Photos by Sharon McCutcheon and Hide Obara
Africa / Technology

Lions on the Horizon: Venture Capital and African Tech

We already know the big names. With the advent of the global tech economy in the past two decades, two powerhouses have come to dominate the world of startup innovation: the US and, in its footsteps, China. Africa, however, is often left out of this conversation. Here’s what people don’t talk about: Africa is a 52 country market with 1.2 billion people and some national GDPs reaching a six, seven, or even eight percent growth rate. 

Despite Africa’s slow digital adaptation, mobile integration is now taking off. Researchers predict that by 2022, smartphone users will increase to 635 million from 2013’s 315 million—a net increase of mobile users close to the population of the United States. Mobile internet, which transfers data on the continent, is expected to increase sevenfold. If infrastructure investment continues as it has, the internet should take a leading role in economic growth in Africa over the next decade, with projected internet contributions to Africa’s GDP in the range of $300 billion per year. At this stage, technology in Africa is less budding than it is blossoming, seeking pollination in the form of investment to fully bloom. These factors are important when trying to consider or predict where venture funds will circulate in the next few decades, and which markets are poised for the most transformation.

Today, money follows technology. In 2015, during the open question section of Douglas Leon’s address to the eager minds of Stanford Business School, a faculty member asked why Brazil had not been identified as an emerging startup scene by Sequoia Capital in the same way China had been. Douglas, a prominent venture capitalist at the now global Sequoia Capital with investments in the likes of Google, Airbnb, and Alibaba, answered, “We traveled to Brazil probably six, seven times…the more we traveled down there the more it became apparent that there were very few engineers coming out of Brazil.” This makes sense. Sequoia Capital tends to focus on technology companies, and pours its resources into countries with strong tech-ecosystems. These ecosystems more easily produce what Silicon Valley calls “unicorns” – startups with valuations over one billion dollars.

Emerging markets entering the 2020s will be driven, in part, by technology and technologists. Regions with the ability to surface A+ programmers within a strong tech-VC ecosystem are likely to produce innovative business models poised to infiltrate and scale in underperforming industries. As a result, these regions receive more attention from investors looking to get involved early when the price is low. Investing in any company in its early stages is far from easy, for obvious reasons—convincing ideas are much easier to create than a business model that actually makes money. The best venture capital (VC) firms and accelerators usually only throw money at a handful of startups out of every few hundred. What’s more, around 80 percent or less of the chosen few startups actually grow enough to bring in any revenue at all, with most teetering along at break-even until sputtering out. It becomes even trickier to spot a potential “unicorn” when entering a foreign market: the rules suddenly change, and the typical investment value metrics are clouded by culture and politics, legality and, sometimes, instability. Given these barriers-of-entry, the well-funded Western investment community (and also the businesses community at large) shies away from targeting foreign countries–especially developing countries–even when the value is clearly there.

The impact that VC has in tech markets and on their surrounding economies is rather enormous. Of all companies formed after 1978 in the US, VC-backed companies make up 57 percent of US market capitalization and 38 percent of total employees. While not all of these companies are necessarily “tech firms,” a good majority of them are, including Apple, Google. VC tends to focus on technology because technology transforms industries and grows economies, which produces higher returns for investors. Technology, besides being valuable, also aims at solving problems. We often hear of Africa’s challenges—poverty, resource distribution, sanitation, and health—and fail to see that African technologists are and have been using innovation to address those challenges. Some indicators of this tech-ecosystem are many African countries’ commitment to tech education, large urban centers with a high density of mobile and internet users, and growing VC confidence around investing in African tech founders. Although Africa is brimming with these elements and more, it remains largely overlooked among the mainstream startup/VC buzz—and the prospects of growth are more than plentiful.  

