Growing the East Africa Technology Ecosystem: Challenges & Opportunities
By Mary La Rocque, Associate
About the ‘East African Tech Snapshot’ Series: In July 2018, I-DEV surveyed leading investors, entrepreneurs, and tech sector influencers to uncover key strengths, opportunities and companies to watch.
This article is the 3rd of 3 pieces highlighting our findings. Also see:
Part 1. East Africa Top 10 Tech Startups to Watch
Part 2. Tech Disruption & Innovation on the Frontier: Key Sectors in East Africa to Watch
Challenges Hindering Tech Sector Growth and Development
While East Africa is rich with opportunity, challenges remain hindering growth within the ecosystem. Stakeholders cite limited local founder funding, limited access to investors across different transaction sizes, and a lack of successful exits and success growth stories as key challenges impacting the growth of the sector. This article highlights the top challenges affecting the tech sector in East Africa as well as support needed to resolve these challenges and support ecosystem growth.
Top 3 Challenges for Tech Sector
1. Limited Local Founder Funding: According to a report by Village Capital only 10% of East African companies who have received investment are locally founded. This is primarily driven by limited access to the same networks and contacts across a larger international investment pool, inherent biases and different sector dynamics- local founders are less familiar than US and European founders in the capital raise process and investor expectations.
2. Limited Access to Investors Across Different Transaction Sizes: While a growing number of local and international investors are attracted to the East African market, many stakeholders in the tech startup sector are concerned with the limited interest of local investors for investing in startups. As investors continue to invest primarily in post-revenue driven solutions, early stage companies look towards grant financing and pitch competitions to receive early stage funding. Regarding interest of local investors, local angel investor networks are nascent and those with capital prefer to invest in brick-and-mortar, debt-like investments which are more familiar with regular cash flows. Meanwhile, only the earliest highest risk tech investments are offered to angels and while the next generation of family business owners are warming to tech, they still struggle to access the family capital or the interesting opportunities that will appeal to their board.
3. Lack of Successful Exists and Success Growth Stories: Exits and acquisitions help to validate markets and show their potential to investors. Until the East African market has seen multiple “successful exits”, the startup ecosystem will continue to be challenged by lower risk appetites of international and even local investors concerned with the sustainability of the market ecosystem. Exits and growth successes are on the rise, but often with a longer time horizon. Also, the story of success is often a different one in East Africa- through management buyout or strategic acquisition vs. to the public market or a high profile IPO.
The Secrets to a Successful Series A Raise
But how do we resolve these challenges? What do startups need to succeed and grow? Our survey respondents highlighted that strong active user growth, strong unit economics, and a strong management team are the factors most critical for securing Series A investment.
6 out of 10 respondents believe a strong management team is the most critical factor for securing a Series A
1. Strong Active User Growth: Many East African investors look toward active user growth as validation for growth potential. A company with strong active user growth shows repeatable traction and ability to maintain customers while also demonstrating their ability to scale.
2. Strong Unit Economics: While companies looking to secure their Series A are not yet required to be profitable, clear unit economics is a driving force needed to demonstrate success and potential for the business.
3. Strong Management Team: More than anything else a strong management team is necessary for securing a Series A as the team makes the foundation of the company and it will be their decision making that drives revenue and ensure stability. A strong management team will be able to build strong unit economics, active user growth, etc. and demonstrate the success of the business.
Additional Drivers of Tech Startup Success
And, we cannot ignore the networks and contacts- who you know and get exposure to- is also critical to driving success. While not a key indicator that a company secures funding, it is not to be overlooked as a valuable factor in expediting growth in many cases!
The following chart outlines general success indicators our survey respondents mentioned:
When we delved further into the responses above, we also uncovered this network link back to intermediaries, capacity buidlers and network builders…incubators, accelerators, strategic and capital raise advisors.
With rising international NGO support and grant-funding along with number of local accelerators and incubators, there is a rising level of technical assistance support available for young entrepreneurs. Incubators such as iHub list more than 150 companies that can trace their origins to ideas sparked at their facilities. Technical assistance or capacity building can be a key differentiator when done well, according to respondents who feel that the following areas are top needs to strengthen the startup ecosystem:
Capital Raise & Investment Support: 27% of respondents
Data Analytics & Data Management Support: 45% of respondents
Technology Strategy & Strengthening: 30% of respondents
Growth & Business Innovation Strategy: 12% of respondents
Note: Above percentages will not necessarily sum to 100% as respondents may select more than one of the following as a critical factor.
Conclusion
There is growing optimism and opportunity for the East Africa tech sector, as demonstrated by a growing number of investors scoping out the market. While there continues to be a gap between the large number of early stage companies and the pool of capital and actors that come in with enough capital and resources as an early to early growth stage, there is generally positive sentiment and new models on the rise to address these market weaknesses. Better yet, the growing population of strong leadership that’s here to stay, support programs and ecosystem builders that can push for further improvements ensure we’ll see ongoing and healthy growth.
Read the other articles in this series:
Part 1. East Africa Top 10 Tech Startups to Watch
Part 2. Tech Disruption & Innovation on the Frontier: Key Sectors in East Africa to Watch
Part 3. Growing the East Africa Technology Ecosystem: Challenges & Opportunities
