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Evaluating African Startups from a Mainstream Perspective

Data from VC4Africa’s new Venture Finance in Africa 2016 report shows that venture capital funding and angel investments secured by the 462 African ventures tracked has more than doubled from $27 million last year to $73 million.  – Yomi Kazeem, Quartz Africa

It’s common knowledge to many that Africa is witnessing a revolution of sorts in entrepreneurial and startup activity. The continent has garnered the attention of businesspeople and techies alike for its vast – yet largely untapped – resources for innovation.

A rudimentary evaluation of African startup investment trends shows a rather drastic upward trend in funds invested. Initially, this seems to be a promising development for prospective entrepreneurs, even if certain unknowns remain.

This article evaluates African startups from an investor perspective by applying a sort of “litmus test” that many who hold the funds often insist upon, evaluating current investment activity while identifying and attempting to explain investment patterns.

An Investor’s Perspective

office workerOutside of charitable giving – which often has noble and selfless intentions – most investors are concerned with return on investment (ROI). Many financiers are businessmen and businesswomen who remain “neutral” in their approach and are ultimately concerned about profitability, both for themselves and the operations that seek their resources.

In order to make rational and profitable decisions, investors often apply a type of litmus test – an analysis evaluating both internal and external factors that every for-profit venture must contend with. Investment factors one may consider are numerous, but most frameworks of this type have four common denominators:

  1. State of marketplace: Is there enough demand to support operations?
  1. Entrepreneurial resources: Are entrepreneurs supported, and how?
  1. Economic stability: What is the state of the economy in the country or region?
  1. Risk/reward: Given the perceived amount of risk, what can we potentially gain?

By no means is this an exhaustive list, but one could reasonably make most investment decisions by carefully addressing such questions.

Africa’s Litmus Test

Africa is among the most diverse places on the globe in terms of economics, demographics, infrastructure, and so forth. Some countries in Africa (e.g. Nigeria, South Africa, Egypt) are quite advanced, while other African countries remain chronically underdeveloped.

It should come as no surprise, then, that the more-developed parts of Africa collect disproportionate amounts of startup funding. This analysis focuses exclusively on these areas. For reasons of simplicity, the aforementioned litmus test will be applied.

State of Marketplace

Africa is home to one of the fastest-growing middle classes in the world. Economics  suggests that when income rises, so does consumption – a vitally-important factor for potential investors.

Disposable income – funds available after meeting obligations – is necessary for purchasing non-essential goods and services. In the past, prior to the current economic shift, most Africans in underdeveloped areas had little to no disposable income. This trend is currently shifting as well, which makes investment in countries in Africa more realistic.

Entrepreneurial Resources

Many organizations seek to promote the startup culture in Africa, and they have been relatively successful in doing so in recent years. The more important question is whether or not these supportive factors will persist amidst the uncertainty surrounding the state of startups on the continent.

In this case, it is necessary to evaluate the source of startup capital – an important indicator in determining the level of available resources. Most startup capital in 2016 (57 percent) is being invested by the founder(s), while only 12 percent is invested by private sources. While these numbers may be construed as a negative, it is worth mentioning that startup capital investment is on a downward trend globally.

Economic Stability

moneyAs mentioned, a growing middle class means more disposable income for citizens of many African nations. When considering whether or not to invest, it is important to consider whether the middle class is expanding or contracting. Answering this question allows investors to project business growth or stagnation.

Evaluating the expansion or contraction of Africa’s middle class is complicated, and experts are divided on the subject. The consensus, if one could define it as such, is one of both optimism and caution. Historically, and almost without exception, all nations experience economic turbulence over time. Many countries in Africa, having experienced a positive economic stretch, are considered “due” by some to enter a period of stagnation.

Risk/Reward

African startup investment is no different from that in other areas of the world, in that it is a risk-laden endeavor. Investors that have traditionally seen sizeable returns in Africa have had a long-term approach that takes into account the uncertainty of the African marketplace.

The consensus is that many investments in African startups are deemed riskier than those in other areas of the world, but may yield significantly higher rewards. One predominant example is iROKOtv, a company that has been called the “Netflix of Africa,” where early investors made a 3000 percent profit on their initial capital investment.

The Future of Startups in Africa

African startups have yet to mature to levels seen in many areas of the developed world. Yet, the collective entrepreneurial spirit on the continent is filled with promise. No developed part of the world has thrived without subjecting itself to the unknown, and Africa is no different in this regard.

