 70-80%, which is higher than the global average. This means that for every 10 startups that are launched in Africa, only 2 or 3 are likely to survive the first few years. The report attributes this high failure rate to a number of factors, including weak infrastructure, limited access to finance, and a lack of skilled human capital.
According to another report, the African Tech Start-ups Funding Report 2020 published by Disrupt Africa in January 2021, a total of 397 African start-ups closed in 2020 which was a 14.7% increase from the previous year. Although the COVID-19 pandemic was a major factor contributing to the increased start-up failure in 2020, many survived in the face of economic uncertainty and disrupted supply chains.
Leading African start-up sectors
Fintech leads the way across three of the “big four” African start-up ecosystems with remarkably similar statistics, but there is one outlier. In Kenya, fintech accounts for just over 30% of tech start-ups, nearly three times more than its closest competitors agri-tech and e-health. In Nigeria, fintech startups make up 36% of all start-ups, again almost three times more than any other sector. Similarly, in South Africa, fintech is a major driver, with 30% of companies operating in the space, also nearly three times as many start-ups as any other individual sector. However, in Egypt, e-commerce reigns supreme, with 20% of the country’s tech start-ups in the e-commerce or B2B retail-tech sectors, almost twice as many as many fintech start-ups. In contrast to South Africa, Nigeria, Kenya, Ghana, and other African countries with budding start-up ecosystems, Egypt places fintech in a distant second place in terms of start-up activity.
Over the past few years, despite economic volatility and instability around the world, the startup ecosystem in Africa has persistently expanded, recording substantial amounts of funding. According to the African Private Equity and Venture Capital Association (AVCA), funding for African startups is predicted to set new record levels, with $3.5 billion worth of venture capital deals closed in the first half of 2022 alone, more than two times the amount raised in H1 2021. AVCA predicts that if this trend persists, the total funds raised could reach up to $7 billion in the current year. However, African start-ups and SMEs still face a significant funding gap in comparison to their non-African counterparts. Africa currently hosts just 0.02% of the global start-up ecosystem value - the global start-up ecosystem is valued at $3.8 trillion, whilst Africa makes up just $6.6 billion.
Projections for future growth
Projections indicate that Africa could brag of more unicorns in the near future if it contains to maintain its impressive fundraising trajectory from the previous years. Further, successes in the African Fintech space, previously limited to certain countries are set to record steady growth across the board. According to a report by Africa: The Big Deal, with an anticipated steady rise in financial backing, African start-up funding is predicted to reach $7.3 billion by the end of the year and $93.9 billion by 2030.
In conclusion, if African Tech Startups and other businesses are to unlock their full potential and thrive in the years to come, they must pay close attention to certain growth enablers that can help them overcome the challenges they face and seize the opportunities that lie ahead.
SOME GROWTH ENABLERS FOR TECH START-UPS
In order for African Tech Startups to unleash their growth potential and achieve long-term success, it is essential that they pay attention to a set of critical factors known as growth enablers. There are two main types of growth enablers – internal and external factors which can help Tech Startups navigate challenges and capitalize on opportunities.
Mastering some of the forces that impact businesses internally is more challenging than handling others. Unlike the external environment, the start-up has control over these factors. Although it is important to recognize potential opportunities and threats outside company operations, managing the following strengths of internal operations is the key to business success.
- Provision of innovative solutions
According to a report, every year there are over 100 million new businesses which are launched worldwide. This translates to approximately 11,000 startups being launched every hour. In this rapidly evolving environment, it is crucial for start-ups to continue to innovate if they hope to succeed. With the constant influx of new companies, African Tech Startups cannot afford to become complacent and avoid experimentation and innovation. They must stay vigilant and aware of market trends, keeping a close eye on competitors and new players. Technology is advancing at such a rapid pace that the introduction of new or disruptive technology can potentially destroy an entire business overnight, rendering all the resources, time, and effort invested in building the start-up wasted. In order to avert such an outcome, African Tech Startups must provide innovative solutions that solve everyday problems customers face in a creative and ingenious manner.
To create innovative solutions, startups must be willing to take risks, experiment, and iterate. They must be willing to challenge conventional wisdom, think outside the box, and push the boundaries of what is possible. This requires a culture of innovation, where failure is seen as a learning opportunity and experimentation is encouraged.
To ensure that their solutions are effective, startups must also focus on user experience and user design. By providing a seamless user experience, startups can increase user adoption and customer loyalty, which can translate into growth.
Finally, Tech Startups must be willing to pivot and adapt as market conditions change. They must be nimble and responsive to changing customer needs, emerging trends, and new technologies. This requires a willingness to embrace change, be flexible, and pivot when necessary.
- Capacity Building
Tech Startups are constantly on the lookout for new and innovative ways to grow their business, but one of the most important ways to unlock their full potential is by investing in capacity building. By investing in capacity building, African Tech Startups can gain a competitive edge in their industry, and position themselves for long-term success. This can be achieved through a variety of methods, including training and development programs, mentoring, coaching, and skills-building workshops.
One of the key benefits of capacity building is that it empowers employees to take ownership of their work and responsibilities, which can lead to greater job satisfaction, motivation, and productivity. This can help to create a positive company culture, which in turn can attract and retain top talent.
Another benefit of capacity building is that it allows startups to adapt and respond to changing market conditions, technological advancements, and customer needs. This is because employees are equipped with the necessary skills and knowledge to identify and seize new opportunities and to make informed decisions that drive growth.
