The Growing Startup Scene in Africa

It’s a great time to be a startup in Africa.

The overall amount of startup investment obtained by African startups nearly quadrupled in 2018.

The number of fundraising transactions has more than doubled, and companies on the continent are increasingly receiving large-ticket rounds of over $5 million. African companies raised a total of $725.6 million in 458 transactions, setting a new record.

These were surpassed in the years that followed. In fact, in the first half of 2021 alone, African startups raised $1.19 billion. This is more than twice the amount raised in the first halves of 2019 and 2020.

Africa is a continent of potential, and there's a thriving startup industry in multiple nations seeking to capitalize on it.

The Evolution of African Startups

Despite the fact that startups on the continent have been inspired by both Eastern and Western competitors, there is an inherent push to develop the required infrastructure that feels unrelated to venture “trends.”

In general, the industry has evolved in three stages.

The initial wave saw African entrepreneurs venture into e-commerce, copying companies such as Amazon. These businesses adapted to the local context, but in many cases, the needs of that environment shattered the business model. Payment rails and bank access were unavailable, consumers were accustomed to paying upon delivery, and logistical infrastructure was inadequate.

In the second wave, the industry looked to Asia for inspiration. Successful startups from the continent had succeeded despite the region's limited infrastructure and lower discretionary income levels—challenges that African businesses also faced.

Many businesses thrived by offering a high-frequency product (messaging or payments) and then adding on higher-value services such as e-commerce, lending, and investments.

The industry has entered its third wave. Rather than patterning themselves after other ecosystems, an increasing number of African entrepreneurs attempt to adapt to the reality and needs of their own settings.

Companies are developing market-enabling technology that will enable them to generate consumption from non-consumption and rearrange economic behavior patterns.

African Startups Are Getting Support

Part of the reason why the startup space in Africa is growing is due to organizations and the government providing support to entrepreneurs.

Organizations like Boost Africa, the Future Africa Fund, and Y Combinator are providing investment, technical support, and incubation to African entrepreneurs.

Boost Africa is a program designed to finance African startups and help the continent realize its full potential. The investment program, the technical assistance pool, and the innovation and information lab are the three core components of Boost Africa.

The Invest Program comprises seed funds and incubators, with an emphasis on ecosystem builders that create possibilities. The investment component is organized as a co-investment partnership between the African Development Bank (AfDB) and the European Investment Bank (EIB), with both institutions contributing $50 million to African organizations.

The Technical Assistance Pool provides company founders with business and technical training, while the Innovation Lab fosters innovative concepts. Participants will get the opportunity to learn about new technologies and trends.

These elements work together to build an effort that emphasizes new African businesses, notably those in the healthcare, renewable energy, and education sectors.

The Future Africa Fund is an angel fund that focuses only on giving early-stage funding to African startups. The fund offers coaching, financing, and a network to companies with objectives that benefit the African ecosystem. Its “Collective” section is made up of a group of co-investors looking to support businesses that develop innovative solutions to some of Africa's most difficult problems.

Y Combinator is a startup incubator based in Silicon Valley, California. Despite the fact that it is not based in Africa, the program is devoted to developing incubator classes that contain a broad collection of entrepreneurs. Only 35% of its businesses originated from the United States in 2018, and the incubator has taken in 19 African startups since 2015.

The program is very selective and well-connected. They offer some of the best coaching and networking opportunities for early-stage businesses.

Legislations Encourage and Protect Startups

African entrepreneurs have long faced adverse regulatory conditions, which make it difficult to launch, build, and expand an innovative business.

Many businesses, particularly in countries like Nigeria where older politicians govern over a majority youthful population, see the government as out of touch with their needs.

Changing this view through restoring confidence between lawmakers and entrepreneurs, a crucial first step necessitates the development of new policies that prioritize the interests of entrepreneurs, investors, and other stakeholders.

Smaller African nations have attempted to strengthen their own innovation ecosystems by enacting favorable legislation that supports and protects startups.

Most likely inspired by Italy’s 2012 Startup Act, Tunisia and Senegal first passed similar legislations in 2018 and 2019 respectively. The Acts are designed to spur innovation and foster entrepreneurship. Rwanda and Ghana, two of Africa's fastest developing economies, have both followed suit and begun conversations with stakeholders.

Even larger economies like Kenya, Ethiopia, and Uganda have hopped on board and are in the process of enacting their own versions.

The growing willingness of governments to approve pro-startup legislation is promising. Enacting legislation to give additional support and runway for startups—a major engine for employment development in African economies—could be especially essential during economic downturns when firms struggle and financing becomes scarce. This may be an indication that governments now realize how closely the GDP is linked to growth in African tech ecosystems.

Investments Are Pouring in

The 'Big Four' of Africa—Nigeria, Kenya, South Africa, and Egypt—have retained their prominence as key investment destinations, with investing in businesses based in one of these countries accounting for 80% of all startup funding during this time. Nigeria and South Africa alone contribute to 56% of these nations' funding.

Despite a dip in investments in 2020 due to the COVID-19 pandemic, the continent’s startup scene reportedly ended the year between $1.3 billion and $1.4 billion in investments. This follows projections that the industry could receive between $1.2 billion and $1.8 billion.

Investments have picked up again in 2021. Reports show that in the first half of 2021, African startups have managed to raise between $956.2 million and $1.19 billion.

A look at reports shows that financing for African companies increased significantly from January to March before declining in April. Investments increased from $78 million in April to $208.5 million in May, indicating a resumption of growth.

This growth is poised to continue. As worldwide lockdowns were lifted, things are perking up in the second half of the year. As vaccination rates rise across Africa and economies stabilize, investments in African startups are also seeing a rise as well.

A Bright Future for Africa and for African Startups

The African startup industry is looking for its own unique path to success. It is difficult to anticipate what the world will look like in a decade.

However, there are certain underlying elements that define success in an innovative economy. These variables include the availability of finance, access to expertise, and an increase in general entrepreneurial attitudes.

As there have already been good developments in this direction, more successful businesses in Africa are likely in the future years.