If savvy startups are willing and able to weather the storm of uncertainty surrounding the state of the region’s capabilities, they and others who take sizeable financial risks may be the beneficiaries of such vision.

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5 Innovative African Startups You Need to Know About

Scaling a startup business can be a time-consuming and arduous endeavor. The effort generally involves finding the right people with a shared vision, pitching investors, marketing and advertising, producing the product/service, and maintaining cash flow. These are just a few obstacles that young companies face. Indeed, it is an accomplishment to obtain any type of recognition in the competitive startup market.

While African startups such as M-Kopa, Interswitch, M-Pesa, and others may garner a significant amount of attention, there are a number of other startups around the continent that are starting to make their presence known through rapid innovation and a savvy business model.

Following are five African-based startups that you need to know about:

  1. Mozambikes

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Image courtesy DIVatUSAID | Flickr

Rural Mozambique faces significant transportation challenges on a daily basis. The country’s infrastructure is severely underdeveloped, and economic stagnation makes it difficult for people to afford any type of vehicle.

The founders discovered an innovative way to generate income for the company: by selling advertising space on their bikes. With ad revenue in hand, the startup can then sell the bikes at heavily discounted rates, which makes purchasing a bike feasible for people with low incomes.

In addition to discovering a great business opportunity, the startup has made it its mission to make a difference. Dubbing itself a “for-profit social venture,” the company uses its profits to further advance its social change mission: to alleviate poverty through low-cost transportation. The company also operates a charitable arm that seeks bike donations from around the world.

  1. DIYlaw

While solar, financial tech (“fintech”), and other startup sectors may receive the most attention, another specialty that is gaining ground is do-it-yourself (DIY) legal services. The Nigerian startup DIYlaw is one such example.

DIYlaw offers an assortment of legal services, including a wide array of business document preparation services such as employee contracts, non-disclosure agreements, privacy policy documents, and more. Business owners can register their organizations with the appropriate government offices and even obtain certifications of incorporation.

The company plans to launch a legal service that allows members to pose questions directly to an attorney listed in a comprehensive database. Additionally, members will have the ability to post reviews of attorney services in order to help others to decide which attorneys are best suited to their needs.

  1. RecycloBekia

recyclobekia logoEgypt has quickly become Africa’s second-largest economy, which has been partly made possible by the booming technology sector. The country has also seen the rapid expansion of a variety of startups and other entrepreneurial ventures.

Seeing an opportunity to create a business model based on recycling electronic waste (e-waste), RecycloBekia was launched in 2011 by a group of students from Tanta University on an initial investment of only $1,000. The startup specializes in recycling electronic waste. Specifically, the company collects, dismantles, filters, and recycles electronic components.

Today, the startup business sells about $2.4 million in e-waste annually, and it has expanded to four warehouses. RecycloBekia is the first company to offer environmentally friendly methods of recycling e-waste. The company also offers safe and secure data destruction services to complement its recycling operations.

  1. Sweepsouth

Sweepsouth is a South African startup that enables users to schedule a variety of home cleaning services from the convenience of their tablet, phone, or computer. The company vets all of its cleaning staff with a background check and insures all of its workers. Additionally, clients have the ability to review the cleaning staff on a number of performance measures.

Clients are charged a fixed rate for each service, of which there are many. Sweepsouth offers cleaning services for kitchens, bathrooms, and living rooms. Customers can also choose to order “extra tasks” that may include doing laundry and ironing, as well as cleaning refrigerators, ovens, cabinets, interior windows, and interior walls.

The startup has been featured in a variety of media outlets, including Fast Company and Forbes. The company has been voted among the “Top 10 African Startups” by Web Summit and has won a variety of startup competitions.

Currently, the company is available for house calls seven days per week from its main headquarters in Cape Town. Sweepsouth also offers its services in Johannesburg and the metropolitan areas of Pretoria and Centurion in South Africa.

  1. Vula Mobile

Vula Mobile is another young South African startup that is presently in the process of raising investment capital. The startup has grown at a fervent pace. Initially, the company’s business model focused on connecting health workers with eye care specialists via a mobile app, which proved to be widely popular.

The demand for mobile health services in South Africa provided an opportunity for the company’s founders to expand its range of specializations quickly. The company’s specializations include cardiology, orthopedics and dermatology.

General health care workers, whom patients initially visit, are responsible for referring individuals to the correct specialist. Health care workers gather patient information, take photographs, and generate a basic, brief medical history before sending the information to a medical specialist.

