The rise of African startups in the face of adversity

Africa, with its vibrant cultures and emerging economies, is experiencing a new wave marked by a rise in startups, a realm that promises jobs and opportunities for the continent’s young population.

Across economies, these startups are not only thriving but are also paving the way for a brighter future. While a good number of these businesses are increasingly positioning themselves as engines of growth and development globally, they often find themselves grappling with systemic challenges.

The latest Africa startup ecosystem report sheds light on the underlying hurdles these emerging enterprises face, from infrastructure gaps to regulatory complexities.

This study on the Positioning African Tech Startups as Engines of Growth & Development: A Comprehensive Analysis of the African Startup Ecosystem was undertaken by Fola Odufuwa and Muriuki Mureithi, on behalf of Mozilla Corporation in collaboration with the African Union Development Agency (AU-NEPAD).

It depicts how startups are showcasing resilience and innovation to help tackle unique challenges that threaten to stifle their expansion across economies.

The challenges facing African startups

Across Africa, the journey for startups is far from straightforward. African startups face a myriad of challenges that often slow their growth and ability to innovate and scale effectively.

One of the challenging obstacles to their growth is weak digital infrastructure, respondents, who were largely founders in Africa, said.

For instance, despite the reliance on fast and reliable internet, mobile devices, and digital platforms across economies, the quality and affordability of these services are often subpar, especially outside major urban centers in the continent.

Respondents said this huge digital divide limits their startups’ potential to innovate and scale to wider markets, in turn placing them at a disadvantage compared to their global peers offering similar services or products.

Persistent talent drought

Another barrier slowing the growth of startups in Africa is the absence of skilled talent. Startups in the tech sector in particular are experiencing a shortage in talent in areas that are most crucial for expansion such as software development, product management, and digital marketing, the report says.

At the moment, the available tech talent pool often lacks the right skills and knowledge, a scenario that is forcing entrepreneurs to consider post-graduation training programs that better align workers with the required industry standards.

For instance, a West African digital bank founder noted that the startup “struggles to find consultants with adequate knowledge to help the business.” In yet another case, a Senegalese founder responded; “Bangalore produces 80,000 new developers every year compared to 700,000 developers for the entire African continent.”

Overall, Africa’s talent gap is not only stifling innovation but is also slamming the brakes on the ability of startups to scale and compete internationally, the survey established.

Taxation and regulatory challenges

Currently, startups are grappling with complex tax systems and regulatory environments across African economies. Quite often, the report said many founders remain unaware of potential tax benefits and find themselves burdened by onerous taxes and regulations that simply constrain growth.

In Ghana, for example, aggressive sales campaigns have yielded unexpected results: significant tax bills for startups. “When you make noise as a startup, the taxman will come for you. This is why most startups [in Ghana] prefer to operate below the radar,” the report reads in part.

Additionally, respondents noted that cumbersome regulations in sectors such as health and pharmaceuticals have often resulted in delayed product launches, a challenge that usually pushes up the cost of operations.

Read also: World Bank steps in to turn startups into investor magnets

A tough business environment

According to the report, the business environment in many African countries comes out as simply harsh and unfriendly to innovation. Startups struggle with a lack of sector-specific support that is necessary to power their scaling across borders.

What’s more, they are grappling with a pervasive mindset across the continent that they cannot compete on the global stage.

However, to foster a “can-do spirit,” some initiatives are being rolled out. Africa’s biggest economy Nigeria for instance, the country is assisting innovators to believe that they can compete globally under the National Information Technology Development Agency through mentorship plans targeting the innovators.

Study shows that their struggles are compounded by inadequate government support across economies, where the absence of conducive policies and regulations stymies the emerging entrepreneurial ecosystem.

Take the case of Senegal for instance where health and pharmaceutical startups must get a Market Authorization (MA) from the Department of Pharmacy and Laboratories for each new product at a fee of $850 per product.

Even when coming at such a huge cost for a startup, this process is reported to take roughly two years to complete and the irony is that these MAs though renewable, are valid for just five years.

Funding misalignments and capitalization woes

Interestingly, while funding is often cited as a challenge, excessive funding directed towards startups with unsustainable business models has also been identified as another pain point.

