Panel Discussion on The State of African Startup Ecosystems

Title: Panel Discussion on The State of African Startup Ecosystems – Summary 

Authored by Siphosethu Makananda, Intern at Double Feather Partners (DFP) 

As part of the JICA NINJA Accelerators in Africa, DFP, alongside special collaborator 500 Global,  co-organized the “Silicon Valley Olympiad” which was an opportunity for Project NINJA (Next Innovation with Japan) startups and ecosystem enablers to learn from and network with Silicon Valley stakeholders. The 3-day trip to San Francisco from February 2nd to 4th , 2022, culminated in a virtual event which included a startup showcase and a panel discussion about the state of African startup ecosystems. 

To set the stage, Mrs. Sachico Hara, JICA Startup Ecosystem Advisor in Ethiopia, introduced Project NINJA and highlighted JICA’s aim to support the growth of startups that overcome social challenges through innovative business initiatives. 

The panel discussion that followed reveal great insights on the state of African ecosystems based on various experiences from guest speakers from Kenya and Nigeria. The panel included:  

• Mr. Naonobu Fuwa – JICA expert in innovation, competition, and incubation. He also supports the National Center on Artificial Intelligence and Robotics (NCAIR) in Nigeria;
• Dr. Robert Karanja, chair of Association of Startup and SME Enablers of Kenya (ASSEK), who previously spearheaded social entrepreneurship initiatives and impact investment in Healthcare and Life Sciences industry.
• Mr. Justin Ziegler, an angel investor who invests in African startups. In addition to being a Stanford MBA Candidate,  he has experience working at Andela in Africa as Chief of Staff as well as Program Director in New York.
• Mr. Riki Yamauchi, Managing Director at DFP who leads the investment committee for the company’s Africa Innovation Fund and advises local and global startups on business development and investor relation strategies. He also experienced as an Institutional Equity Sales at international investment firms.

The panel discussion was moderated by DFP’s Managing Director (Acceleration) Yannick Gayama in the format of a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) of the startup ecosystem in Africa with the aim of providing an overview of the current situation.  

Strengths 

First, Fuwa san opened the discussion highlighting that each county in Africa has different characteristics which makes summarizing quite difficult. With regards to strengths, from the Nigerian perspective, he pointed out the vibrant youth population as 70% the population is currently below the age of 30. Youth are usually early adopters of innovations invented by startups which provides an edge to Nigeria. The continent has a fairly young population – with over 60% of the population being under the age of 25, making Africa the youngest continent. That said, if this young population is not meaningfully engaged in the economy via job creation or employment (which startups help generate), this young population, compounded with rapid urbanization (900 million people move into cities in the next 30 years) can quickly turn into a double-edged sword.  

The resilience of entrepreneurs was also a strength for Nigeria. Fuwa san indicated that despite the challenging business climate such as high costs of doing business, poor infrastructure, unpredictable government policies and currency devaluation, strong startups still manage to emerge from Nigeria, which implies that they have endured wide range of challenges and are, therefore, resilient and more likely to be well positioned to scale into other African and emerging markets.  This resilience is something that all panelists echoed was widespread. African entrepreneurs are building authentic solutions to address local pain points and contributing positively to economic growth and inclusion, in a sustainable way. While operating in complex business environments with limited resources, they are still finding ways to navigate and grow. 

From the Kenyan perspective, Robert highlighted the vibrant entrepreneurial environment that revealed local founders while also attracting international founders and investment. 

Moreover, speaking about African entrepreneurs, the large qualified, brilliant, and driven talent pool available in the African continent is one that stood out to Justin. As someone who had worked for a startup in Africa (Andela), he recalls that the entrepreneurs and software developers he interacted and worked with were amongst the smartest and hardest working.   

Riki from DFP added that there is a large transformation of capital going into the African continent from international players. In comparison, the funding in the first month of 2022 is now equivalent to more than an entire year of funding 6 years ago. Lastly, governments are inviting startups to come experiment in their jurisdictions to increase innovation as 70% of global regulatory sandboxes are now in emerging markets according to The World Bank. This creates further potential for African-born innovation. 

