Technology is a critical driver of prosperity in the 21st century. It plays a vital role in unlocking opportunity, economic growth and development across all industries from agriculture to education. A healthy startup ecosystem and an environment that fosters innovation is its foundation. Maximising the benefits of technology requires a bold national and regional strategy to build a critical mass of tech startups. Where technology startups are nurtured across sectors, governments will increase productivity, create jobs, and find new solutions to meet the challenges their countries face.
Africa is already pioneering many of the innovations that are changing the world. Financial technology in parts of the continent is decades ahead of the rest of the world – from M-Pesa in Kenya to the world-leading fintech innovations coming out of Nigeria. And as the most entrepreneurial continent – with 22% of Africa’s working age population starting businesses – and the region with the largest free-trade area, Africa has the potential to be a tech startup giant. But cumbersome regulations, limited funding and highly fragmented markets are holding startups back. Africa currently hosts just 0.02% of the global start-up ecosystem value - the global start-up ecosystem is valued at $3.8 trillion, African makes up just $6.6 billion. Leaders across the continent are putting in place bold measures to encourage tech innovation which are starting to bear fruit. But more is needed for the startup continent to achieve its huge potential.
What should leaders prioritise to build thriving tech startup ecosystems? We are developing a roadmap for policymakers setting out the key actions needed to achieve 10x growth in Africa’s tech startup ecosystem by 2030. As we launch this project, we set out the critical importance of getting this right and the key challenges to address.
Why should leaders prioritise this?
For African nations, the digital economy is a critical lever of economic and social development, enabling governments to create opportunities that improve public services and accelerate the achievement of the SDGs.
Thriving tech ecosystems are a major driver of economic growth on the continent. Africa has a $68-$108 billion infrastructure investment gap per year, yet population growth is estimated to reach 2.5bn people by 2050. The digital economy can contribute 300 billion dollars to African GDP by 2025 (representing 10% growth per year). In Nigeria, the technology sector contributed more to the country’s overall GDP than the oil and gas sector did between 2010-2019, while Kenya’s ICT sector has contributed up to 8% of the country’s GDP through IT-enabled services (ITES) and created 250,000 jobs by the end of 2020. As this example illustrates, besides GDP, the tech-enabled sector can significantly contribute to job creation, which could prove critical to solving the growing youth unemployment situation on the continent.
To maximize the benefits of the tech revolution African nations must be creators not just users of technology. Building vibrant tech ecosystems in Africa puts the continent on the path to digital sovereignty: building the technology and setting the rules that will shape our global future, driving the Fourth Industrial Revolution rather than being driven by it. Africa has already been on the leading edge of using technology to leapfrog certain legacy innovations, such as bypassing landlines straight to mobile phones, and adopting e-banking and mobile money while traditional banking rates were still low. Building Africa’s capacity to create technology will accelerate its ability to shape its own digital future.
Technology can dramatically increase living standards for all: transforming the delivery of education and healthcare, improving our ability to produce food for a growing population, and helping protect people against worsening climate crises. The tech innovations that will change the world and transform progress on longstanding challenges are still being developed. But the closer the creators of those technologies are to the challenges they address the more effective they are likely to be. Innovation for Africa should be driven by innovation by Africa.
A thriving tech sector can boost economic recovery from COVID. With the COVID-19 crisis, Africa has experienced an unprecedented economic shock. African governments and regional bodies face a daunting task in the recovery process. There are worries from leaders such as Ken Ofori-Atta the finance minister of Ghana that Africa will “lose a decade” if nothing is done to respond to the pandemic’s economic shock. Fast recovery from the pandemic, economic development and job creation will mean looking to new growth sectors. African governments need to rapidly build and deploy a digital economic policy that will open up and connect economies while creating opportunities for its growing youth.
How to address the barriers to progress
This work seeks to address three key barriers: an unfavourable regional and national business environment, a global funding gap and weak support networks for start-ups.
Unfavourable regional and national business environment
Africa’s business environment is fragmented and complex for tech start-ups seeking to launch digital solutions. According to the World Bank “Doing Business 2020” report an entrepreneur in a low-income economy typically spends around 50 per cent of the country’s per-capita income to launch a company, compared with just 4.2 per cent for an entrepreneur in a high-income economy. Sub-Saharan Africa remains one of the lowest-performing regions on the World Bank’s ease of doing business index with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. The cost of business setup remains high for entrepreneurs in Africa. Despite efforts towards a single digital market, business regulations and policies remain siloed across the regions, stunting the growth of tech startups.
The funding gap
Tech startups in Africa are not attracting the levels of funding seen in other regions. Over the last decade, there has been a more than 10x increase in tech venture capital (VC) investment in technology start-ups across Africa. According to the AfricArena report “The state of tech in Africa 2021” investment volumes increased from $200million in 2015 to $2.2 billion in 2020. Despite the significant gains made, Africa still receives only 0.005% of global tech VC funding. For parity with Latin America – the next lowest funded region – Africa needs to close a gap of $3 billion. Catching up with more mature tech ecosystems would require significantly more funding: the gap with Europe is $33 billion, the gap with Asia is $87 and the gap with North America is $133 billion.
Weak support networks and linkages
Entrepreneurial business networks, formal and informal, promote the growth of the tech startup ecosystem. Connectedness’ ranked as 1 of 6 key characteristics of thriving startup ecosystems – alongside Performance, Funding, Market Reach, Knowledge and Talent. No African city appears in the top 40 global cities for tech startup innovations and a lack of connectedness is limiting the benefits of tapping into a diverse range of resources, including from potential funders through to academic institutions. Incubators and accelerators in Africa remain the critical networking and support avenues for entrepreneurs. But recent evidence shows that the longevity and sustainability of tech incubators, accelerators and hubs remains challenged. Donor funding accounts for about 60% of incubator funding in Africa. The average lifespan of tech incubators and accelerators is about two years, and the closure of most incubators is attributable to unstainable financing models and managerial capacity shortfalls. From 2016 to 2019, about 150 African tech hubs and incubators have shut down. This further derails the ability of stakeholders to build lasting support networks and reduces regional connectedness and knowledge sharing. Achieving this would facilitate the development of an African tech startup ecosystem that fosters the creation and growth of tech startups for inclusive growth.
Reasons to be hopeful
While significant progress is needed to address these barriers, governments across the continent are recognising the importance of action and are putting in place bold measures to support tech startups. Dedicated startup acts have been or are being developed in countries across the continent including Benin, Burkina Faso, the Democratic Republic of the Congo, Ethiopia, Ghana, Kenya, Mali, Nigeria, Rwanda, Senegal, South Africa, Tunisia, and Zambia. These acts set out far-reaching policies which aim to create an enabling environment for high growth technology-enabled businesses: supporting entrepreneurs to start businesses, increasing incentives for investors to put their money into promising companies and making it easier for startups to operate. These efforts should be replicated across the continent and supplemented with other types of intervention to drive progress.
Get involved
We recognise the valuable and important work already being done to champion vibrant and inclusive tech ecosystems across the continent. We want to make sure that this work reflects the views, experiences and knowledge of those closest to these issues: startups, incubators, investors and policymakers. To ensure we are arming donors and policymakers with the tools they need to leverage these great ideas, we want to hear from you.
If you have views on the questions we are tackling please reach out to b.bayuo@institute.global, r.bamford@institute.global or connect with us through Twitter using #AfricaTechStartups.