The availability of “free money” from foreign investors can be detrimental if the fundamentals of the business are not sound, the report established. Moreover, the challenge of securing funding is exacerbated by a lack of credible third-party data to verify startups’ potential, leading to cash flow shortages and, ultimately, failure.

A Nigerian respondent offered counsel, noting that; “Funding needs to correlate with the objective. It is better to provide funds to startups in waves or milestone cycles and get feedback through monitoring and evaluation systems.”

Marketing missteps and waning public trust

African markets are ripe with opportunity, yet startups frequently struggle with marketing their innovations effectively. A lack of understanding of market needs and poor community engagement results in solutions searching for a problem rather than addressing existing needs, the survey established.

A founder from Nigeria summarised this predicament, noting; “Startups lose because of poor marketing. They simply do not understand what they need to do to win the market. They build solutions for markets that are not there and find it difficult to build a community of satisfied users who willingly pay for services.”

Additionally, a deficiency in public trust in new technologies often forces founders to invest significantly in training and creating awareness, particularly for emerging areas such as agri-tech, health-tech, and fintech.

A survey respondent from East Africa said, “Farmers need a lot of support to fully understand [technical] information.”

Respondents from this study indicate that Fintech stands out as the leading and most dynamic sector among African startups, particularly highlighted by the fact that 6 out of 11 African unicorns operate within this space.

At the same time, the legacy of colonialism and the specter of digital colonialism looms large across industries, negatively impairing African startups’ ability to secure the necessary financing to power their growth on a global scale.

Discrimination and racism also act as a huge barrier for African startups eyeing potential international markets. Internally, startups face a “nightmare” with dispute resolution and founder infighting, which many times rocks daily operations and triggers eventual business failure.

Nigeria startup Koolboks founder and CEO Ayoola Dominic is pioneering innovative freezers to thousands of small-scale traders who often struggle with electricity supply challenges. Across Africa, startups’ ability to navigate and adapt to the constraints of Africa’s unique operating environments highlights their determination and resourcefulness. (Source: Africa Tech Summit 2024)

Read also: Kenya’s Eurobond issuance sparks economic optimism

Charting a path forward through resilience and innovation

Amid these challenges, the report established that African startups exhibit a great level of resilience and depth in their capacity to innovate and solve problems. This ability to navigate and adapt to the constraints of Africa’s unique operating environments highlights their determination and resourcefulness.

African startups excel in crafting innovative solutions that cater to the unique challenges of their markets. From fintech innovations that bridge the gap in financial inclusion to agritech solutions that boost agricultural productivity, these startups leverage technology to address critical societal needs.

Africans living and working in foreign countries play a pivotal role in enriching the startup ecosystem, and bringing global education and experience back to the continent. This influx of diverse perspectives fosters a culture of innovation and cross-pollination of ideas, enhancing the vibrancy of the startup landscape.

Business hubs, incubators, and accelerators are increasingly becoming crucial in nurturing startup growth, providing essential support such as mentorship, networking opportunities, and access to capital. These entities help startups navigate the early stages of their development and achieve scalable growth.

“The incubator and accelerator systems are the best things to have happened to the startup ecosystem. It would have saved me years and years of learning if they’d started when I founded my first startup 15 years ago,” a founder in an African country responded.

Additionally, sustainability is critical and is evolving in economies such as Zambia where company-backed hubs that do not charge fees are thriving. To enhance their competitiveness, these hubs are also reviewing their value proposition over and above training and capacity building by offering incentive-based schemes to innovators.

“We have managed to flip the model we are running. In most cases, a client is sponsored in the program, and through this we guarantee incentives. You need to go beyond capacity, and be very targeted,” a hub director reported.

“I couldn’t have survived if the hub we were in had not funded us,” a founder from Ghana adds. Currently, according to the available industry data, there are roughly 70 tech hubs in Ghana, up from just three, namely, MEST, iSpace, and Impact Hub, back in 2010.

In Africa, some of the outstanding hubs are the Innovation Hub and UVU Africa, formerly CiTi in South Africa, JokkoLabs in Senegal, Nigeria-based ccHub, RiseUp in Egypt, and iHub in Nairobi, Kenya.

Furthermore, African startups are remarkably adept at adapting to their environment. Their flexibility in business models and operations enables them to pivot in response to changing market demands and regulatory changes, ensuring their survival and continued grow.

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