The Tech Startups, Venture Capitalists and the Race for Tech Solutions

Strong acceleration of investment capital deals is helping tech startups in Africa innovate increasingly as well as break into the unicorn mound. Notwithstanding the fragmented impacts of the global health crisis, tech startups on the continent are seen as peak investment attractions. In the first half (H1) of 2021, African startups raised approximately $1.2 billion in venture capital funding, with 48% of the total investment fund going into tech startups.

The growth of these tech startups on the continent has remained on the rise primarily due to the continent’s huge youth population, increasing internet penetration and smartphone adoption, coupled with relatively limited formal banking penetration. The inherent challenges bedeviling the continent, on the other hand, provide enormous opportunities for the tech startups to innovate and develop solutions that can improve access to healthcare, education, financial services, agricultural support, trading, logistics, etc.  

The last decade has witnessed an exponential growth of these tech entrepreneurs and this growth has occasioned a high level of competition among the players. The fact that competing in the digital space does not require profound scientific expertise or huge capital investment, allows these nimble innovators to easily tap into the mass of talents and available digital knowledge to develop novel products, services, and business models.

However, sustaining and scaling their businesses require that they secure constant capital funding hence the frenzied race for the next bigger and better round of capital funding. While tech startups have remained attractive to investors globally, the Africa tech startups' funding has shown constant growth. From 2015 to 2020, the Africa tech startups' funding reached $4 billion.  

The growth in venture capital funding for tech startups on the continent isn’t unattached to the optimism surrounding the future of the market as a major consumption market considering its sprawling young population, increasing smartphone adoption, and internet connectivity penetration rates. Also, the vast pool of potential demand waiting to be funneled into these ecosystems keeps strengthening investors’ confidence in the various tech startups platform springing up across the continent.

Absa, a leading financial services provider on the continent, captured one of the key drivers of the attractiveness of the African tech space in its 2021 African Financial Market Index. One of the key findings of the report suggests that tech-based innovation, which in turn boosts the local market and strengthens economic attractiveness is a key driver of the tech startup segment and the robust venture capital investment deals witnessed on the continent recently.

Charles Russon, the Chief Executive of Corporate and Investment Banking, Absa, put the growth tangent succinctly. He said, “We’ve seen a lot of positive progress in countries’ efforts to upgrade market infrastructure and regulatory support through the development of technology-based tools which will help future-proof Africa’s financial markets. With countries using innovation to boost local markets and build a broader investor base, there are plenty of reasons to be hopeful about the future of Africa’s macroeconomic landscape.”

The emergence and growth of these startups have driven up foreign direct investments, job creation, enhanced access to finance, healthcare, expanded revenue sources by supporting the growth of e-Commerce, logistics, etc. The lockdown guideline necessitated a new growth path for the various tech solutions as well. By closing various social, operational, and commercial touchpoints during the lockdown period, local and global tech startups tapped into the opportunity to create solutions that supported businesses and households to stay afloat while they grew their bottom line.

Due to the restrictions during the lockdown, many people could not shop, socialize and were even afraid to spend cash. e-Commerce, e-learning, digital conferencing, and non-cash payment options became safe alternatives.

For instance, Jumia, an e-commerce/ marketing logistic solution platform that operates in Africa, received a record 6.4 million orders in the first quarter of the year 2020 to revamp its dwindling fortunes. Microsoft had a record sale of over $6.8 billion from its digital conference platform, Teams.

Precisely, the COVID-19 health crisis moved legacy businesses in the market to adopt digital solutions to stay afloat. Currently, the result is a thriving tech startup ecosystem that is seeing its attractiveness morph into stronger venture capital investment.

However, there are concerns that returns on investment on investors’ funds on the Africa continent are low compared to the returns on funds invested on other continents. ROI on Africa tech startups funding is less than 3% on average across the region over five years, compared with around 11% in Asia-Pacific and nearly 16% in Europe. This is primarily because most of the businesses rarely survive the series B funding stage.

While the barrier to entry is low, Africa startups face numerous obstacles in the course of doing business on the continent. Some of these are the low purchasing power of the consumers, inconsistent policy framework, fragmented geopolitical and economic activities, inadequate infrastructure to unfair competition from legacy companies.

It is therefore important to sustain the tech startup and capital investors ecosystem for continued growth and regional economic development. Startups will need to develop sustainable strategies. Investors, government, and legacy companies will need to work together to tackle the substantial obstacles confronting these startups.

Digital infrastructure development is important to maximize efficiency within the ecosystem. It is a powerful tool for removing age-long hurdles to financial inclusion, access to useful consumer information, and valuable networking opportunities. Little wonder why a strong digital ecosystem is becoming a priority in many countries in Africa.

South Africa, Kenya, Rwanda, and Nigeria are making great strides to scale their tech infrastructure. These efforts could facilitate the installation of efficiency-driven economic machinery that matches the rising demand for tech solutions in the finance, retailing, healthcare, mobility, logistics, travel, hospitality, and administrative segments.

Collaborations and partnerships are critical to sustaining the existence of the ecosystem. Partnerships between legacy companies and the startups, such that the startups provide a solution for the legacy company where everyone is a winner; legacy company, startup, and the customer. An example is Nigeria’s Interswitch partnering with Nigerian banks to provide digital payment solutions to the banks’ customers.

Collaborations can be in the form of revenue-sharing partnerships, joint ventures, or technological alliances, Legacy companies can also partner with startups to create external labs or incubators. There is a growing list of accelerator programmes, incubator projects, startup hubs, co-working spaces and broadband framework policies that are pushing the frontier of IT programming, stimulating fresh tech solutions to meet almost every market need on the continent. 

No doubt, Africa is in the midst of a digital revolution with greater implications on the attractiveness of the tech startup landscape. To fast-track ongoing development in the field of digitalization, therefore, the governments on the continent need to continue to upgrade the policy frameworks and market infrastructure as indicated by Absa. This will deepen the innovation culture on the continent, attract further venture capital as well as create a robust service sector that would offset losses in other sectors of the economy.