The technology landscape across Africa has been on an impressive upward trajectory, with several novel technology powerhouses surfacing and the tech start-up scene experiencing a speedy expansion. In contrast, Europe’s technology sector, following an unprecedented peak in 2021, encountered a noticeable downturn in 2022. The economic predictions hint that 2023 might continue to pose challenges. Given this backdrop, one might ponder: Could Africa be the next big frontier for technology investments?
The Resilience of African Tech
In 2021, the world observed record-setting activities in global mergers, acquisitions, and funding. Mirroring this trend, the African tech scene also made substantial strides, with its start-ups drawing in an impressive $4.77 billion in investments and a minimum of five tech unicorns making their grand entrance. This upward trajectory continued into 2022, a year in which African tech entities defied the international slump in venture capital funding. While global VC funding saw a 33% drop year-on-year in 2022, Africa’s tech ecosystem experienced an 8% funding growth.
Henry Ojuor, the Program Director at start-up bootcamp Afritech, associates this tremendous expansion, especially in recent times, with a combination of several internal and external dynamics. On the home front, factors include the youth-dominated demographic, the evolution of the telecoms infrastructure and mobile technology – marked by the spread of affordable internet devices and steadily improving internet accessibility and speed. There is also a discernible shift in how start-ups and their founders are viewed, influenced largely by the global exposure to different ecosystems.
African Tech PR expert, Olugbeminiyi Idowu, points out that Africa is uniquely placed with a fantastic blend of opportunities and a talented population that makes the continent an ideal hub for entrepreneurship and innovation. The continent also has widespread sectors yet to be fully served, thus offering numerous sectors that are ripe for disruption.
Echoing similar sentiments, Yemi Olulana, CEO of Flex Finance, highlighted the growing opportunities for B2B tech solutions. The blossoming economy and middle class in various African countries have spurred an increased demand for goods and services. As a result, there are plentiful opportunities for B2B tech solutions. As businesses in Africa increasingly recognize technology as a key driver of growth and competitiveness, there is an upward trend in investments in digital solutions. These solutions not only streamline their operations but also help them tap into new customer bases.
Further, international businesses have shown increased interest in venturing into the African market, relying on the innovative solutions provided by African tech start-ups and B2B firms to navigate unique operational challenges in the continent.
These factors collectively are driving the demand for B2B tech solutions in Africa, a trend that holds the potential to sustain economic growth and improve the lives of people across the continent. The demand for digital solutions is set to rise with increasing mobile and internet penetration.
The African tech environment is primed for further innovation and investment. This trend has already yielded fruitful results, with many successful start-ups and unicorns emerging in the region in recent years. With supportive policies and investment, the African tech sector stands poised for sustained growth and innovation in the future.
The Expanding Influence in African Tech Investment
Despite the positive divergence from global trends last year, Africa’s tech investment landscape has been predominantly shaped by four countries. Data from the World Economic Forum indicates that Nigeria, Egypt, Kenya, and South Africa were collectively responsible for an astounding 92% of African tech investment in 2021. Of these, Nigeria has particularly been instrumental in propelling tech growth in the continent.
Nigeria’s tech sector’s growth owes largely to the country’s vast population and economic influence, which accounts for over half of Africa’s Gross Domestic Product (GDP). This has propelled Nigeria into the lead within the African start-up ecosystem, boasting the most tech unicorns and the most significant venture capital funding in the past half-decade.
English-speaking countries have been particularly successful in establishing critical regulatory frameworks and infrastructure, fostering innovation, and attracting investor attention. To illustrate, Nigeria possesses the world’s sixth-largest instant payment system through the Nigeria Inter-Bank Settlement System (NIBSS), outpacing even the United States. Such innovation has been crucial in propelling the swift growth of Africa’s tech ecosystem.
Interestingly, Francophone countries are starting to make their mark in the tech arena as well, with tech unicorn Wave, a mobile money platform, setting up headquarters in Senegal. According to the 2022 Partech Africa Tech Venture Capital report, 13 of the 28 countries that secured equity funding in 2022 were Francophone African nations. Excluding the top four countries, Francophone countries captured 49% of deals and 38% of funding, indicating a growing trend.
Historically, African tech has been dominated by English-speaking countries, primarily due to local incentives and the nature of the global VC space. Francophone countries had an abundance of grants and ‘free’ funding opportunities from Development Finance Institutions (DFIs) and institutional partners, which often fostered an ecosystem centered around securing available free funding.
Moreover, the global tech ecosystem, dominated by English-speaking countries like the US and UK, influenced Francophone Africa less directly and at a slower pace. However, this trend is evolving. ‘Free’ funding is gradually giving way to incentives that promote the development of scalable and sustainable tech-enabled businesses, and global VCs are entering the Francophone markets with growing confidence.
The majority of the funding that has fueled Africa’s ecosystem’s growth originates from global investors. However, several nations outside the big four have also significantly contributed, either directly or indirectly. These include countries like the US, UK, China, Japan, Korea, France, Germany, the Netherlands, and the EU.
Eugene Tawiah, CEO of SecondSTAX, attributes the growth to the emergence of incubators within Africa and abroad, which have caught the attention of international venture investors. Companies like Andela, a pioneer in talent development, have served as a model for focused training and skills development, thus fueling start-up ideas across Africa.
