From the rooftop lounge of Andela’s appropriately named EPIC Towers, the skyline of Nigeria’s coastal economic hub Lagos is littered with telecommunication pylons stretching as far as the eye can see.
The tech startup, which trains software developers and is the poster child of the burgeoning tech scene in Nigeria, moved into the new five-story state-of-the art offices in January 2017 to cater for an ever-growing team. Just a few months prior to the move, Facebook supremo Mark Zuckerberg travelled to Lagos on a pilgrimage to visit Lagos’s key tech companies, including Andela, which received a $24m Series B funding round from a consortium of investors led by the Chan-Zuckerberg Initiative founded by Zuckerberg and his wife, Priscilla Chan.
The endorsement by the social media billionaire was an affirmation not only of Andela’s work but also the whole of Nigeria’s tech ecosystem, according to Seni Sulyman, country director at Andela. “People have been talking about tech in Africa, and in Nigeria specifically, for a long time,” he says. “Zuckerberg’s visit was a real validation that all the talk surrounding the tech sector in Nigeria was real and [his visit] helped galvanise everyone and reignite the energy in the ecosystem.”
Andela’s meteoric rise reflects the rapidly developing tech sector in Africa. In 2016, African tech startups raised a record-breaking total of $366.8m in investment, according to San Francisco-headquartered venture capital firm Partech Ventures. To put this into perspective, tech companies across the continent raised $276.5m the year before.
Partech Ventures’ data only includes deals higher than $200,000 and excludes any grant or debt deals, and “megadeals” worth $100m and over. Only three countries accounted for around 80% of Africa’s total funding, with Nigeria securing $109m or 29.8%; South Africa receiving $96m or 26.4%; and Kenya securing $92m or 25.3%.
The average size of the deals struck in Africa by startups also increased year-on-year at every stage of investment, with Series A funding, for example, increasing to around $3.7m. Series A refers to a company’s first significant round of venture capital financing. At the same time, the number of tech hubs in Africa has risen to 310, with 173 accelerators and incubators recorded in 2016, according to the World Bank. There were 117 in the previous year.
The growth in the sector comes at a time when mobile internet adoption in Africa continued to grow rapidly, with the number of mobile internet subscribers increasing three-fold in the last six years to over 300m unique users, according to the mobile operators’ trade body GSMA. An additional 250m subscribers are expected by 2020.
Mobile internet is the platform of choice in Africa due to its relatively low cost when compared to wireless broadband. The growing uptake in mobile technology has fuelled many of the innovative digital solutions and services emerging from the continent, and, as mobile infrastructure advances and the cost of smart devices falls, tech entrepreneurs are developing uniquely African tech solutions to African problems.
The hive of activity last year alone shows that the tech sector in Africa is in a strong position. However, compared to more developed markets such as Singapore and Silicon Valley, Africa still has some way to go.
“Silicon Africa” – myth or reality?
The headline figures only tell part of the story. While the number of African startups raising funding at “Series A” level has been on the rise, the average investment amount in Africa at seed-stage is $200,000, according to the pan-African venture capital community VC4Africa. This compares unfavourably to an average seed investment of $1.14m in the US. Seed funding is the initial investment used when starting a business in exchange for equity.
“The Venture Finance in Africa research shows that there is plenty of early stage money in the market,” says Thomas Van Halen, research lead at the private equity firm Venture Capital for Africa (VC4Africa). “So the deals at the lower end are still happening on a large scale, but the follow-up money that goes into Series A, for example, is where we need new vehicles to increase investments at the next level.” Furthermore, the 2017 Venture Finance in Africa research – to be released soon – identifies the key ingredients that determine why one venture outperforms its peers in their ability to scale up.
The relative dearth of funding available for African startups trying to scale up is a major challenge for those companies looking to grow beyond their local markets. One of the primary turn-offs for international investors looking at the African tech ecosystem is the lack of significant “exits”, according to Femi Longe, co-founder of Co-creation Hub (CcHub).
“The main challenge in terms of getting funding is exit and there aren’t that many success stories,” he says. “If you look at the UK, for example, Facebook and Google are buying startups left, right and centre. So there is a possibility for an investor to see an exit because one of those big companies could buy them out. But in Africa, we only have a few examples of this.
“To boost the number of exits, large local companies and startups should collaborate more often in mutually beneficial arrangements, where the corporation offers financial support and mentoring while the startup provides a solution that the larger organisation doesn’t provide. So the natural progression will go from collaboration to acquisition.”
