Africa is home to one of the most exciting and innovative startup environments in the world. As the youngest and fastest-growing continent, Africa’s population is estimated to grow to 2.5 billion people by 2050. It also has and estimated startup market valued at about $6.6 Billion.
The continent has become an increasingly attractive hub for foreign investment. However, in order to thrive in this space, it is crucial to have a thorough understanding of the circumstances on the ground.
In this post I will discuss three reasons why Africa is an exciting market for innovation, while addressing some of the common issues facing local start-up ecosystems. I will also touch on how founders should tackle those issues in order to be successful. From my observations, the challenges of doing business in Africa range widely from country to country. However, there are some common trends. In particular, startups often need to learn how to correctly assess market participants, operate with limited infrastructure, and manage their resources carefully.
As someone who has lived in several African countries, managed businesses in Africa, and engaged with many African founders, here are my perceptions on how to navigate the African start-up environment.
There are four African countries that have successfully fostered start-up ecosystems: Nigeria, Kenya, South Africa and Egypt. Comprising of about 422 million people, this group of countries receives about 83% of startup funding in Africa. Despite this, these countries are by no means the only option for startup creation or investment.
Source: Endeavor Nigeria
Source: Africa: The Big Deal
While a potential recession in the US and Europe seems likely to affect startup funding, the effect on Africa might not be as clear-cut. In fact, it appears that Africa, despite lagging in global Venture funding might be poised to outperform relative to historical levels, having raised $3 Billion so far this year in record time. According to CB Insights, there were approximately 170 deals worth $923 million in Q1 2022, while there were only 111 in Q1 2021 (worth $245 M) and 114 in Q1 2020 (worth $114 M). The number of venture deals in Q1 2022 was higher than any quarter in the past five years. This limited slowdown in funding makes the space an exciting market to observe.
Source: CB Insights
Africa is set to grow faster and larger in the long-run, according to the financial times. The most obvious consequence is the increased need for goods and services to be provided. Entrepreneurs of all types will benefit and those with technical knowhow will create new markets, using VC as a key resource. Cities, which take the opportunity to become tech hubs, will be able to capitalise, especially as initiatives like the African Continental Free Trade Area boost intra-regional trade of goods and services.
Source: Financial Times
1. African Angel Networks Exist. Use them!
While there are some sources of government assistance, African Angel Networks often fill Founder funding requirements from idea stage companies to those at post-seed stage. These fantastic organisations, filled with founders and investors alike, provide a platform for innovation in most major African cities. Angel Investors identify and support startups through these networks, funding the risky companies, relieving some of the pressure and allowing them to innovate in a way that no one else could.
The African Angel Networks provide various types of help and are particularly useful for navigating business environments, which are not always clear or transparent.
These are not only important for building, testing, and pitching products and services, but they allow Founders to learn from what other startups in the space are doing. In addition to this, they connect knowledgeable local investors, as well as people who might be familiar with the regulatory hurdles and unforeseen challenges of African markets. For further insights, take a look at the Africa Business Angel Network here.
Source: Analysing Africa’s Angel Investment Landscape - Better Bridges & Africa Business Angel Network
2. Meet the market where it is
If founders are to operate successfully, the product-market fit needs to be realistic. One of the challenges of doing business in Africa is the mismatch between market reality and expectations, particularly the those of non-Africans.
While many countries have experienced rapid urbanisation, a significant portion of Africa’s population lives in rural areas. This means that products and services need to be tailored to reflect this reality.
More developed markets often focus on how startups can sell on value or quality, startups in rural Africa need a different approach. Many have limited spending power and Founders who identify ways to provide goods or services faster and at a lower price than their competitors, are often successful at capturing local customers.
On the other hand, one needs to consider that each African country has differences in spending power, allowing the creation of a tailored strategy for founders and investors. A small proportion of wealthier markets appears to be increasingly urbanised and interested in embracing luxury shopping experiences. Going into the future, African cities will continue to urbanise so expect spending trends to follow suit.
Source: Financial Times
Infrastructure Development
While Africa has some relatively developed markets, in many cases, baseline infrastructure can be a challenge. Having limited infrastructure, digital or otherwise, can severely restrict the opportunities startups have when it comes to implementing products and services that are popular in foreign markets.
Consider e-commerce or the food-delivery space. More developed markets have it easy when it comes to integrating such services. For example, in the US, Amazon successfully grew after using the United States Postal Service. In Africa, companies like Jumia, which was the first African startup to IPO on the New York Stock Exchange, were never able to take advantage of such a well-established postal infrastructure and therefore have experienced unforeseen challenges on their path to profitability.
Other infrastructure challenges that have hampered startups include road conditions, internet access as well as limited organisation of street names and numbers, which are key in identifying individual homes. The integration of food delivery platforms is similarly more difficult than in countries with that baseline infrastructure. However, this does create opportunities for startups to innovate.
Source: African Development Bank,
The Africa Infrastructure Development Index (AIDI)
In particular, these challenges provide logistics startups with an extreme opportunity. As of 2022, African logistics startups have raised at least $1.6 Billion over the past decade.
One such company is Jabu, a Namibia-based startup (founded in 2020), which uses GPS coordinates to provide logistics solutions to food vendors in Namibia, including those with unidentifiable physical locations. Even in a market with only 2.5 million inhabitants, Jabu has succeeded in raising $18.5 million from prominent investors such as Y-combinator and Tiger Global. This indicates that resilient entrepreneurs and investors can successfully identify issues being faced and bring real, tangible solutions to the table.
3. Get involved in the digital economy
Africa’s digital economy is expected to grow six-fold in the next thirty years, one of the most rapid increases in digital adoption on the globe. As African countries continue to develop their internet infrastructure, the momentum effect from rapid population growth suggests that innovation is inevitable. While only 33% of Africans have regular internet access at the moment, this provides an opportunity for continued innovations. For example, the digital payment space.
Source: Endeavor
Digital Payments
Digital payments are providing immense benefits to the countries that use them and could be an area for Founders to consider building products around (especially considering that 80% of African economies run on cash!).
Some of the many benefits include cheaper transaction fees, simplified audit trails, and the prevention of corruption. India and China have dominated in the race to produce successful digital payment systems, with India recording about $100 Billion of transactions per month.
According to the IMF, African countries are not closing their eyes to this. Many countries are in the process of exploring digital versions of their currencies in an attempt to promote innovation, convenience, and confidence. Nigeria has launched a version of their currency, while Ghana and South Africa are exploring pilot programs. Other countries exploring the technology include Kenya, Namibia, and even Zimbabwe. Similar to the case of M-pesa, which allowed moblile cash transfers as early as 2007, countries willing to take a chance on developing such technologies could potentially implement these systems at a faster pace than European countries or the United States.
Source: Endeavor Nigeria
Source: IMF
The African startup space is developing exponentially and is primed to take off as a global startup and innovation hub. Its access to startup financing may be less of a concern than some think and there are several ways to win in the ecosystem. Discussions with local investors provide unique insights, while employing a realistic approach allows investors and startups to remain grounded. The digital economy is an equally important consideration going forward as countries adopt new technologies and provide improved internet connectivity.