Author: Oxford Entrepreneurship Policy Roundtable
Type of publication: Report
Date of publication: May 2021
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Recent trends in ecosystem development In recent years there have been clear signals that entrepreneurial ecosystems are emerging in several parts of Africa. We briefly review the most salient trends.
One key measure of ecosystem growth is the amount of venture capital funding, and related angel investments. Different data providers estimate different amounts, due to alternative definitions and data sources. Estimates for the amount of venture capital invested in Africa range from $700M to $1.4B for 2020. Importantly, all data sources show a clear upward trend, with 2020 amounts representing a three- to fivefold increase over 2015 amounts.
The dominant sector for venture capital is Fintech, capturing 25% of investment amounts. It is followed by E-commerce with 14%, E-health with 10%, Logistics with 7%, and Energy with 6%. While Fintech is clearly leading, there are clear signs that other sectors are also beginning to emerge. The geographic distribution of venture capital is highly concentrated. Nigeria, Kenya, Egypt, and South Africa account for over 80% of all investments. Within these countries a few cities attract the majority of funding, especially Lagos, Nairobi, Cairo, and Cape Town. Despite this concentration, other centres such as Accra, Dakar, Kigali, or Abidjan are also witnessing a rapid growth in venture capital funding, albeit starting at a much lower level.
The largest source of African venture capital funding comes from the US, accounting for 40% of total investments. This is followed by South Africa (9%), UK (8%), and Nigeria (4%). Many venture capital backed companies are run by expat and foreign founders, not local founders. Bayen examines companies raising over $1M in venture capital: while over 50% of companies had purely local founders in Nigeria and South Africa, in other countries, such as Kenya or Ghana, less than 15% were purely local founders. Note, however, that in South Africa and Kenya approximately one quarter of all companies included a mix of local and expat founders. Other data sources observe similar patterns. Village Capital, for example, finds that only 10% of Fintech investment in East Africa goes to ventures with purely local founders.
There is no shortage of entrepreneurial talent in Africa. In recent years there have been many efforts to improve technical skills. Data by Quartz Africa (2019), for example, shows that Africa has the fastest growing pool of software developers. Our interviews also suggest that technology expertise is growing more broadly. However, there is a marked lack of managerial business talent. Of particular note is the difficulty to find mid-level business managers with experience of managing growth and scaling across multiple markets.
Key Action #1: Develop managerial skills for starting and scaling ventures
The first key action focuses on business skills for potential founders and managers. This clearly goes beyond the current emphasis on technical skills, which also often lead towards careers at more established corporations. These business skills can be imparted through practical on-the-job training, within local and multinational established corporations. Such business training is valuable not only for potential start-up founders, but also for potential non-founding managers who join later-stage scale-ups.
Key Action #2: Focus business training on problem solving skills
A surprising large number of Roundtable participants emphasized the importance of experiential learning and problem solving skills, over traditional teaching methods that focus on knowledge acquisition. Traditional business training for entrepreneurs and managers can easily be misguided, especially if local business conditions differ from those assumed in the training materials. Moreover, it is argued that entrepreneurial talent manifests itself through on-the-job problem solving. Therefore, entrepreneurial training methods should focus on problem solving skills.
One sign of ecosystem growth is that by 2019 there were across Africa 643 tech hubs, where 41% of them had incubators, 39% co-working spaces, 24% innovation hubs, and 14% accelerator programmes, with some hubs hosting multiple activities across categories. Interestingly, nearly half of these hubs were not-for-profit organizations, receiving grants from corporations, NGOs, and philanthropic institutions.
Key Action #3: Improve the business networks of African tech hubs
Roundtable participants argued that the key to improving the quality of tech hubs was to build stronger business networks. Acceleration programmes and tech hubs need to be led by experienced entrepreneurs who understand what it takes to build real companies. Moreover, they need to be closely connected to market participants, especially investors and established corporations. They can help entrepreneurs with product development, market access, and business development. Ideally, tech hubs also include regulators and policy makers in their networks too.
Key Action #4: Design new acceleration programmes for scaling internationally
Many African accelerator programmes are geographically isolated and find it difficult to build meaningful Pan-African or global connections. This limits their ability to support startups that want to pursue ambitious international expansion strategies. Several Roundtable experts noted the opportunity to build new acceleration programmes that focus specifically on the scaling challenges of tech-enabled start-ups. African startups often find it difficult to scale beyond their home market and build business models that reach across multiple African countries and/or to larger global markets in the US, Europe, or Asia. New acceleration programmes could convene networks of mentors, investors, and corporations across these geographies. To be most effective, such programmes might also have a thematic focus, such as E-Commerce, Fintech, Health, Energy, Agtech, or other. And again, these acceleration programmes need to be guided by seasoned entrepreneurs who have first-hand experience building significant businesses themselves.
Despite the recent rise in angel investment and venture capital, there remain large funding gaps across sub-Saharan Africa, both at early and later stages of venture development. There are concerns that funding is dominated by foreign investors and that many local investors lack a proper understanding of the venture investing process. The data above highlights the large role played by foreign investors, especially from the US. Foreign investors are viewed as a mixed blessing.7 On the one hand there is a clear benefit to attracting foreign capital. Moreover, this capital typically comes with valuable expertise on how to successfully scale ventures, and powerful networks to support foreign expansion strategies. On the other hand, there is a concern that returns flow to foreign investors who may not necessarily reinvest into the local ecosystem. Related to this, it is worth noting that most venture-backed start-ups operating in Africa are incorporated outside of Africa.
There are many policy recommendations apply to Africa just like to other places, such as improving the broader business environment, removing regulatory barriers to entrepreneurship, and creating policies to support ecosystem development. In addition, Africa has notable challenges around physical infrastructure (e.g., transportation) and digital infrastructure (e.g., Internet access). To complicate things further, countries across subSaharan Africa are at very different stages of addressing these broader policy challenges. While acknowledging these broader policy issues, Roundtable participants focused on policyrelated initiatives they thought could specifically help the development of sub-Saharan Africa start-up ecosystems.
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