- Between 2015 and 2020 growth of African tech startups receiving financial backing was nearly six times faster than the global average.
- Despite this growth, many startups fail to pass through later stages of funding.
- A Boston Consulting Group report explores the hurdles and opportunities.
Technology startups and the venture capital ecosystem that transforms ideas and fledgling companies into disruptive businesses are growing globally—a phenomenon that the Boston Consulting Group (BCG) explores in a recent report on the expansion and maturation of African tech startups. According to the authors, Africa enjoys a fertile environment for tech entrepreneurs due to the continent’s youthful and growing population, rising internet penetration, and the application of emerging technologies that have the potential to improve access to healthcare, financial services, education, and energy. As such, the research paper focuses on the meteoric growth of tech startups throughout the continent, persistent challenges and structural barriers stymying these firms’ further growth, and policy recommendations to overcome these obstacles and develop Africa’s innovation hubs.
Securing venture capital funding, according to BCG, is an important milestone for startups and is an important step that enables them to scale and develop novel products. In the study, BCG found that the number of African tech startups accomplishing this significant step experienced exponential growth between 2015 and 2020. In fact, over that time period, growth in the volume of African tech startups receiving financial backing was nearly six times faster than the global average (Figure 1).
The trends in financing, though, do not reflect the overall performance of startups, as the continent’s record of scaling up and sustaining such businesses is not as promising. As shown in Figure 2, the vast majority of African tech startups do not survive beyond Series B venture capital funding—the second round of venture capital financing and the third stage of start-up financing (typically initiated by pre-venture seed and angel investor funding). As an indicator of their underperformance versus startups in industrialized countries, such as the United States, this trend suggests that African startups suffer from long-term instability, according to the authors. Indeed, compared to the United States, a greater proportion of African tech startups have yet to progress beyond early-stage seed funding—a trend that remained constant between 2014 and 2019. Figure 2 also reveals that, since 2014, some African tech startups have managed to progress beyond Series B VC funding—a positive trend that signals the maturation of African tech startups. However, as seen in Figure 3, only a few (though growing) African tech startups have successfully evolved into mature companies, as BCG’s analysis indicates venture capital investment in Africa suffers from relatively low average returns compared to other regions.
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According to the authors, a variety of factors make Africa an inhospitable startup environment, as the continent’s business environment is marred by pervasive structural barriers such as:
- Low consumer purchasing power
- Complex and inconsistent regulationsInadequate data communications infrastructure
- A fragmented marketplace of 54 countries
- Scarce capital and digital talent
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In addition to these structural barriers, startups face strong competition from large, established national firms and state monopolies. According to BCG, this concurrence of the continent’s structural barriers and entrenched competition risks “depriving [African countries and competing businesses] of crucial sources of innovative technologies, products, and business models.”
In order to unleash innovation that drives job creation, economic opportunities, and expansive access to finance, education, and health care throughout Africa, BCG advocates for corporate partnerships and government reform to generate strategic alliances with local startups. From the perspective of the private sector, strategic partnerships with local tech startups can introduce cutting-edge digital technologies and novel business models that benefit the firm, the startup enterprise, and consumers. From the perspective of the public sector, financial incentives for investors and large national companies to nurture and collaborate with fledgling startups have the potential to develop innovation hubs that draw foreign investment and talent to the country. In addition, BCG calls on African governments to improve the regulatory environment so that countries can better cultivate hospitable investment ecosystems for startups and venture capitalists.
For more on investment in Africa, read “Figures of the week: Venture capital trends in Africa,” “Figure of the week: Trends in mergers and acquisitions in Africa,” “Placing investment at the center of Africa’s development strategy,” and Africa Growth Initiative (AGI) Senior Fellow Landry Signé’s book, “Unlocking Africa’s Business Potential.”