By Emil Bjerg, journalist and editor of The European Business Review
While some say the African start-up scene is overhyped, no one can dispute its impressive growth rates. This article maps the industries and main trends to follow in the upcoming continent’s start-up ecosystem.
African countries are often seen through a lens of poverty and underdevelopment, but the perception is expanding and evolving these years – and for good reason. Driven by impact and intelligent solutions to local and regional problems, the African tech ecosystem is part of changing the narrative. That happens as companies operating in diverse industries such as agritech, cleantech, and fintech increasingly attract attention and funding from venture capitalists ( VCs ).
Let’s take a look at what the hype is all about.
The data behind the hype
The African tech start-up scene is full of fascinating stories – fascinating numbers even.
According to McKinsey, from 2020 to 2021, the number of African tech start-ups tripled.
In 2021, African start-ups made a new funding record as they raised 6 billion USD, debt funding included. According to the French investor Partech, this represents an impressive 3.6 times increase in funding compared to 2020.
Impressively, the African tech ecosystem also grew in funding during 2022, a tumultuous year in which VC funding fell by 35 percent globally. The growth of the financing in the African tech ecosystem in 2022 was 8 percent, with total funding of 6.5 billion. According to Partech, that makes the “African Tech sector […] one of the very few, if not the only, VC markets to boast net growth funding in 2022 “.
The African tech scene is in an exciting yet paradoxical phase. While the growth rates are impressive, to say the least, the overall volume of investments remains modest in comparison to other populous continents. Or as Philip Gasaatura from Katapult Africa, a VC working with agritech, says: “… in terms of volume, we are nowhere by comparison”. Gasaatura says that he thinks “the opportunity Africa presents over the next 10 to 20 years is huge because you see a shift, in terms of the demographics, in terms of the urbanisation, and tech adoption. So you’ll see more investment into that space because you aren’t just solving a challenge for today but also for the next five years”.
With some of the numbers and reasons behind the hype established, let’s have a look at the centers of start-up growth on the African continent.
New geographies of growth
While successful tech start-ups are spread all around Africa, most venture capital is raised in relatively few countries – namely Nigeria, Kenya, Egypt, and South Africa. According to Disrupt Africa’s African Tech Start-ups Funding Report, in 2021, the four countries raised about 92 percent of the total VC funding, giving them the nickname ‘the Big Four’. The Big
Four’s dominance in VC funding has been on a steady rise, increasing from 79.4 percent in 2018 to 87.5 percent in 2019 and 89.2 percent in 2020 before reaching 92.1 percent in 2021.
Statista reports that as of 2022, Nigeria hosts the most start-ups in West Africa, with around 3,360, placing it securely in first place ahead of Kenya’s estimated 1,000 start-ups.
The location of the major tech hubs reflects the dominance of the Big Four – some of the biggest clusters are in Lagos in Nigeria, Capetown in South Africa, Nairobi in Kenya, and Cairo in Egypt.
After investments in infrastructure, reliable internet, and co-working spaces, Kigali in
Rwanda is also home to many successful start-ups. Countries like Ghana, Morocco, and Senegal has upcoming tech scenes, with talent and start-ups gathering in cities like Accra, Casablanca, and Dakar.
Trends in Africa’s tech ecosystem
Just like it’s difficult to make general statements about which industries are on the rise in Asia, Europe, or North America, the same holds true for the African continent. However, there are some general trends:
- Many start-ups develop innovative solutions to local and regional challenges
- A substantial part of the new tech start-ups are working in fintech
- Start-ups are held back by a lack of funding
- African start-ups will likely continue attracting attention and funding from more VCs.
Let’s delve further into the trends.
Trend 1: Impact-driven start-ups in various sectors
A main trend, if not the main trend, is that the grander tech ecosystem in Africa works impact-driven, tailoring innovative solutions to local challenges and local markets. That happens in several sectors, including agritech, healthtech, cleantech, and edtech.