Tech Startups that invest in capacity building are better positioned to unlock their full growth potential, by equipping their employees with the skills, knowledge, and capabilities needed to succeed in a rapidly changing business environment. By building a culture of continuous learning and development, startups can create a sustainable competitive advantage, and position themselves for long-term success.
- Establishment of effective management systems
Establishing effective management systems is crucial for African Tech Startups looking to make it big time on the global stage. No matter how ambitious the founders’ vision is, they can’t achieve it without talented leadership and management. Without this, the founders will struggle to get the start-up off the ground for the management team influences the company’s performance and growth.
To establish an effective management system, startups should focus on several key areas. Firstly, they need to identify the key performance indicators (KPIs) that will help them measure progress towards their goals. By setting clear KPIs, startups can ensure that everyone is working towards the same objectives.
Secondly, startups need to establish clear processes and procedures for decision-making, project management, and performance evaluation. This will help to streamline operations and ensure that everyone is working together in a coordinated and efficient manner.
Finally, startups should establish effective communication channels to ensure that everyone is informed and on the same page. Regular team meetings, progress reports, and feedback sessions can help to keep everyone aligned and working towards common goals.
Startups in Africa cannot operate in a vacuum. They exist in a dynamic environment that is constantly changing and evolving. Therefore, they must be abreast of the external factors that influence their success. By taking advantage of the following external factors, start-ups can gain access to resources, expertise, and funding that can help them grow and scale their business.
- Government and regulatory interventions
In a continent of untapped potential where start-ups are key drivers of economic growth and innovation, it is crucial that African governments and regulatory bodies play a role in supporting their success.
Tech Startups often struggle to access funding, which can be a significant barrier to growth. Governments can provide financial support to early-stage startups through grants, loans, and tax incentives through legislation. In addition, they can partner with private investors to provide seed funding and other forms of financing.
Compliance with regulatory demands can be complex and burdensome, especially for start-ups and small businesses. Government regulators can simplify regulations and provide clear guidelines to help startups comply with them. This can help reduce compliance costs and streamline processes, making it easier for businesses to operate. They can also provide regulatory sandboxes which allows start-ups in the fintech industry to test innovative products or services in a controlled environment without facing regulatory penalties.
Innovation is key to the success of startups and SMEs. Governments can create policies that encourage innovation by providing research and development funding, creating incubators and accelerators, and supporting entrepreneurship education.
Finally, governments can create networking opportunities for start-ups by hosting events and conferences where they can meet potential investors, customers, and partners.
- Private sector partnerships
Innovation is the lifeblood of any successful start-up, and the ability to unlock a company’s potential can be the difference between success and failure. In today’s fast-paced business landscape, African startups are increasingly turning to private sector partnerships with incubators and accelerators, start-up hubs, and national start-up associations to gain a competitive edge and achieve success in their respective markets.
Many Tech Startups struggle to access the funding they need to grow and scale their business. Private partnerships with accelerators, incubators, and start-up hubs can provide access to funding sources that may not be available elsewhere. These organizations often have established networks with investors and can help start-ups secure the funding they need to secure.
Private sector partnerships also offer mentorship and coaching to help start-ups develop their ideas and grow their businesses. This can include advice on business strategy, marketing, and sales, as well as guidance on how to access funding and navigate regulatory environments. Such partnerships also offer training and education programs to help startups develop the skills they need to succeed.
Tech Startups can also benefit from collaborations with national start-up associations in several ways. National start-ups associations often advocate for policies and initiatives that support the growth and development of startups. By partnering with these associations, African businesses can gain a stronger voice in policy-making and ensure that their needs are represented. They also provide opportunities for start-ups to network with other entrepreneurs, investors, and industry experts. This can help start-ups identify new opportunities, gain exposure, and expand their reach.
The most obvious means by which investors may unleash the potential for growth and innovation in African start-ups is through funding. Access to funding is one of the biggest challenges facing businesses in Africa. Traditional sources of funding such as bank loans and government grants are often difficult to obtain, leaving start-ups struggling to raise the capital they need to grow their businesses. By providing seed funding, venture capital, and private equity investment, investors can help startups access the initial capital needed to develop a product or service and launch their businesses.
Investors can also help start-ups innovate and stay ahead of the curve in their respective industries by providing technical assistance. This can include access to research and development resources, support for product development, and advice on emerging technologies. Also, since they have experience in running successful businesses, they can provide valuable advice and guidance to start-ups. Investors can help start-ups avoid common mistakes and navigate the challenges of building a successful business.
Investors often have extensive networks within the business community, and they can introduce start-ups to potential partners, customers, and suppliers. This can also include introducing start-ups to media outlets and attending industry events and conferences. This can help start-ups gain exposure by promoting them to their networks and the broader business community in order to find new opportunities for growth.
The potential of Tech Startups in Africa to drive economic development is undeniable. These businesses have the power to transform lives by providing access to vital services and products, and by creating job opportunities. However, for these businesses to reach their full potential, it is crucial to leverage the growth enablers available to them. With the right support and strategy, Tech Startups in Africa can drive innovation and create lasting impact, driving economic growth and development across the continent.
ABOUT THE AUTHOR
HAROLD KWABENA FEARON is a Trainee Associate at SUSTINERI ATTORNEYS PRUC with its Corporate, Governance, and Transactions Practice Group, specializing in legal service provision for Startups/SMEs, Fintechs, and Innovations. He welcomes views on this article via firstname.lastname@example.org