Therefore, entrepreneurs no longer need to work solely for big tech in the US and other places. They can deploy their talent and innovation within Africa, driving growth. Though the African tech ecosystem is still smaller than Europe’s in terms of overall size, if more African countries start attracting similar levels of funding to the big four, the potential growth of its tech ecosystem could be tremendous.
The Role of Governments in Nurturing Africa’s Tech Ecosystem
Optimizing the growth of African tech largely depends on how effectively individual governments can foster environments where companies wish to operate and investors desire to fund. As previously mentioned, flexible legislation and regulatory approaches play a significant role in creating such an environment.
One of the leading countries in Africa’s tech landscape, Nigeria, has recently taken a notable step by announcing a $618 million fund dedicated to supporting its tech and creative industries. Furthermore, the legal landscape is changing to favor tech start-ups, with three countries already having passed start-up Acts and 16 others in the process of drafting and approving theirs. These acts aim to make operations easier for tech start-ups, which signals positive future prospects for Africa’s technology ecosystem.
Historically, African countries have received substantial support from their governments through regulatory interventions. These interventions have involved special provisions to accurately define start-ups, thereby granting them access to opportunities previously beyond their reach. This has resulted in the launch of new business models. The evolution of this flexible dialogue process between the start-up community and regulatory/legislative institutions has led to the adoption of start-up acts.
However, regulatory bodies often display inconsistency, reversing previously endorsed mandates, which increases uncertainty for new and growing tech businesses that need stable regulations to succeed.
For tech businesses to truly thrive, they require uniform laws and incentive structures akin to those established by extractive industries, including tax incentives. They also need streamlined processes for incorporation and access to capital. These elements can significantly influence entrepreneurs’ decision to set up a disruptive tech business in a particular country.
Therefore, it is critical for governments to drive these key initiatives to ensure the sustained growth and productivity of start-ups across Africa. These actions can mitigate uncertainties and promote a more stable environment for the burgeoning tech industry on the continent.
The Promising Potential and Emerging Challenges of African Tech
With progressive legislation being enacted and the recent rise of francophone countries, the African tech sector seems poised for a period of growth and prosperity.
A report by Endeavor Nigeria estimates Africa’s digital economy to be currently valued at $115 billion and anticipates it to surge to $712 billion by 2050. According to the same report, Africa will house a third of the global youth population by that year, and by 2025, one out of six internet users worldwide will be in Africa. The COVID-19 pandemic has also expedited digital transformation across the continent.
These dynamics have caught the attention of investors, drawn to the potential of African tech. There is also increasing evidence of successful exit strategies for early investors, thanks to the rise in mega-rounds, liquidity events, and unicorns.
A recent survey of 4,500 Africans revealed that the current surge of tech innovation in Africa is changing the continent’s perception. The majority (84.6%) agreed that recent advancements in African technology have positively impacted their view of the continent. Moreover, the report found that most are likely to use African-made technology solutions and perceive Africans as innovative and entrepreneurial.
Despite the global economic downturn, Africa has been relatively insulated from its immediate impacts. However, this recessionary environment has made attracting funding challenging for tech companies, and Africa is not without its unique difficulties.
Africa faces a growing debt burden that governments are struggling to manage in order to maintain access to international capital markets for infrastructure projects. In contrast to other regions where the tech ecosystem addresses issues atop well-established infrastructures, Africa is still in the earlier stages of foundational infrastructure development.
The current recession creates a challenging environment for fundraising, a crucial lifeline for many start-ups operating in Africa. As funding sources become scarce, or investors hold off due to economic headwinds, a few Africa-based start-ups have already had to close their doors. However, local angel and venture funds are beginning to pay attention and invest more in new start-ups in the African ecosystem, helping to buffer the slowdown in funding from external parties.
In the context of investment in Africa, a long-term perspective is essential. Softbank’s successful $20 million investment in Alibaba in 2000, which grew to an astonishing $100 billion by 2021, serves as an example of the rewards that patience and strategic foresight can yield.
Just as Softbank saw potential in China, investors today have a similar opportunity with Africa. Though the current economic recession might deter some, it may also open opportunities for investors with long-term vision and conviction. By focusing on supporting sustainable, innovative businesses that can withstand challenging times, these investors are likely to reap significant returns over time.
In 2023, African tech will undoubtedly face challenges, but the growing digitization, improved regulation, and rising entrepreneurs from beyond the traditional “big four” countries appear to be shifting perceptions and fostering an environment poised to continue outperforming global trends. While parts of Africa’s tech ecosystem remain underdeveloped, the potential for African tech is vast if the right infrastructure continues to be established and investors adopt a long-term perspective. If these factors align, African tech could indeed make a monumental leap forward.
Are you an entrepreneur, a start-up or a SME with the goal to start up between or in Africa and Germany? Then our team will happily assist you on the legal side! We are specialized both in supporting multicultural businesses in Germany, in supporting African businesses in Germany and in supporting businesses across various African jurisdictions. While our support starts with providing help on immigration and relocation matters, it does not stop there – taxes, tech, intellectual property…You heard us! Contact us today to find out more!