Separating Hype From Reality in the Fizzy World of Africa Start-Ups – VC4Africa Survey Findings [analysis]

It’s hard separating hype from reality in the current African start-up sector so it’s always good to get some facts to hang on to. VC4Africa’s latest annual study Venture Finance in Africa 2015 provides a useful look at a key part of this fizzy sector. Russell Southwood spoke to researcher Thomas Van Halen about what it all means.
VC4Africa is a site that promotes linking investors to African start-ups in that graveyard of all entrepreneur hopes, the so-called equity gap between US$50,000 and US$2 million. It has gone from being a rather unpromising looking LinkedIn group in Spring 2008 to becoming a significant investment “dating” mechanism.
Its annual survey is based on a survey of 1,300 entrepreneurs on its website platform, of whom a respectable 19.8% (257) responded to a questionnaire. It is as Van Halen puts it:”A nice snapshot of our target group … 80% of our members have IT related products and services. Farmers producing agricultural product won’t be on the platform.” The sample is fairly well balanced between companies in the start-up and growth stages: 57% of the ventures are in a startup phase where 43% are in a growth stage.
It represents a very useful description of the sharp-end of the African start-up sector. Their start-ups are spread across 16 areas (in declining order): Computer Software (24%), Internet (21%), E-Commerce (17%), Agribusiness (17%) Education (14%), Media (12%), Professional / Diversified Services, Health Services, Clean Technology, Financial Services, Food & Beverages, Renewable Energy, Telecommunications, Computer Hardware, Leisure, Transportation, Import/Export, Retail Construction and Real Estate.
This represents an impressively wide spread of industry sectors and the fact that e-commerce is in the top 3 shows that it is firmly on the agenda to happen in Africa. Thirty percent of the registered ventures have an explicit social mission and could be qualified as a social enterprise. This represents both the laudable desire to address the development issues of the continent but also the impact of donor funding. The cruel question is how many start-ups would address these issues if that money was not on the table?
So where are the biggest geographic clusters of start-ups?:”Most of the companies come from Kenya, Nigeria and South Africa but there’s a growing number of them from Ghana, Egypt, Tanzania and Uganda.” And what does Van Halen think are the conditions that produce these clusters?:”Culture? Incubators and accelerators? It’s a hard question to answer. More and more success stories lead to new angel investor groups in these areas and this (in turn) makes people want to work on new products. It happens by example.”
Leaving aside North Africa, this geographic distribution of countries almost perfectly mirrors a listing that combines highest GDP per capita and population size. On that basis, the missing countries in terms of number of start-up respondents are Angola, Ethiopia and Sudan.
Angola and Sudan might be explained by the impact of oil on the expectations of the young and relatively unsupportive Governments. Ethiopia is constrained by the hopelessly unsympathetic environment of Government policy and an inefficient telecoms monopoly which makes anything online difficult. For me one surprise is Zimbabwe (only 2 respondents) which seems rich in certain kinds of cultural and media start-ups but again start-ups there operate in a difficult economy.
But the unsaid thing is that the start-up clusters happen in economies that are large enough to have three things1) significant numbers of mobile broadband and internet users; 2) a middle class of some significant size; and 3) larger companies that might support B2B type applications.
Smaller countries that lack these things find it hard to create the soil in which to grow start-ups. From my recent visit to Mali, the interview I did with Rene Gaudin of co-working space Jokko Labs describes some of constraints for start-ups working without these things.
Fernando de Sousa, Microsoft (which is significantly involved in this space) identifies the difficulty of trading across countries as a significant barrier and by implication one that affects smaller countries disproportionately. It may only be just over an hour by plane to Dar es Salaam and Uganda but it always surprises me how many Kenyan start-ups stick to their home turf. And this happens in one of the better-organized African trading spaces, the East African Community. Likewise, too few South African start-ups go north.
In terms of jobs, survey respondent companies had created an average of 5.7 jobs per company with a total of 1011 by the end of 2013. The projected jobs by the end of 2015 was estimated at 4,176, over four times the current level. 70% of the companies have generated revenues but they were not asked about levels of profitability, something that should have occurred with the earlier respondents who have been around since 2010.
On the investment side, the survey showed that US$26.9 million had been raised through a combination of founders, internal and external capital. The responses seem to indicate that those who went through accelerators or attended accelerator events had raised significantly more capital.
So what did Van Halen think caused African start-ups to fail? This was not in the research but on an anecdotal basis, he felt that there was often something wrong with the team that sometimes led to conflicts with investors.
Another barrier is not understanding what’s involved in getting investment, something that VC4Africa was set up to overcome:”There’s a gap between the moment when the venture registers and when it’s ready. We are working with Orange and Citibank to raise the quality of ventures through virtual incubation programmes. We provide help to them to tell their story and write investor briefs.”
To know more about VC4 Africa programmes, click on the link.

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