AAs CEO of Think Startup (a not-for-profit that provides free advice to African Entrepreneurs), I have spent the last year and a bit thinking about and engaging with startups in Africa, as well as African entrepreneurs. Here are a few insights I thought would be useful to share.
African Startups Matter
African Startups matter to African development in the same way that Small-to-Medium Enterprises (SMEs) mattered during the period of Western development and industrialization, and still matter. The idea of capitalism, the real beauty of it is that every society contains at every time, an untapped source of creativity, knowledge, talent and dynamic energy.
The opportunity to earn one’s livelihood by leveraging these abilities is what capitalism offers. Some may interpret this as the drive to make more and more profit, and indeed it may become that for many, but the magic of business is that it offers the opportunity for an individual to be compensated for what they do well. Startups are not a new idea. They are simply the latest iteration of what developing societies have always had to do, and do well; Leverage the human resource, by compensating it. So yes, international aid has a role in development, as do international organizations that seek to provide an environment in which the human resource can flourish by improving healthcare or education for example. Ultimately however, these efforts need to evolve into more pointed efforts at incentivizing the so-called “animal spirit”, that “spontaneous urge to action rather than inaction” as coined by Keynes, of African citizens towards self-expression, and value creation. I believe startups and startup culture could be a significant catalyst towards this end.
The African Startup Environment is different
Much of the emphasis within startup communities in Europe and North America is on the tech sector. This makes sense for investors because startups are actually very high risk investments. The figure tossed around casually is that 99% of startups fail. I am sure there is a more accurate number than this but we all agree that failure rates are high. Investors address this high rate of failure by trying to invest in as many startups as possible as a sort of hedging strategy. In my opinion there are better ways to reduce risk in this environment but this is the “state of the art”. In order to hedge, investors must find many startup investments at low costs, and tech startups fill that criteria particularly well because of the relatively low infrastructure requirement to build software. Tech startups aren’t more successful than any other type of startup, they just have lower cost requirements, so most investor money goes there, and more tech startups get off the ground as a result.
In African countries however, labour and infrastructure costs are still significantly lower than the rest of the world. This means we should be seeing much more money going towards a wider range of fields than just tech (unfortunately we are not). Most of the startups I interact with are in agriculture, and manufacturing, and that makes sense because societies generally progress through the primary and secondary sectors, before becoming more service oriented. The discouraging thing is that investors, particularly western investors are quite locked into thinking of startups as tech companies and do not see the myriad opportunities available in other sectors, at comparable costs. Admittedly businesses in the agricultural and manufacturing sectors are more likely to require dealing with local or national governments, which comes with its own set of obstacles. This poses an additional source of risk for investors, but for those willing to take this risk, the rewards can be significant, given the lack of maturity of most industries in Africa, and hence the lack of commoditization. For me however, the sheer variety offered by African startups offers a great deal of excitement in itself.
Another thing worth talking about is the structure or nature of investments. These can also be significantly different. While investors in the West, and particularly in the tech space are used to stipulating exit points of around 3-5 years post investment, this is usually unrealistic in the African context. Again, this boils down largely to the nature of tech, versus other sectors of investment. Tech’s low infrastructural requirement means expansion can happen more quickly, all you generally need is more server space. Conversely, even though infrastructural costs in other sectors might be low in the African context, the infrastructure generally still requires time to build, rent or retrofit. Additionally, on the marketing front, virality is much more easily attained in the tech space as tech products are available online, and so lend themselves to consumer generated marketing, like shares via social media. Speed of infrastructural expansion and potential for virality makes tech highly scalable and customer acquisition costs are generally significantly lower in the short run. As a result, it is often realistic for tech investors to see investment values multiply at rates that allow them to exit quickly. Investors in African startups however, will need to be of a different mindset and be open to different pay-back instruments, such as dividends, with the view to exiting (if that is their aim)at 7 years and upwards. The use of subordinated debt from equity holders may also be incorporated into investment structures.
The Way Forward
The African startup environment despite the differences outlined above, requires what every startup environment does; Financial resources, and Human resources. The latter is where we at Think Startup focus our efforts. Our aim is to help develop creative, knowledgeable, motivated, ethical future business leaders, and we are making inroads, but this is only one half of the equation. For African business to finally start to realize its potential, brave, forward thinking, and ethical investors are required, not 10 years from now, not 5 years from now, but today. We believe the opportunities are endless, and aim to position ourselves such that when startup investors finally come knocking on African doors, we will be there to help “make an introduction”.
Guest Contribution by David Harlley May 2017. Read more aobut David's work at http://www.thinkstartup.org/