Decades of international aid have failed to make a meaningful impact in Africa. But startups across the continent, particularly in Lagos and Nairobi, are giving reasons for optimism about the future. Can they produce results where aid failed?
Introduction
Africa's borders, politics, and economies of the present day trace their roots in large part to the continent’s period of destructive colonization, but that legacy won't define the continent forever. In the mid 20th century, waves of independence led to the formation of dozens of new states in a relatively short period of time, unlike anything world history had seen. Almost overnight, these countries were expected to have functioning political, economic, and social systems after decades (and in some cases, centuries) of infiltration, dominance, and extractive practice by foreigners.
In a well-meaning effort to assist these newly-minted nations with their development, the international aid model followed. While it had good intentions, research suggests that in the long run, this model has not helped the continent, and at worst, has encouraged some of the worst practices, from corruption to governments being unaccountable to their own people to propping up dictatorships and funding violence. As Dambisa Moyo puts it in Dead Aid: One trillion (US) dollars and fifty years later, the aid model has failed the continent.
This outside-in approach discounted the resourcefulness of Africa and its people. And while the continent faces many inherited and new challenges, there is a reason for optimism about the future:
Integration efforts are picking up speed, from the African Union’s (AU) African Continental Free Trade Area (AfCFTA) and Free Movement Protocol to subcontinental efforts like regional economic communities (RECs). We’ve covered the AU, AfCFTA, and RECs in our #Africa101 series, which offers explainers on issues, efforts, and trends that are essential for understanding the continent.
Africa has a booming – and very young – population, which is set to double by 2050. In the coming decades, and as industrialized nations continue to struggle with growing and maintaining their own populations, the world will not be able to ignore the power of the African workforce. We've previously covered the rapid urbanization of African cities, another key trend to watch in coming years.
And as we’ll discuss in this article, a fast-moving and quickly-growing tech scene is spawning startups across the continent, attracting significant international interest and investment, and helping develop economies, solve urgent problems, and empower a new generation of Africans.
Africa’s tech sector has coalesced around the “Big Four”: Nigeria, South Africa, Egypt, and Kenya. Collectively, these countries received 81% of the continent’s investment funds in 2021, or nearly USD 3.9 billion. While Johannesburg, Cape Town, and Cairo have long been hubs, cities like Lagos and Nairobi could be pivotal to driving future tech development in Sub-Saharan Africa. While 2022 was a difficult year, the continent produced four unicorns in 2021 (startups valued at USD 1 billion), with three in Nigeria alone.
Decades of aid may not have meaningfully moved the needle on continental development, but could homegrown tech startups help drive the it forward?
Tomorrow’s tech lions: Lagos and Nairobi
Globally, the digital economy is growing 2.5 times faster than GDP. In Africa, the trends are even more accelerated: The number of total internet users has doubled since 2015 – to roughly 570 million people. Lagos and Nairobi appear poised to reap the benefits (Nigeria experienced the largest leap in internet users and now boasts 100 million of them), and foreign companies have taken notice. In 2022, Microsoft announced new offices in both cities for the African Development Center, hubs for developers that promote “ideas, innovation, and learning.”
Closer look: Nigeria
As mentioned, Nigeria has produced several unicorns in recent years, which has put the country on the venture capital map. Its tech sector is valued around USD 9 billion, and the city’s government is keen to help this sector grow to 10% of its GDP in the coming years. But changing data protection laws and regulations have been a stumbling block for the country, and recent success stories have turned into cautionary tales.
Case in point: Jumia. A logistics, e-commerce, and payment service founded in 2012, Jumia was the first African tech firm to list on the New York Stock Exchange just five years later. But “vanity metrics, an obsession to list instead of fixing problems, and a problematic workplace culture” saw the company grow too quickly and fall from its great heights. At its peak, it was valued at USD 4 billion. Today, it has shed nearly 90% of that value.
But Jumia’s story has not overshadowed the industry at large or reduced the need for tech forward solutions. With a massive informal sector across the continent often estimated to be an unrealized 40% of countries’ GDP, fintech continues to be an area of interest.