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Innovation in Africa: How Businesses Are Driving Remarkable Growth

Many parts of Africa suffer from extreme poverty, especially sub-Saharan Africa. The Borgen Project reports the following:

  • 75 percent of the world’s poorest countries are located in Africa.
  • The 10 countries with the highest proportion of residents living in extreme poverty, defined as those subsisting on less than $1.25 USD per day, are all in sub-Saharan Africa.
  • One in three people living in sub-Saharan Africa suffers from undernourishment.

street vendorOf course, the statistics are only one part of the story; the true tragedy is the men, women, and children who struggle to acquire and sustain even the most basic necessities of food, water, and shelter.

Hope is on the horizon, however, as visionary entrepreneurs seek to tap into Africa’s vast human capital and talent. African businesses and startups are advancing the economic development of the continent and helping to pull more and more people out of poverty. Their innovations span every sector of the economy and all industries, including mobile communications, agriculture, finance and banking, retail, energy, manufacturing, and more. Even in sub-Saharan Africa, innovators have led a movement to better the lives of the many who call it home. In addition, foreign investment continues to help spur growth.

The case of M-Pesa, a digital payment platform that has revolutionized Kenya’s economy, offers an excellent example of the kind of business innovation that is taking place in Africa. The company’s story also reveals the factors that are encouraging entrepreneurism across the continent.

Kenya and M-Pesa: A Case Study

In 2007, many Kenyans lacked access to basic financial services. The vast majority of Kenya’s citizens did not have a bank account, couldn’t transfer or receive money, and had no access to credit. Without basic financial infrastructure, even the most talented and ambitious entrepreneurs had trouble setting up a business.

Kenya safariThen, researchers who had received funding from the UK Department for International Development (DFID) noticed something striking about the Kenyan economy: many Kenyans were paying for goods and services with mobile airtime, instead of an exchange of cash. DFID then connected with mobile service provider Vodafone, which had been interested in the microfinance sector and saw potential in mobile banking. After a student software development project, Vodafone’s Kenyan affiliate, Safaricom, introduced M-Pesa. The service is now widely considered the most successful mobile-based financial service in the developing world.

M-Pesa helped revolutionize the everyday lives of Kenyans by implementing a formal, reliable, and user-friendly mobile system for banking. Many Kenyans live in rural areas far from banks, although the country is increasingly urbanizing as young people move to cities for jobs and the chance at a better life. Prior to M-Pesa, city dwellers who wanted to send money home to their families in isolated villages had few options—they could send the cash with a trusted friend traveling to the area, or send a postal money order, although this could take weeks and required a post office box.

Now, businesses across Africa are using M-Pesa for everyday transactions, and the technology has helped them stabilize their revenue streams and attract repeat customers. In addition, M-Pesa has enabled many of Kenya’s low-income citizens to send money, pay bills, and access microcredit services—in fact, 72% of Kenyans living on less than $1.25 USD per day used the service in 2011.

Entrepreneurial Climate in Kenya

M-Pesa’s success in Kenya shows how the country’s climate is favorable for business, despite its relative poverty. On the surface, the country doesn’t appear to be an attractive investment opportunity. For instance, the United Nations ranks Kenya 145th (out of 187 countries) on the Human Development Index (HDI)—a comprehensive measurement of a nation’s average life expectancy, education, and income.

Nevertheless, as a result of its strong entrepreneurial culture and growing business sector, Kenya has become one of the world’s fastest-growing recipients of foreign investment. Several sectors of the economy are benefiting from the renewed business confidence in Kenya; agriculture, health, medical services, and tech companies are being targeted by investors.

Investment in Africa

In 2015, $185 million was invested in African startups; this number represented a strong year-over-year growth rate that perplexed some venture capitalists. What were the factors behind the increased investment in African startups?

For one, the sheer rate of growth that many African countries are achieving actually outpaces that of many other regions of the world. In addition, foreign investors are known to focus on three specific criteria: (1) culture: the perceptible “level” of entrepreneurism in a country; (2) environment: the necessary financial, legal, and political frameworks to sustain and grow business operations; (3) opportunity: the overall odds of growing and scaling within local markets.

While many areas of Africa remain underdeveloped and impoverished, the continent is making remarkable progress in these three criteria. Many African nations are working diligently to encourage entrepreneurs, attract investment, and strengthen public-private partnerships. Together, they will continue to drive the African continent’s economic growth and development.