The African agritech is a good example of an impact-driven sector as it creates solutions to increase food production, manage waste, reduce pollution, and partakes in bettering local economies all at once. In terms of funding, in 2022, agritech was the third-biggest sector on the African start-up scene, accounting for 600 million USD. Research commissioned by Microsoft projects that the value of the agritech sector will be a staggering 1 trillion by 2030. By then, it’s expected to be the global center of agritech solutions.
An impact-driven start-up to look out for: Brastorne. The Botswanian company Brastorne has a vision of “Connecting the Unconnected“. While 80 percent of Africans can’t afford a smartphone or data, many can afford a feature phone. Brastone connects farmers by providing “farming information, markets and short-term finance”. The start-up was recently one of three winners of the “AYuTe Africa Challenge“, an initiative that supports “young agritech innovators across Africa who are using technology to reimagine farming and food production across the continent.”
Trend 2: Fintech – the largest sector in the African ecosystem
With a total of 1.2 billion in funding in 2022, the most backed sector was fintech. According to Center for Strategic & International Studies, more than half of Africans “remain unbanked or underbanked, which presents an opportunity for financial technology companies to digitize payments.” Further, according to McKinsey, cash is still used in more than 90 percent of all transactions opening a vast growth potential for African fintech. McKinsey identifies the most prominent growth potentials in blockchain and cryptocurrency technology, payments, and wallets.
Contributing to the optimistic prospects of this sector are factors such as increasing smartphone ownership, improved internet connectivity, declining data costs, and a youthful demographic, Center for Strategic and International Studies notes.
The fintech sector has its elements of volatility. KYC is a challenge in most African countries. So is regulatory variation and volatility, as well as a lack of venture capital in the industry. Nevertheless, in August 2022, McKinsey estimated that African fintech could increase revenues eight times by 2025.
A fintech company to look out for: Flutterwave. Flutterwave enables payments across borders for small and large businesses via a single API. They also help companies like Microsoft, Uber, and Wise operate in Africa. In 2022, Flutterwave raised 250 million USD in a series D funding, giving them a valuation of 3 billion USD, tripling their valuation from their series C round.
Trend 3: Lack of funding is a showstopper
Despite the impressive funding growth figures, Africa’s start-up scene is generally held back by a lack of funding. According to Tony Blair Institute, despite the impressive growth rates, African start-ups receive only 0.2 percent of the global start-up funding. That has economic consequences as well as consequences for initiatives within impact.
This is the case for solar energy, the biggest sector in cleantech in Africa. The discrepancy between the estimated value and existing funding is substantial: according to the International Energy Agency, “Africa is home to 60% of the best solar resources globally, yet only 1% of installed solar PV capacity”.
Several reasons explain the so-called ‘funding gap’. The novelty of the tech ecosystem is one. Another reason is the perception that African start-ups are exceptionally risky. The reality is that investing in start-ups generally is risky business – in Silicon Valley, the success rate of start-ups is five percent.
With that said many African countries could benefit immensely from government regulation of start-ups. In contrast to start-ups in other parts of the world, many African start-ups are actively lobbying for more regulation. A more defined playing field could help reduce the volatility connected to investments in the African ecosystem.
The positive perspective to the story is that the hype around the tech ecosystem is expected to continue to drive new attention and investment.
Trend 4: Increasing attention and funding from VCs expected to continue
With growth rates in funding more than quadrupling from 2018 to 2022, the African tech ecosystem is predicted to continue to snowball. From fintech to clean tech, African start-ups are in dire need of capital, while more and more VCs recognize the continent’s companies’ growth potential.
While funding in Q1 of 2023 has been slow, as VC is generally harder to come across, the African ecosystem is expected to bounce back. Lesego Tladinyane, Investment Associate at Newtown Partners, says: “Africa will increasingly become a viable investment opportunity for more global funds.”
Factors such as increasing urbanization, growing populations, increasing access to necessary infrastructure as well as the possibility of getting into untapped markets drive the projected increase in funding and value.
