How Africa can attract tech investment beyond ‘Big Four’

AFRICA’S “big four” countries — Kenya, Egypt, South Africa, and Nigeria — continue to lead as markets that have long captured attention from global investors, securing 87 percent of all startup funding in Africa in 2023.

However, there is a need for venture capitalists to redirect and explore untapped potential in other parts of Africa’s techpreunerial landscape.

While Africa recorded a slight dip in funding and deal count in 2023, the tech industry activity in Africa’s venture capital ecosystem is still very strong and promising. In contrast to other developing nations, Africa’s resilience is distinctive, and success doesn’t necessarily hinge on capital-rich environments.

Amidst the well-known challenges associated with the global macroeconomic environment such as high interest rates, currency devaluation, inflation, and layoffs, the Partech Africa Report attributed the funding contraction to two key factors. Firstly, startups adopted conservative capital raising strategies, prioritising cash efficiency over fundraising due to a significant decline in valuations and heightened economic requirements.

Secondly, there was a notable withdrawal of investors from the market, with a 50 percent decrease in the number of investors participating in funding rounds in Africa in 2023 compared to the previous year. This decline was particularly pronounced among major institutional funds, which typically play a significant role in driving larger funding rounds.

Furthermore, the decline in global IPO volumes and proceeds is reported to have shifted the focus towards outright acquisitions as the primary avenue for investment.

Despite the ongoing challenges faced by global venture capital, a broader perspective quickly nullifies concerns of suboptimal growth in 2024. Africa remains one of the fastest-growing VC markets globally, proving bullish amid an unfavourable macroeconomic climate.

While West Africa continues to attract the highest volume of VC deals, North and East Africa follow closely in deal signings, overshadowing Southern, Central, and other multi-regional areas.

The increased number of entrepreneurs and startups in Africa, coupled with the development of unique and innovative mass-market solutions by start-ups, contributes to the growing interest from global investors in African startups. The expansion of players investing and operating in the industry is driven by a combination of factors, highlighting the dynamic and promising nature of the African venture capital landscape.

On the other hand, foreign investors outnumbered local investors, with Africa-based investors accounting for slightly less than a quarter of the total number of investors active in Africa.

However, in an industry-first accomplishment, the number of investors that took part in VC deals on the continent topped a thousand across both venture capital and venture debt deals. Despite these statistics, the emphasis on this reliance is diminishing in conversations, as attention pivots toward the benefits accrued by tech entrepreneurs and the broader economy.

It’s an indisputable fact that investment revolves around calculated risk and the probability of returns. Meanwhile, Africa continues to exhibit the characteristics of a fertile ground for innovation. Unfortunately, non-“Big Four” countries continue to receive smaller percentages of funding.

This then calls for key stakeholders, such as investors, founders, incubators, accelerators, governments, and regulators, not solely within Africa but globally, to scrutinise vulnerabilities in the tech-funding sector. It is imperative to safeguard more investors who are exposed to remarkable start-ups across the continent. Unquestionably, providing fiscal and non-fiscal incentives for venture capitalists to invest in the financial and tech sectors will propel investments in the continent.

Essentially, there is an urgent need for an increased number of proficient data scientists, software developers, data engineers, analysts, and other data professionals to meet the growing demand on the continent. Africa needs to establish initiatives and revitalise the education system to align with this demand.

While acknowledging that the realisation of this need may require time, the government must invest in benchmarking. By learning from developed countries, Africans can acquire valuable insights and skills, subsequently applying them to benefit the continent.

There is a need to transform non-“Big Four” countries into appealing destinations for startup investments. Countries can leverage the African Continental Free Trade Area (AfCFTA) as a tool to attract investments.

Through the AfCFTA, African governments, including those in non-“Big Four” countries, can draw increased start-up funding by reducing investment barriers and enhancing investment governance within their respective countries.

However, before venture capitalists can venture into the space, it is essential to acknowledge that Africa is not a uniform market. African markets are unique, and the constraints also differ. Issues to do with infrastructure limitations, regulatory requirements, and socio-economic factors, therefore necessitate a tailored approach for each region. The aim is to extend investments beyond the “Big Four.”