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BlackBOX TV: A High-Tech Startup Takes Its Place on the World Stage

The African startup community is abuzz with the news that BlackBOX TV, a Mozambique startup, was declared the winner of a prestigious competition.

BlackBOXTVlogoThe competition, Seedstars Maputo, saw 10 startups competing in Maputo, Mozambique, for the chance to represent their country at the international Seedstars World competition in Switzerland. In the end, BlackBOX—a broadcasting service that allows customers to stream content sans an Internet connection—was declared the winner at the Maputo event. The young startup received additional recognition as “Most Promising Seed-Stage Startup of Seedstars World Mozambique 2016.”

The global Seedstars competition receives over 4,000 applications, of which 700 are selected. Just 65 of the initial 4,000 eventually become finalists. BlackBOX now vies for the coveted international prize: up to $1 million USD and the opportunity to pitch to a legion of prominent investors. The startup is turning its focus on the international stage—a rare opportunity to expand beyond its current capabilities.

Claude Champier, founder of BlackBOX, remarked to the press, “I started BlackBOX TV because I wanted to create a VOD (Video on Demand) system, a Netflix for Africa. However, I wanted people to have access to content without a conventional data connection.” His vision would become a reality and then some.

How BlackBOX TV Works

Traditional streaming of content (e.g. Netflix) requires a data connection with sufficient bandwidth to operate. BlackBOX requires no such connectivity; instead, the product “uses third party programmes written externally by programmers and developers.”

The company’s proprietary software runs off of Android 4.4.2 (KitKat), and the company attempts to mimic the end-user’s interaction with that of a smartphone. Promising a simple “plug and play” experience, the company hopes to expand product usage internationally.

tv watchingAnother interesting aspect of BlackBOX is that there are no subscription fees. The company sells the product at a one-time cost (currently £125), according to the company’s website. The price point for the product is affordable, and in most cases, more cost-efficient over the long term than subscription-based services such as Netflix and Hulu Plus.

In terms of specifications, the BOX Media Player utilizes the world’s first Android 4.2 Quad Core TV Box with a 1.8 GHz CPU and 2 GB of RAM. The processing capabilities of the product permit viewing in a number of formats, including the newest 4K resolution. Other compatible viewing technologies include standard definition (SD) as well as 720p and 1080p high definition (HD). Impressively, the box also supports 3D viewing tech such as SBS, TAB, anaglyph, or interlaced.

Among the biggest draws for the product is its simplicity. The product itself is shipped with three basic items: a power adapter, remote control, and HDMI cable. Instructions are relatively basic in nature, as the regional TV listings guide is already preinstalled. Listings automatically update every 15 minutes to provide the user with the most current information.

The content available to watch includes movies, TV shows, and sporting events. The specific programs are determined by regional availability, although a payable option called IPVanish exists. It spans over 40,000 IPs on a network of over 400 servers located in more than 60 countries around the world.

Some users have voiced concerns about BlackBOX’s legality in terms of copyright law. The company has devoted much of its website’s FAQ (Frequently Asked Questions) page to assure users that its product is legal.

The Future: An Analysis

As the company is very new, it is difficult to ascertain the future levels of customer adoption. BlackBOX has goals to expand internationally, which may be difficult given the complexities of marketplace penetration in many countries.

In addition, the media streaming market is strongly concentrated to companies such as Netflix and Amazon, with its Prime subscription service and Fire TV products. In 2015, Amazon allocated over $5 billion USD to marketing, according to its Annual Report. It is clear that BlackBOX faces competition from global giants in several markets.

To enter new markets, BlackBOX is implementing a re-seller/distributor business model that involves “zero capital outlay and zero risk,” according to its website. It appears this strategy is a creative way to introduce the product in new territories at a lower cost than a traditional product rollout. When and if the startup achieves the desired operational scale, it will be interesting to observe whether a shift in marketing strategy unfolds.

Despite the challenges of entering such a competitive market, BlackBOX has a number of unique selling points: no subscription fees, plug-and-play capabilities, an affordable one-time purchase price, and international viewing options.

Conclusion

BlackBOX is exciting on a number of levels. In addition to offering a seemingly well-designed product at a relatively affordable price, BlackBOX epitomizes the technological and entrepreneurial revolution that is taking hold across Africa.

The startup has successfully launched a product in an area of the world that is home to countless talented and driven entrepreneurs. These visionaries are achieving success at an encouraging rate, and the team behind BlackBOX TV seems to have joined their ranks with their innovative product.

