by African Development BankToday, 11 African countries are ranked among the top 20 fastest growing economies in the world. Outlook Report The continent’s real GDP (gross domestic product) growth is projected to average 3.8% and 4.2% in 2024 and 2025, respectively. This compares favorably with the global average forecast of just 2.9% and 3.2% for the same periods.
By actively seeking out and supporting African-led start-ups, investors can tap into the region’s enormous potential and contribute to the long-term growth and development of this dynamic continent.
Slow investment
The big question is whether Africans are fully embracing the potential of venture capital (VC) investment. Existing data shows a positive upward trend. African Venture Capital Association (AVCA) Report It is predicted that the African continent will attract US$4.5 billion in venture capital investment in 2023, with investors participating in venture capital fundraising in Africa increasing 23 percent year-on-year between 2014 and 2023.
However, despite these positive signs, investment volume fell by $2 billion year-on-year in 2023. While this slowdown reflects global investment trends, the $4.5 billion invested in 603 deals on the continent is still small compared to the $78.1 billion invested in Asia over the same period, and the $144.3 billion invested in more than 11,000 deals in North America.
It is clear that more work needs to be done to fully unlock the potential of VC investments and overcome obstacles in specific geographies and business sectors in Africa. Indeed, in many African business ecosystems, the VC model remains a relatively unknown entity, relying on basic principles and practices. Traditional business models dominate, honed through decades of refinement and adaptation. For many business models, they offer stability, predictability, and proven success.
Central Bank of Kenya 2022 Survey Report on Access to Bank Financing for Small and Medium Enterprises In Kenya, banks are by far the top provider of financing to SMEs, reflecting the model that prevails in most African countries. Access Bank And South Africa Absa Groupoften seek to work closely with SMEs by actively promoting financing and training.
Context and local know-how
Venture capital investments often target innovative models, but the current investment ecosystem may not fully support African-specific innovation. Around the world, innovation comes from a variety of sources. However, in Africa, necessity is often the primary catalyst, inspiring Africans to invent creative solutions that are uniquely tailored to the context and culture of the continent and individual countries.
From innovative agricultural practices to ingenuity in addressing healthcare challenges, African entrepreneurs have demonstrated incredible ingenuity in finding solutions tailored to the specific needs of their communities. These solutions can be highly effective and impactful in local contexts. But it may not be relatable It will partner with investors from the United States and Europe, which traditionally provide the majority of funding in the African startup industry.
take Drop Accessis a Kenyan startup that has developed an ingenious solution for small-scale dairy farmers. Traditionally, dairy farmers have used bicycles or donkey carts to transport fresh milk to collection centers, but they faced the challenge of keeping their product cool. Drop Access has developed a solar refrigerator that can be mounted on a motorcycle, enabling a faster and more hygienic method of delivery. The company’s innovative solution fills a very important need, and brings potentially huge supply chain benefits that are relevant and scalable across the African continent. However, this may be a need that is not obvious to overseas investors. It is also a relatively low-tech solution that may not be as “attractive” to investors obsessed with the latest technological innovations.
The point is not that only Africans can solve Africa’s problems, but rather that understanding and embracing local behaviours and perspectives is essential to finding truly relevant and impactful solutions. Foreign investors may prioritise innovations that align with their own experiences and perspectives, and as a result may overlook the potential of African-led or African-focused start-ups.
Lack of relevance can create funding barriers and hinder the growth and scalability of viable innovations – and just as importantly, it can stifle the development of solutions that could be truly transformative in the African context.
Lack of network
A further challenge is that the majority of venture capital funding still goes to European and American founders. Local Report Many of the startups that VCs invest in are major financial app developers. branch Solar Energy Company Sun King.
One of the factors is an over-reliance on existing networks connecting American and European investors with startup founders. As a result, investors may not fully understand the challenges and trends specific to African markets, hindering effective decision-making and resource allocation. Ultimately, this affects the success trajectory of startups led by founders from diverse backgrounds.
The good news is that this is starting to change, with the creation of new networks connecting African innovators with investors. One notable example is African Business Angel Networkplays a key role in facilitating connections between angel investors and promising startups across Africa, with Nigeria being one example of a country where investment in unicorns like the payments platform is booming. Flutter Wave, It is also beginning to emerge from within our own borders.
Another option to build such networks is to leverage existing collaborations, such as current MOUs between international universities and African universities and business schools. Alumni communities and research and knowledge sharing between global institutions can help fill network gaps. For example: INSEAD Africa Initiative (IAI) aims to develop and disseminate the best in business thought leadership, education and research in partnership with African universities. IAI also leverages INSEAD’s alumni community, with their extensive experience and connections across the continent, giving them an edge in the African venture capital sector.
Creating a level playing field
Africa is an extremely diverse continent with 54 countries. Currently, most investment is concentrated in just a handful of countries. AVCA Report South Africa, Kenya, Egypt, Nigeria and Seychelles were named as the top five countries for investment. The good news is that with increased investment, startups are beginning to scale up. Nigeria Foodtech Platform Old Africa Other countries are also making progress. Ugandan ride-hailing company SafeBoda Newly relaunched e-commerce site in Kenya JumiaFounded in Nigeria, the company now operates in 10 African countries.
One of the challenges startups face is the vast differences in regulatory environments and economic conditions in each country. A potential solution could be to negotiate a continent-wide legal structure for VC investments in Africa. If this approach proves too optimistic, they could consider implementing the legal structure through existing regional blocs such as the East African Community (EAC) or the Southern African Development Community.
For example, in the EAC, Swahili is the main language. SAFE (Simplified Contract for Future Equities) Notes Pricing in a common currency to standardize investments could help broaden investment opportunities while reducing the risks of currency fluctuations.
Educating local investors
To further encourage engagement with African VCs, it is also essential that local investors recognise the high returns and long-term growth potential opportunities that this asset class offers.
Encouraging African companies to set aside capital to invest in startups and support the early-stage ecosystem is another avenue to consider. An example of how this has worked in other countries is Singapore’s Economic Development Board (EDB), which has a team that matches corporate funding allocated to “build” ventures internally on the ground in the city-state.
The more local investors become familiar with the asset class, the easier it will be for them to identify investment opportunities that fit their objectives and risk tolerance. By actively participating in venture capital funding rounds, local investors can contribute to the development of a strong startup ecosystem and foster the growth of innovative ventures across sectors. This also opens up the possibility for African venture capital syndicates to partner with Western investors, bringing much-needed local expertise to the partnership.
Learning from experience
Investors also need to learn from past mistakes of venture capital-funded startups that failed in Africa. With this knowledge, they can build stronger systems based on experience, networks, familiarity and trust.
To further support the growth of this sector, African governments Saudi Arabia’s Public Investment Fund Develop our own sovereign wealth fund with investment opportunities in local startups and SMEs through VC carve-outs.
These funds will provide significant capital and strategic support to emerging startups to foster innovation and economic growth across the continent. These funds will help close the funding gap currently facing many African startups and accelerate their development and capacity building.
Providing these startups with VC funding at an earlier stage can improve their trajectory to success. This not only helps the startups, but also educates local investors about VC investing, highlights the value of local expertise, and strengthens vital network ties between local and international investors.