The model outlined by Longe is currently the most viable option for startups because African stock exchanges tend to not hold enough liquidity for exits via an initial public offering (IPO). Some analysts believe that one of the primary reasons huge exits do not occur on a regular basis in Africa could be that most startups have focused on solving local issues rather than setting out to tackle global ones.
Africa tech rising
The rapid growth of the African tech sector was mainly due to the expansion of mobile technology and driven entrepreneurs seeking to find answers to some of the main challenges facing the continent. In the three key tech ecosystems of Kenya, Nigeria and, to a lesser extent, South Africa, innovation has been fuelled by necessity. In Kenya, Safaricom’s M-Pesa, the mobile money platform which has around 19m active users in the East African country, was launched in 2007 as a way to offer financial services to low-income underbanked Kenyans. At the time of the platform’s launch, only 18.9% of Kenyans used traditional banking services.
M-Pesa provided a unique solution to a common problem in Africa by utilising already existing technology, in this case mobile, to resolve an issue. The tech scene across the continent is filled with examples of tech companies and entrepreneurs finding a gap in the market and plugging it with simple tech solutions, according to Iyin Aboyeji, co-founder of Andela and creator of digital payment service Flutterwave.
“Because we have weak institutions and poor service delivery in Africa that leave millions of people on the fringes, [tech entrepreneurs] actually have the ability to reinvent society around infrastructure that is built with technology,” he says. “The continent is undergoing a massive digital transformation. Every industry is digitising, from banking to telecoms, and right at the centre of that are technology developers who are building applications that fit into that mission and supporting business to digitise their processes.”
In Aboyeji’s native country, Nigeria, there are numerous example of tech companies doing just that, such as the online payment service Paystack and the e-health app LifeBank. While the tech innovations in Kenya and Nigeria have an obvious value in their home nations, overseas investors still view startups in these markets as only dealing with African issues which do not translate to the global market, according to Paul Gabriel, Africa Analyst at Control Risks.
“If you look at the solutions that the startups in Africa are developing, they usually are local in nature with an unclear path as to how they can properly scale up,” he says. “And where there is an overlap with other regions, such as the mobility sector, then the likes of Uber move in quickly and push out the local business.”
However, the tech sector in South Africa, led by startups in Johannesburg and Cape Town, remains the most advanced on the continent, with the number of exits increasing year-on-year in 2016, and startups such as WhereIsMyTransport and website builder VIGO expanding to the UK and Asian markets, respectively. But despite the positive indicators, overseas investors, who are key to boosting the funding available for startups, prefer to err on the side of caution when investing in Africa. However, this could be down to them showing a lack of imagination or an understanding of the local market, Gabriel added.
As the tech scene in Africa continues to flourish, entrepreneurs will need to be ambitious if they hope to compete on the global tech stage. One tried and tested method would be for government to boost investment in research and development (R&D).
Future of African tech
Investment in R&D has played a crucial role in the evolution of the tech spaces in Israel and Singapore. Although R&D spend does not usually bring immediate returns to the investors, the long-term benefits far outweigh any expenditure, according to Chika Nwobi, cofounder of Lagos-based Level 5 Lab (L5Lab).
In Africa, budgets are often stretched, with funding being directed towards more pressing needs such as healthcare and education. “I think that we’re being unambitious about what we can do in the tech space,” says Nwobi. “When you’re very far behind in a race then you have to run faster just to catch the others. And investing more of our GDP in R&D is the only way Africa can reach and surpass the other [more developed] countries.”
The African Union has set a target for member states to spend at least 1% of GDP on R&D. According to UNESCO data, only Kenya, Mali and South Africa are close to achieving the target, and the latter is the only country that spends a significant proportion in the business sector.
In comparison, Israel and Singapore spend over 2% of GDP, with Israel investing over 4%. Both nations have reaped the rewards of their investments, especially in the ICT sector, according to Nwobi.
“R&D is like acceleration, so the most advanced countries [in the tech sector] are also the same ones that are spending the most on R&D, even though they are further ahead than [African countries],” he says. “This is money that you spend, which might not have immediate returns, but it’ll help you leapfrog your development.”
But for now scalability remains an issue due to the lack of limited amount of capital flowing into the sector. In the meantime, the focus should be on skilling up young Africans so that they will be ready to shape the global economy of the future.
“We all know that we are living in the digital age and there is a huge deficit of jobs in Africa, and Nigeria has huge youth unemployment issues,” Nwobi says. “So I believe that if we are to be prepared for the coming age then we need to educate an army of coders to take us into it.”
This article was first published by African Business Magazine and is republished with permission.