Flutterwave is another homegrown Nigerian success story. The company has revolutionized payment services across the continent in one platform, serving both businesses and individuals (and like Jumia became a unicorn in five years). It landed on Y Combinator’s list of top companies for three years in a row and has adeptly navigated legal and financial challenges in other African markets, most recently receiving the all clear to again operate in Kenya and expand into Egypt.
While Jumia and Flutterwave have received a considerable amount of press attention, the Lagos ecosystem boasts other successes, including:
Mobile payment platform OPay, which secured a USD 400 million Series C round in August 2021, taking its valuation to USD 2 billion
Leveraging the Nigerian diaspora: Founded in 2012 by Dr Adetunji Adegbesan in London, Gidi Mobile, is helping low-income students in Nigeria access online learning by providing a gamified experience and attempting to compensate for Nigerian government’s severe underfunding of education and reach the over ten million children that are out of school.
Entrepreneurs paying it forward: Successful local founders like Olugbenga Agboola (Flutterwave, previously mentioned), Gregory Rockson (mPharma), and Shola Akinlade (Paystack) are also re-investing into other startups and creating a virtuous feedback loop in the country.
Progressive government plans (though implementation remains to be seen): The Nigerian government has also been proactive, with plans to transform Lagos into a smart city through the addition of thousands of kilometers of fiber cables and broadband infrastructure and the Nigeria Startup Bill which aims to create a new framework of regulations to support the tech and digital economies.
While on paper, this is all great news, it remains to be seen how it will all play out. The global financial shudders in early 2023, especially the collapse of Silicon Valley Bank, could have a disproportionate impact on financing strategies for African companies. Additionally, in Nigeria, corruption remains high and government effectiveness low. These promising steps could easily be derailed if implementation falls short or the government seeks to bar certain technologies.
Closer look: Nairobi
In eastern Africa, Nairobi has become a tech hub in its own right. And while it cannot compete with Lagos on volume alone (Lagos has a population nearly four times larger), it hosts a more mature tech scene with nearly 200 startups and multinational regional headquarters for Google, IBM, Intel, and Microsoft. A strong domestic tourism sector means the city boasts a well-connected regional airport, better infrastructure than Lagos, and diverse communities to give ambitious startups a leg up on the international scene.
Photo: VIP tour to the innovation hub (the iHub), Nairobi, Kenya (ITU Pictures/ Flickr)
Perhaps the best known success story in Kenya is the one that has streamlined a seemingly small but fundamental societal issue: micropayments. M-pesa is a mobile phone-based money transfer service that was launched in 2007 by Safaricom that allowed Kenyans to send money to family in rural areas with the same tech that sends an SMS. Previously, money had to be exchanged physically, necessitating long and often expensive trips for an individual to deliver funds to family.
M-pesa changed the way money flowed and eventually added features for bill pay and borrowing money. As of 2022, it was estimated that nearly 50% of GDP was flowing through M-pesa – an enormous shift in just fifteen years. And this is not the only venture making waves in the country:
Nairobi online-processing company DPO Group also made headlines in July 2020 when it exited at USD 288 million.
iHub, founded in 2010, aims to continue this cycle, accelerating the region’s tech industry, by bridging the gap between innovators and resources they need. It provides coworking space, programs for entrepreneurs and innovators, software development services, and mentorship programs in partnership with IBM and Oracle.
For its part, the government has made strides to encourage the growth of this ecosystem. In 2020, a StartUp Bill was introduced with the goal of encouraging entrepreneurial growth and to create a more favorable environment for innovation.
A year later, the Federal Development Ministry launched develoPPP Ventures to empower Kenyan startups by providing grants of up to EUR 100,000 (USD 106,000).
However, it’s not all been smooth sailing. In October 2022, six promising startups failed in quick succession, including BRCK. The company had gotten its start iHub, launched free WiFi in public transport, and even received funding from Facebook. But it was no match for knock-on economic effects of the pandemic which have weakened the sector in Nairobi. The African Development Bank has predicted that “Africa’s growth is likely to stagnate at around 4 percent in 2023,” and while the continent produced five unicorns in 2021, zero emerged in 2022.
Obstacles to overcome
While the trends in Lagos and Nairobi are encouraging, there are some limiting factors and obstacles that could derail their development. Is the sector really poised to change the continent in coming years, or is it just hype? We've identified the following limitations to keep an eye on. How each city (and country) deals with them will greatly shape which narrative emerges.
