Funding African Startups

Funding African Startups

In the previous article “The argument for startups and entrepreneurship in Africa“, we discussed the importance of entrepreneurship and startups to African economic development through creating sustainable employment.
To gain a deeper understanding this article will look at data on the financing and funding of African startups and consider potential solutions.
According to the International Finance Corporation, a division of the World Bank, African entrepreneurs raised $556 million in 2017, a 53 % increase on 2016.
That said, in the same year Latin American entrepreneurs raised $1.9 billion and Indian entrepreneurs $7.4 billion (1).
The graph below compares the population, GDP and startup equity financing of the three regions (2).

Table 1: Equity investment, population and GDP in emerging markets

The above data clearly indicates that Africa lags far behind India in terms of equity financing to entrepreneurs despite having similar population and overall economic size.
Furthermore, even within this relatively limited pool, 84% of total funds to the region in 2017 were concentrated in just 4 countries – South Africa ($167 million), Kenya ($147 million), Nigeria ($114 million) and Egypt ($37 million) (3).
This suggests a critical lack of startup financing, not only to the region as a whole but even more so to entrepreneurs located outside of major innovation hubs like Cairo, Cape Town, Johannesburg, Nairobi and Lagos.
Given their similarities in demographic size and economic development, what is the reason for the more than tenfold disparity in startup funding between Africa and India?
This issue can be examined broadly from two perspectives – the supply side and demand side.
Starting with the supply side, let us first examine the largest financing deals over the past two years in India and Africa:

Largest Startups Investments in India over 2017/2018 (4)(5)

CompanyFunding AmountMain Investor
1. Flipkart $2.9 billionSoftbank, Tiger Global, Naspers
2. Ola$1.9 billionSoftbank, Tencent
3. Paytm$1.4 billionSoftbank
4. Swiggy$1.31 billionNaspers, DST-Global, Meituan Dianping
5. OYO$900 millionSoftbank, Lightspeed India Partners
6. BYJU’s$540 millionNaspers, Sequoia, Tencent

Largest Startups Investments in Africa over 2017/2018(6)(7)

CompanyFunding AmountMain InvestorCountry
1. Webuycars$94 millionNaspersSouth Africa
2. Zola Electric$75 millionHelios, SunFunderTanzania
3. Takealot$69 millionNaspersSouth Africa
4. Jumo$55 millionGoldman Sachs, Proparco, FinnfundSouth Africa
5. Cellulant$47.5 millionThe Rise Fund, Endeavor CatalystKenya
The difference in funding between the two regions over the last two years is stark, with each of the top 5 deals in India receiving greater funding than all startup funding across the African continent combined.
A further important point from the above data is that the majority of startup financing is cross-border.
The three largest sources of financing for Indian startups over 2017-2018 are corporate venture capital (CVC) investments by Softbank, overwhelmingly the largest funder through its Softbank Vision Fund, Naspers and Tencent.
Naspers, itself a South African company, is of particular interest as it is also the largest investor in African startups over the same time period.
It has further investments across the developing world including most notably a 31% stake in Tencent itself valued at over $100 billion.
This suggests that the disparity in financing is not a supply-side issue but a demand-side issue – there simply are not enough startups operating at a sufficient scale on the African continent to match the level of financing demand seen from Indian startups.
What are the causes for insufficient financing demand by African startups?
Although there are likely to be numerous and complex, three primary reasons stand out.
The first is fragmentation.
Although as a continent Africa has similar economic and demographic weight to India, it consists of 54 sovereign states with disparate economic, legal, financial and regulatory environments.
Flipkart, India’s largest e-commerce site, serves over 1 billion customers whereas Takealot serves less than 60 million in South Africa.
Indeed, market size and a lack of global, or even continental, ambition appears to be a key factor preventing the appearance of startup unicorns in Africa (8).
Although other small markets, including Portugal, Sweden and Poland, have produced unicorns domestically, this still seems far off in the African startup ecosystem.
The second issue is insufficient human capital.
According to UNCTAD’s Technology and Innovation Report 2018, 29.2% of recipients of first university degrees in STEM subjects graduated from Indian universities, and only 0.9% from African universities (9):

Table 4: Percentage of bachelor’s degree students of STEM degree by country / region in 2012

In Asian countries STEM degrees accounted for a total of 32% of all degrees awarded, with numbers as high as 42% in China.
By contrast STEM degrees accounted for 18.5% of degrees awarded in the European Union, 16.7% in the United States, and just 7.2% in Africa (although the share in Ethiopia was 29.5%).
This indicates a lack of engineering and IT skills that are critical to the successful management and expansion of startups, the majority of which are operating in the tech sector.
A third, related issue, is the relatively undeveloped state of startup ecosystems in most African countries, particularly at the seed stage.
VC4A’s analysis of South Africa’s tech startup ecosystem points out numerous deficiencies, including a lack of experienced entrepreneurs, no focus on pan-African growth, unclear government policy, shortage of seed funding, restrictive IP legislation, and extremely low levels of mathematical and science literacy (10).
Such problems are magnified in other African countries which lack South Africa’s wealth base, relatively sophisticated corporate sector, strong university system, and close ties to Europe and the United States.
The consequence of these problems – continental fragmentation, poor human capital, and weak startup ecosystems, is that most African countries fail to produce a sufficient number of seed and early-stage startups with the potential to grow to the scale necessary to compete even with startups from other developing countries for major financing.
One radical proposal would be to stimulate demand for startup financing by massively increasing the domestic capital supply. Jason Levin, a South African entrepreneur, has suggested that the government direct all public sector pension funds, in particular the PIC, to allocate 0.5% of funds under management to startup venture capital.
This would boost early stage funding in the sector by close to $1 billion (11).
The question remains though, whether African markets have the skills and capacity to take advantage of such financing. Indeed, as recent multi-million, and even billion dollar investments by companies like Softbank and Naspers indicate, the supply of large scale financing exists, what African countries need to focus on now is to increase the demand through seed and early-stage financing, substantially higher investment in STEM education from primary to tertiary levels, and comprehensive strategies to both improve the startup ecosystem in each individual country and, importantly, coordinate them with one other to mitigate the fragmentation of African markets which are individually too small to compete effectively with other emerging regions.