All roads along Africa’s tech moment lead back to Kenya and the “Silicon Savanna.” Four key factors at play in Kenya between 2007 and 2010 spurred rapid tech development in the region. The first was the mobile payment methods born out of M-Pesa mobile money. The success of 2007’s M-Pesa Mobile Money, developed by telecom-Safaricom, showed that mobile users in African countries were not only growing, but that digital technology could fundamentally change the way people interact with their economies. Soon after Mobile Money, four technologists developed the second factor, Ushahidi, an impressively effective tool for mapping open-source data and predicting demographic events anywhere in the world. Ushahidi has become an international tech company with applications in over twenty countries. The third factor was Africa’s first tech incubator model with iHub. Following Ushahidi success, one of the company’s co-founders, Erik Hersman, dreamed up the idea for Nairobi’s iHub innovation center in 2008 with the hopes of “creating a nexus point for technologists, inventors and tech companies.” iHub has since pumped out over 150 companies, with a community of 20,000 African programmers. The fourth factor is the government’s commitment to Information and Communication Technology (ICT) policy. Kenya’s 2010 completion of The East African Marine System (TEAMS) undersea fiber optic cable project that bolstered East African broadband is one example. Kenya’s acknowledgment of and investment in tech potential have formed the “Silicon Savannah” moniker, and allowed Kenya to become a model for what African countries can achieve when policy, infrastructure, and technological innovation cooperate. 

The progress made in Kenya is being used as a model across Africa, from Nigeria to Rwanda and to Ghana and beyond, disturbing everything from energy and agriculture to banking and commerce. Nigeria has become an increasingly popular destination for tech innovators and commercially-oriented startups interested by the prospect of scaling in Africa’s most populous market. Nigeria’s tech culture has taken root and continues to showcase African entrepreneurial drive in new ways. Similar to how Chinese repatriation—the phenomenon of large swaths of Chinese gaining advanced technical degrees in Western universities and then returning home—has helped bolster tech movements in China over the past couple of decades, Nigerians are returning home to start ventures as well. All three of Africa’s most prominent e-commerce startups—Jumia, Konga and MallforAfrica—were founded by US-educated Nigerians who were exposed to the Silicon Valley startup model. Nigeria also funds more startups than any other African country. According to Crunchbase research, of the 22 African-led and located VC funds formed since 2016, roughly ten are Nigerian. 

A few factors make the tech landscape uniquely positioned for exponential growth in Africa in the coming decade. According to the African Development Bank, 55 percent of sub-Saharan Africa’s economic activity as of 2016 is informal, meaning that it is not taxed or monitored by any governments. We will inevitably see VC-backed startups hustle to scale projects in every corner of the informal market for things like enterprise software, small business banking, affordable third-party logistics, internet access, or even commercial drone delivery—things that are too risky and regulated to take off anywhere else. Tech applications for African socio-economic and infrastructural problems prove to have unforeseen opportunities for foreign markets as well. M-Pesa mobile money, invented to address the lack of brick-and-mortar banks, has been used as a case study for digital payments globally. Ushahidi was even used in the 2012 US presidential election. The African community at large is also recognizing that technology is intimately linked to development. Countries such as South Africa, Botswana, and Kenya are urging other African governments to enact ICT policy and infrastructure. Nigeria, Ethiopia, and Ghana are rapidly adjusting, striving to attain to the famed success of the Silicon Savannah.

A unicorn is a nearly impossible thing to catch, yet it is magical. When Sequoia Capital moved into China, instead of taking the typical route of setting up shop and waiting for entrepreneurs to come to them for money, they established a Chinese team of investors who, being already accomplished entrepreneurs, understood China in a more intuitive way. The team included Neil Shen—founder of C.Trip, the largest online travel agency in China—who spotted and invested in Alibaba back when Jack Ma was only a Harvard reject. Sequoia caught the unicorn the smart way. Foreign VC firms in China always fare better when they incorporate locals into the inner workings of the startups they fund. 

When foreign VC money enters Africa, as it will in the trillions in the coming 20 years, it will need to adopt a similar approach. Given the particular investment challenges posed by many African countries, whether resource scarcity or political instability, international VC-firms will need to not only partner with African entrepreneurs when looking for value, but also let them take the wheel. The lions are on the horizon, and amidst the pessimism about the state of some African countries stirs the beginnings of revolutionary tech giants and global tech solutions. With all that has been achieved in the last ten years, African preeminence in the global tech-economy is no longer a matter of if, but when.