First and foremost, data protection and privacy will be key. Governments are unlikely to move quickly on establishing guidelines, given the varying degrees of development across the continent. This, coupled with the fast-moving nature of tech startups will only compound the problem. A related concern is cybersecurity: Given the connection of millions upon millions to the internet, phishing, fraud, and identity theft could be set to explode as a new generation of internet debutantes goes online.
Economic disparities persist (within Africa and between Africa and the rest of the world). Simply put, Africa doesn’t have the purchasing power of other regions, and this is already guiding what kind of startups are flourishing (as we've discussed, there has been much activity with cash payment services, fintech, e-commerce, etc.). Additionally, many countries on the continent are saddled with high data and internet costs, making adoption of services slower. The kinds of tech that will flourish in Africa will be different than those in Silicon Valley and elsewhere. Will they be able to attract the kind of capital needed to scale up quickly and effectively?
Stereotypes about the continent hinder startups. Companies like Chipper Cash from Ghana initially faced ignorance from investors who didn’t understand the maturity of some African markets, especially when asking questions like, “Why don’t you talk to Unicef or an impact investing firm?” Entrepreneurs will continue to face bias about the potential and capabilities of African talent and companies, even with more unicorns being minted each year.
Critical infrastructure is missing or incomplete. While foreign investment has initiated many projects across the continent, large gaps remain in physical and digital infrastructure. This will continue to make it difficult for startups specializing in logistics or requiring reliable transport corridors, but could lead to new innovations or leapfrogging of technology.
Access to energy, as well as reliability, will also directly impact the growth potential of organizations. Case in point: Twitter said it didn’t choose Nigeria for an office because of electricity supply issues.
Regulations differ between countries, and internal protectionist measures can favor longer-standing industries. We see this through governments protecting old guard companies threatened by new e-commerce ventures, and it was especially prevalent in the South African government’s bizarre decision to “ban unfettered e-commerce” during the peak of Covid-19. What other reason than to protect legacy service providers? Additionally, a lack of coordination amongst nations when creating policy will lead to difficulties in operating transnationally.
Gender disparities: Female startups garner less. “There’s a significant difference between how much money is going to all-male founders versus teams that have women founders or all women,” says Isis Nyong’o Madison, Co-founder of Womenwork. According to her, it’s single digits. This pattern has been backed up time and again with research into wage disparities by The World Bank and access to finance by the IMF.
Looking forward
While we’ve outlined a number of obstacles, the tech and startup sector could yet provide the homegrown boost the continent has long needed – and that decades of aid has failed to deliver. Looking forward, it could also address Africa’s employment woes, especially if companies address the kind of quality-of-life issues that have hindered the continent. For example, the IFC estimates that faster, less expensive internet has “increas[ed] employment in some areas by as much as 10 percent. This rapid Internet expansion has contributed to a 14 percent increase in East Africa’s gross domestic product since 2009.”
The continent also has many favorable factors the rest of the world lacks, and these could be a game changer if properly harnessed. These include:
The youngest population in the world: 70% of sub Saharan Africans are under the age of 30. If they are educated and given opportunities on the continent, they’ll be more likely to stay and contribute to its future.
A 40 million strong diaspora in North America (alone) which could be harnessed through skill transfers, investments, and in some cases appealing to them to “come home.”
An increased push to harmonize regulations and standards across borders, an effort that is gaining momentum with the implementation of the continent’s ambitious African Continental Free Trade Area.
The next decade will see a further sharpening of the continent’s fintech capabilities, and while 2022 produced none, we will undoubtedly be seeing more unicorns on the continent soon. But growth cannot be “business as usual.” Sustainability will be front and center as Africa faces the increasingly dire effects of climate change (which we’ll cover in a separate article).
Final note
We’ve outlined a number of promising developments in just two of the continent’s many urban centers. Like success in the startup sector, there remain many challenges and potential pitfalls. But there is little doubt that the continent possesses the key elements necessary for creating revolutionary digital products and services, doing much more, much faster, than decades of aid ever did.
If you or your business are looking to make moves on the continent, especially in the tech sector, we recommend tracking the markets mentioned in this article. And if you’re interested in a specific sector or market, get in touch with us today to help you create a strategy tailored to your business or organization.