This in return calls on African governments to enhance their legal and institutional environments to foster a hospitable investment ecosystem for both investors and start-ups. - African Business

THE success of efforts to deepen intra-continental trade, including the landmark African Continental Free Trade Area (AfCFTA), depends in large part on the existence of cross-border payments systems. However, despite the success of mobile money on the continent, cross-border payments still add unnecessary costs and delays to businesses and individuals, industry leaders claim.

During the Africa Prosperity Dialogues in Aburi, Ghana, panelists called on governments and regulators to accelerate efforts to build robust inter-country payments systems to support intra-continental trade.

Ernest Addison, governor of the Bank of Ghana, said that expanding mobile money access, “could empower the underserved populations with essential financial tools to help unlock opportunities for savings, loans, and secure transactions, as well as promote economic stability and growth.”

Quoting McKinsey, Addison noted that Africa’s e-payments industry generated approximately US$24 billion in revenues in 2020, even though it accounted for a mere fraction of all payments. This, he said, shows that “e-payments have the potential of being a major growth pole for Africa.”

Cross border payments, however, continue to be hampered by legacy challenges, including inadequate payment infrastructure, inconsistent regulation, limited policy coordination and user education, and security and fraud concerns. Addison pointed to the Pan-African Payment and Settlement System (PAPSS), an initiative of the African Export-Import Bank, as an ideal solution to facilitate efficient and secure financial transactions across borders, stressing its potential for scalability and innovation in cross-border trade.

As at the end of 2023, 12 central banks, including those from the West African Monetary Zone (WAMZ) and the East and Southern Africa regions, had joined, with others on the verge of signing on to the platform.

Industry claims lack of political will

Patricia Obo-Nai, chief executive of Vodafone Ghana, noted that operators had been able to solve the problem of interoperability in-country, meaning that money can be sent from one network to the other seamlessly.

However, the inability to do so across borders takes a toll on customers who are unable to send money to family or business associates in different countries. For some customers this means making withdrawals and sending money through offline methods.

“What we have done is take away the ability to build a digital footprint,” says Oba-Nai.

That means, she said, that many customers have no records that could help them access loans and other financial products.

Obo-Nai acknowledged that regulators have concerns including data privacy, security and exchange rates but said that mobile operators are able to address these concerns. For example, she pointed out, mobile operators are able to charge customers roaming on their network while away from their countries of origin. This indicates, she says, that the main barriers are of governance and political will, rather than operational issues.

“The big one is just the political will to be able to do it. If somebody takes ownership and says, I want to make this happen. I am confident it will happen,” she stressed.

Eli Hini, chief executive of MTN Mobile Money, Nigeria, said that progress in Ghana showed what is possible elsewhere.

“We have been able to enable interoperability in Ghana and now no one is worried about settlement because they know that process has been taken care of. That is what we need to achieve across Africa,” he said.

Regulators will need to sit down to discuss the key issues and determine the protocols to put in place. He added that it will be necessary to ensure that the barriers for participation are lessened for small businesses.

“We must make it easy for them to participate in the conversation around requirements and that they can meet those requirements because they are the ones who struggle every day to trade across borders,” he emphasised.

While lots of investments have been made in payment infrastructure, Angela Wamola, head for sub-saharan Africa, GSMA, pointed out that only 60 percent of the capacity that is available is utilised by customers.

Even though this is an improvement on 2014, when only 12 percent was in use, Wamola questioned whether investors would be encouraged to deploy resources towards systems that would take 10 or 20 years to reach usage capacity. “We have to ask ourselves a difficult question. What is it that we are not doing that is not allowing the infrastructure, the capital that has been employed to be utilised?”

Technology, she said, is the least of the problems, pointing to the east African region, where it has been possible to “roam like home” for a decade, something that has not been replicated in the other regions.

“What we need to do is to make use of the legal frameworks and systems that we already have to make it possible for people to work and get their money in a way that is safe, secure and convenient because that is what interoperability is about,” she charged.

Private sector disruption can set the pace Lacina Koné, CEO of Smart Africa, challenged operators not to be constrained by regulators but instead to focus on innovations that bring convenience to their customers.

“If Safaricom had waited for the regulators in Kenya to allow MPESA, it would never have happened,” he argued, adding that “the operator followed choices…then the rules, that is the regulator, followed”.Governments, he said, are not positioned to make the rules until the innovations are actually in place, as had happened with the iterations of mobile technology up to 5G. Innovators must thus focus on disruption and device solutions to the challenge of cross-border payments. —African Business