Why native African investors are shying from backing local tech startups and why this should change

photo credits: tuscorlloyd.com

In May of 2000, The Economist in no subtle terms labeled Africa ‘The Hopeless Continent’. Making up its mind that the continent was gone to the dogs. Ten long years later they changed their tune; the cover now read, ‘African rising’ and later in March 2013, ‘Aspiring Africa’.

Africa has changed the narrative, defying all odds to become the rather new and most exciting investment frontier in recent times for investors around the world; it is particularly exciting for investors who fancy emerging markets, risks and all.

The rapidly growing tech sector is one of the fields that has been on the receiving end of millions of dollars in investment and is likely to receive even more in the future. Despite the evidence of growth and interest from foreign investors, native African have actively shied away from tech startups, choosing instead to pump their money into more traditional sectors such as real estate. This article investigates the reason why this is a pattern that has repeated itself for years on end and highlights the biggest reasons why this should change.

According to the International Finance Corporation, IFC ’s regional head Wale Ayeni, it is surprising that the obligation to support Africa’s startups has been left squarely on foreign capital due to a lack of local funds to invest in tech entrepreneurship. “Africa is the youngest continent and more than 60% of the population is below the age of 24. Who is betting on the local youth?” he ponders.

The dominance of foreign capital on the African investment scene is set to continue because tech sector is still in its infancy and seems alien to what is the norm, while investments by locals are usually focused on the more stable infrastructure industry.

Foreign investors are all but fazed when it comes to risk, according to Omobola Johnson, a Nigerian technocrat and senior partner at TLcom Capital, “The truth is that a lot of the money is going to come from outside the continent because they are more used to that VC risk that we’re still trying to get used to in this part of the world.” But she says that as more investments and more successful companies spring up, they will validate the need for more domestic capital.

The intangibility of technology also doesn’t do much to help the situation. Compared to infrastructure, you cannot physically see or touch software and though the manifestation of the software is apparent, most people still do not understand how it works. This is also a barrier towards investment in the local tech scene.

Africa has the talent, but the continent’s start-ups are scrabbling for a tiny fraction of the global venture capital pie. Governments and local investors need to step up so that funding can keep pace with the ideas

It is a gloomy thought to think that natives have so little faith in local tech, but I am strongly convicted that this is bound to change in the future. This is because of various factors that actively contribute to its growth such as; A large educated labor force, that is more willing to work for cheap than anywhere else in the world. The population on the continent is to experience a demographic transformation over the next decade, that will see the majority of the population consists of individuals in their 20s to 30s. Typically the most energetic and productive years of one’s life.

According to the UN World Population Prospects report, Africa will be the fastest-growing continent over the course of the 21st century. This is the upside to being last to develop, the only way for Africa is up come what may.

Of course, investing in Africa comes with its very own set of unique challenges (as with investing anywhere else). One of the major challenges is political instability shared by some of the countries in the continent, rampant and overt corruption (most recently, Kenya’s US$ 100 Million corruption scandal); corruption happens at all levels of the value chain which seriously hampers the development of whichever industry it occurs in. Poor internet penetration, high data costs and a swathe of other non-available infrastructure.

These, nonetheless, have not crippled the growth of the continent’s economy and is unlikely to do so in the time to come. The startup revolution may be slow but it is happening. If there was ever a better time to invest, I would say better sooner than later.