Global venture capital investment in tech startups fell significantly in the first quarter of 2016. Startup funding plummeted 25 percent from the final quarter of 2015 to $13.9 billion. However, there was one exception: African tech startups.
Upon further examination, the influx of capital into tech startups in Africa hardly comes as a surprise. The brainpower behind flourishing new companies such as M-KOPA, a solar energy provider, and BitPesa, a merchant payment system, have garnered attention and funds from some of the biggest names in the tech world. Notable individuals who have invested in African tech startup companies include Bill Gates and Steve Case, one of the founders of America Online (AOL).
Perhaps the most widely known investment around Silicon Valley is Andela, a Nigerian startup that teaches those within its ranks about software development. The company received a $24 million investment from perhaps the biggest name of all in the tech world: Mark Zuckerberg, the founder and CEO of Facebook.
Economic analysts and other experts predict that the exceptional growth in African tech startup investment will continue for the foreseeable future. As it turns out, human capital and an impressive business infrastructure are ubiquitous within the Saharan continent.
Following are some of the reasons behind the proliferation of investment in African tech startups and why this growth is expected to continue.
The advancement of a disruptive tech culture is widespread throughout various regions of Africa. The port city of Lagos in Nigeria is the predominant tech hub of West Africa. The Kenyan capital, Nairobi, is the African headquarters for companies such as Google and General Electric. Cape Town in South Africa is quickly transitioning into an information technology (IT) powerhouse, for example.
Perhaps just as promising and heartening is the rapid tech infrastructure currently developing in previously underdeveloped places such as Rwanda, which is still widely known as a war-torn country that is facing significant civil unrest. SafeMotos, a startup that offers an app to help commuters locate taxi-bike drivers, was founded in the Rwandan capital of Kigali. The business is making a measurable social impact by reducing the second-leading cause of death in Africa: traffic accidents.
Africa is a continent where, in addition to plentiful business opportunities, a significant amount of social good can be accomplished. Many areas of the continent are underdeveloped, resulting in a lack of access to basic services, such as electricity and education.
The World Bank estimates that two in five African adults (about 400 million people) are illiterate, and the United States Agency for International Development (USAID) estimates that about 66 percent of sub-Saharan Africans lack access to electricity. In addition, about one-third of the population has no banking service.
Statistics such as these have attracted those known as “impact investors,” individuals or organizations seeking to invest capital “into companies, organizations, and funds with the intention to generate a measurable, beneficial, social, or environmental impact alongside a financial return.”
A Rising Middle Class
According to UHY, the world’s largest network of accounting and financial firms, Africa is home to the fastest-growing middle class in the world. UHY cites “growth in business technology” as the catalyst for Africa’s expanding middle class. As a result, analysts state that “the rate of return on foreign investment in Africa is higher than in any other developing region.”
As the middle class expands, so does disposable income, a vitally important factor for potential investors. The McKinsey Global Institute estimates that consumer spending will increase from “USD 860 billion in 2008 to USD 1.4 trillion in 2020,” more than a 60 percent increase in only a 12-year span.
For most, investing in an African company is exactly that: an investment—a means to earn a certain amount of profit from an initial expenditure. Fortunately, investors are able to commit capital with a level of confidence that was once questionable.
The most successful startups are capitalizing on increasing consumer demand for certain products and services. Niches currently being filled include: mobile banking services, access to solar power, lending to small- and medium-sized businesses, and transportation services. Savvy investors are also able to take advantage of such economic developments and realize a sizeable rate of return in the process.
Many factors are contributing to the growth of tech startup investments in Africa. Rapid growth in certain areas, an increasingly educated workforce, an expanding middle class, and government support are all viable reasons to invest in Africa’s fertile economic climate.
An influential factor that cannot be overlooked is the rise of impact investing. One can argue that many of the region’s most prominent investors, such as Bill Gates and Mark Zuckerberg, are committing significant amounts of money in the interest of advancing certain elements of African society just as much, if not more so, than in the interest of obtaining a return on investment. This is a promising trend with a humanitarian twist that is likely to continue into the foreseeable future.