Africa is poised to become one of the world’s leading centers of entrepreneurship, with exciting companies emerging in a number of different cities. The continent has a highly skilled and increasingly connected and globalized workforce with game-changing ideas, and more venture capitalists are starting to take notice of the region’s growth and provide support for innovators. Moreover, governments have increasingly taken notice of startups as their potential for fueling economic growth becomes more readily apparent. Despite the bright future ahead for many African entrepreneurs, a number of hurdles still exist for people interested in pursuing and developing a novel idea. However, these hurdles are not insurmountable.
1. The fledgling nature of the venture capitalist community.
In many ways, venture capital is still inaccessible throughout much of Africa. While many accelerators and incubators have sprung up around the continent, access to venture capital remains rather limited, especially when compared to other parts of the world. As a result, many entrepreneurs have turned to traditional bank loans to finance their companies. Unfortunately, these individuals may end up with loans whose terms are not optimized for startups. Banks typically view startups as a high-risk investment and may demand very high interest rates or simply deny loans altogether.
The success of some African entrepreneurs has attracted more venture capitalists to the continent, but startups need to know how to appeal to these investors. Most venture capitalists expect to see a solid business plan and numbers that demonstrate the likelihood of the startup’s success. In addition, entrepreneurs need a deep knowledge of their particular industry and target demographic. Venture capitalists will invest money in people who they see as leaders in their fields.
2. The need for more entrepreneurial education.
Many entrepreneurs—whether in Africa or elsewhere—do not understand the basic elements that contribute to the success of a company. While people worry about securing funding, they often miss the bigger picture of what success requires. While funding is important, so is the entrepreneur’s ability to adapt to changing markets. In an increasingly global world, this ability also translates to adapting products across markets. Funding will come more readily when an innovator demonstrates an immediate need for a product in an African market, as well as a more global need that the product could eventually fulfill in the future. This kind of mindset demonstrates long-term strategy and instills confidence in potential investors. Entrepreneurs also need to understand the value of diversification and should plan to expand across product channels and revenue sources to encourage growth.
3. The lack of viable exit opportunities.
Funders will not invest in a fledgling company if they cannot see a viable exit opportunity in the future. According to the Accelerating Entrepreneurship in Africa report, released by the Omidyar Network and Monitor Group, nearly half of entrepreneurs in Tanzania, Nigeria, Ethiopia, Kenya, and Ghana reported concern about a lack of exit opportunities. In Africa, it is still fairly rare for business owners to sell firms through buyouts, which provides an incentive for investment in companies in many other parts of the world. One of the major issues contributing to the exit problem is regulation. In many countries, entrepreneurs are worried that regulations about selling companies are too rigid and may discourage this strategy. In addition, many business owners aren’t aware that private equity funds and multinational corporations can offer impressive buyout packages, and so they fail to pursue this potentially lucrative option.
4. A potentially discouraging international reputation.
Mobile communications technologies have made Africa more connected to the rest of the world than ever before. As a result, many people have had the opportunity to set up online businesses, which require relatively little startup funding and can generate a significant amount of income. Unfortunately, some of these business ventures have been harmed by the fraudulent activities of other “businesses” operating out of Africa. These fraudsters have caused some international customers and investors to be wary of African startups. As Africa’s position as a technological leader becomes increasingly established, this reputation will likely change, but it can still hurt many fledgling organizations that want to take their businesses across borders.
Luckily, online entrepreneurs have more tools than ever before for creating and guaranteeing secure and verified transactions. Implementing these sorts of payment and credibility systems can provide confidence to customers and investors alike.
5. A dearth of networking opportunities.
As the startup communities in African cities continue to grow, this obstacle will shrink. However, many entrepreneurs still struggle to create an effective professional network. This is unfortunate, as the size and power of an innovator’s network largely can determine the reach of his or her creativity. People with a broader and more robust network may feel more emboldened to take risks, which can lead them to an idea that redefines an industry. An entrepreneur’s network serves as a sort of support that provides protection in the event of failure.
Some African entrepreneurs have emphasized the need for more formalized seed and angel investing networks, which could provide invaluable support. Some such networks, such as the Tony Elumelu Foundation, have already emerged, demonstrating the feasibility of and demand for these organizations.