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A Revolution: Africa’s High-Tech Money Companies Are Innovative Disruptors

“This time around, traditional bank-to-bank competition is not the issue. This new wave of competition is coming from both nimble, innovative, cloud- and mobile-first startups as well as the major technology players largely unencumbered by policy and regulation.”  – David Lynch, Director at DBS Bank, describing the vulnerability of traditional banking institutions.

“Fintech,” or financial technology, companies singularly focus upon the development and application of cutting-edge technology to make banking services more accessible and efficient. These companies are also offering services similar to traditional banking systems that have, for the most part, dominated the global banking sphere for well over a century.

DBS logoProminent banks, such as the aforementioned DBS in Hong Kong, recognize the vulnerability of their respective business models as a result of innovations coming out of fintech startups across the world. As a result, many traditional banks are coming to the realization that a proactive approach to innovation is a necessity to compete in this rapidly-evolving economic sector.

There is perhaps no other area of the world where this trend is more evident than in Africa. By most accounts, Africa’s brick-and-mortar banks have been slow to realize the disruptive innovation and competitive threat that fintech startups pose.  One prominent South African entrepreneur put it this way: “The banking sector in Africa is going to be disrupted faster than anywhere else in the world.”

Two primary reasons for this disruption are: (1) the rapid adoption of smartphones, and (2) the disproportional number of unbanked people. Some areas of Africa, such as South Africa and Kenya, have among the fastest-growing populations in terms of smartphone usage, but lag far behind in terms of banking services. Statistically, it is estimated that only about one-third of sub-Saharan Africans have bank accounts, while over two-thirds have a mobile phone.

However, demographic trends do not fully tell the story of the rapid rise of fintech in Africa. This article examines the innovative nature of fintech startups and their wide-reaching effects on the global marketplace.

Africa and Fintech Success

Arguably, fintech companies have had the most successful track record of any startup sector in Africa. In a span of under a decade, fintech startups have built user-friendly, easily-understandable digital platforms for millions of people.

As mentioned, the primary driver behind the fintech phenomenon is the wide adoption of digital technology. In perhaps no other place in the world has mobile access proliferated at such a remarkable pace. As a result, African businesses are building their brands, and African consumers are well-informed. Some financial institutions also see an opportunity to increase efficiency and reduce operating costs.

While there are a number of factors contributing to the rise of fintech in Africa (e.g., mobile access), there exist prominent drivers that have spearheaded these efforts. These include no business license requirements; an enhanced mobile network infrastructure; streamlined access of mobile applications (apps); increases in processing capabilities, and customer-centric business models, among others.

While there are a number of success stories related to the fintech industry, some stories have garnered disproportionate levels of attention. Recently, Barclays Rise – a global startup initiative of Barclay’s Bank focusing on fintech – began operations in Cape Town, South Africa. Additionally, the banking conglomerate has drastically expanded its presence within Africa (more on this below).

BitPesa, a digital money transfer and exchange platform, has become one of Africa’s prominent startup stories. Recently, the company expanded, opening offices in the cities of Lagos, London, and San Francisco. The enterprise recently received another round of funding in efforts to scale its operations and research potential new markets.

Africa’s Fintech Revolution

Put simply, fintech is drastically altering the way that everyday Africans use and manage money. Innovative disruptions from the fintech industry took hold following the 2008 global recession, blindsiding the established banking order.

fintechThe continuing economic development on the African continent effectively created an opportunity for innovative companies to reach a previously-underserved population: people without banking services. As a result of this insight, fintech startups have blossomed into a leading catalyst for economic development throughout the continent.

The scale at which fintech startups have disrupted banking practices in such a short period of time has been nothing short of astonishing. Accenture, a leading global consulting company, estimates that over one-third of worldwide financial services revenue is at risk due to innovations from fintech companies.

One example of the rapid proliferation of fintech innovation is the presence of Barclays in 13 African countries. According to the company’s financial statements, Barclays’ 2015 revenue was 25.45 billion British Pounds (33.3 billion U.S. dollars). The company currently employs over 140,000 people in over 50 countries.

Arian Lewis, Barclay’s Head of Open Innovation, summarizes the company’s stake: “People in Africa do banking on their mobile phones, but our talent base is all built on bricks and mortar banking. So we’re thinking, are we actually a tech company? To make that shift you have to approach talent that sits at the front end of that change curve.”