African Tech Startups Need Changes In Venture Capital To Embolden Them
The African tech scene is thriving, especially in certain parts of the continent, but a couple of tweaks could empower the sector to achieve even more success.
Taking an Uber ride in Nairobi is the norm. Taxi drivers will be the first in Kenya’s capital to tell you that technology is changing the dynamics of business in Africa. “Technology is the norm here,” says one local, “like seeing black skin is the norm.”
Silicon Valley remains the global hub for the tech revolution. But it is finding friendly competition in tech hubs across the African continent. Uber, Venmo, and Amazon are the American middle-class essentials. Uber, Mpesa, and Jumia are the Kenyan middle-class essentials. It is this mirroring effect on life across continents that has developers excited inside of tech hubs from Lagos to Nairobi to Cape Town.
There are currently 300 tech hubs in 93 cities across 42 countries on the African continent. The growing number of tech hubs and developers is drawing significant investment, with more than $366 million invested in startups across Africa in 2016.
Two-thirds of that investment was directed at Kenya, Nigeria and South Africa. Still, the African tech scene could use a couple of tweaks.
Tweak #1: More venture capital in Africa
Entrepreneurs will constantly talk about the entrepreneurial scenes, especially in Nairobi and Nigeria. Ask them what the biggest challenge is (as I did during a lunch) and they will generally smile and mention capital.
As the story goes in Africa, says one entrepreneur, every fund manager gives the never-ending proverbial line on fundraising as it relates to raising the capital to invest: “We will close on funding in about three months.” Come three months, nine months and sometimes three years later and the same fund managers, says another entrepreneur, are pulling you down the rabbit hole of constant discussions with no end in sight.
Entrepreneurs are agile and patient. But there is a call out for more venture capitalists to come to Africa. Jumia’s $211 million capital raise over a two-year period was ‘great,’ but this group of entrepreneurs at my lunch table want to see more investors roaming the continent.
Mark Zuckerberg’s surprise trip to Kenya in 2016 and Jack Ma’s well-received (and well-attended) showing in Kenya earlier this month is hopefully the beginning for more venture capital investors setting up shop in local markets. Jack Ma, to his credit, brought along more than 30 other Chinese billionaires for this trip, as well as his stop in Rwanda.
Tweak #2: Focus on the middle class and…bottom of the pyramid
Let’s give due credit to fintech for being the first to capture the symbiotic relationship between the middle class and the bottom of the pyramid. Solutions for the bottom of the pyramid in emerging markets very often capture significant portions of the middle class.
This happens for a few reasons. First, applications that make life easier for poorer populations can generally make life easier for wealthier populations. Using mobile money to make small payments and reduce handling of cash and time easily appeals across income levels.
Secondly, poorer populations are ideal for testing the economics of an entrepreneurial idea. Consider pay-as-you-go power and mobile phone usage.
Flat monthly fee transactions for power and phones are the norm in the corporate world. But, as corporate purchasers slowly saw bottom of the pyramid consumers manage their expenses on a pay-as-you-go basis, they began to imagine an income statement where they better manage their costs through a structured internal pay-as-you-go system.
Third, as related to the second reason, adoption cost with bottom of the pyramid consumers can be less because proving its economic benefit is the main cost to adoption. The best (non-African) example is how much time can be lost pitching some family members and friends in the U.S. to use apps such as Venmo and Whatsapp…it can be quite costly at times with adoption still not guaranteed at the end of the day.
A focus on bottom of the pyramid outside of fintech could be the big game changer for other sectors.
Mobile apps to help Africans manage their health, connect with doctors, and access medicine is necessary at the bottom of the pyramid. Solve the issue of time and knowledge in the health care space on the larger continent and middle class consumers will come running with cash in hand. They face sickness and disease like any other human being.
Energy is another sector where bottom of the pyramid consumers are receiving benefits from technology. Technology for pay-as-you-go cooking fuel or solar power for cold storage facilities originate from developers in Africa, Europe and the U.S. and find their way to Africa because they provide solutions to cost and delivery issues.
Bottom of the pyramid consumers already understand the benefits of off-grid solutions…and higher-end consumers are coming around to it too.
More venture capitalists to focus on poorer consumers could have been the headline here…but, as one investor described it, that is the secret sauce in this startup space in Africa. Whether that is true is not clear…but what is true is that more capital is needed in this space, and buying into the solutions at the bottom of pyramid will benefit those in the middle and at the top of the pyramid.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.