Weaknesses 

On the other hand, in terms of weaknesses, for instance, Fuwa san highlighted that 40% of Nigerians live below the national poverty line. For entrepreneurs, this fact limits the total addressable market since a significant portion of the population may not be able to afford products or services offered by startups.  Furthermore, what stood out unanimously as a big challenge for startups on the continent remains funding. High interest rates are prevalent across the continent, making access to capital via traditional methods expensive. A broken funding pipeline also makes it hard for early-stage startups to get through the “Valley of Death” – a challenging period for startups with a heightened risk of failure. This not only limits the growth of startups, but the ecosystem in general, since there are few investors in Africa offering investment to the startups in the idea phase. Contrastingly though, the average Silicon Valley Series A valuation in 2021 was $100 Million, while in Africa it remains 1/10th of that, Riki reflected. Lastly, 90% of venture dollars in 2021 went to male founders, leaving female-founded ventures critically underfunded. However, Justin encouraged the audience to reframe this and notice the great business opportunities led by female founders. 

Opportunities  

Despite these weaknesses, the Nigerian government and a handful of other African countries1, are launching Startup Bills to encourage innovation and entrepreneurship. These ‘Startup Acts’ are designed to help create pro-startup legislation to spur innovation, create jobs, and deepen relationships between governments and entrepreneurs. In conjunction with the AfCTA (African Continental Free Trade Agreement), these are also opening opportunities for energizing economic activity. Additionally, ecosystem enablers such as JICA are playing a vital role in strengthening the ecosystem to help get closer to a reality where startups play an indispensable and deserving role in socio-economic development. 

Nonetheless, work remains to be done to build capacity to sustain the current momentum and further grow the ecosystem. A key way of ensuring its sustainability and even accelerate it, Dr. Karanja suggested to look at the ecosystem holistically. In other words, optimizing and organizing it in a way that encourages collaboration. Startup Bills are journeys that many African countries are embarking on, but a key question is: how to get it right the first time? One way is to have a balanced approach and consider all stakeholders simultaneously. If ecosystem enablers and players come together, speaking in one voice to government and being part of policy creation, it will go a long way in intentionally building the desirable future, which is what ASSEK strives to accomplish in Kenya.  

Threats  

By the same token, despite the growing number of Startup Acts in Africa, it remains vital for government to maintain a consistent stance towards startups. In Nigeria, for example, there have been instances where government has adopted aggressive policy changes which ended up impeding startups as a result. For example, when the Central Bank of Nigeria banned crypto currencies in 2021 or when the government banned motorcycle hailing platforms in Lagos in 2020. 

Talent retention is another threat, as illustrated in Nigeria, where startups compete with global players (who can offer higher salaries and better incentives) for qualified staff.  The panel was quite candid to mention that there are many real challenges across Africa such as poor infrastructure, currency devaluation & social challenges prevalent in varying degrees from country to country.  

Fuwa san, nevertheless, highlighted that the ‘Size of the problem also speaks to the size of the opportunity’.  Simply put, these challenges are opportunities for creating innovative business models that help solve these challenges. There may be untapped opportunities for innovation where developed counties borrow innovations from relatively less developed countries, such as Egyptian mobility startup SWVL starting a pilot project in Kawasaki (Japan) supported by Japanese trading company Itochu Corporation.   

Another threat is that there is a misconception that Africa is all about corruption and less capable founders. Riki articulated that there are great things happening in the startup ecosystem and it is the new narrative the world needs to know. Indeed, as exemplified by Dr. Karanja, both Kenyan and Nigerian ecosystems are on a roll. The vibrant entrepreneurial environment has been conducive to revealing local founders and enabling the attraction of international which is also a key driver for venture capital flowing into the country and the continent. In the first two months of 2022 alone, African tech startups raised more than US$1 billion-more than half of total funding raised in 2021. 

The discussion uncovered the immense potential in Africa and concluded on a high note from Justin who stated: 

” The technology revolution may have started in Silicon Valley but the raw entrepreneurial energy on the continent indicates that the future of that revolution is in Africa”  

Summary 

The panel of ecosystem players and enablers shared their experiences and outlook for African Startups from various angles. The discussion left the impression that African startup ecosystems are developing well, producing relevant solutions, great talent and amazing startups, while also attracting international resources. As governments try to play a crucial role by creating favorable legislation, this process must proceed in an inclusive way and followed up by action, in order to be beneficial to all stakeholders. 

There are weaknesses such as poverty and limited access to funding which remain – especially in the early stages of the startups as well as ventures led by females. Much is yet to be done for ecosystems to achieve their huge potential. Furthermore, the young continent must find ways to meaningfully engage its youth in order to contribute positively to the economy. However, in challenges lie opportunities to innovate.  Lastly the narrative about Africa needs to shift from a pessimistic one to reflect the great strides being made on the continent. 

Summary of the “SWOT” discussion 

STRENGTHS	WEAKNESSES
Vibrant youth population– 70% of population is below 30 in Nigeria.   Resilient entrepreneurs able to find innovative ways to navigate challenges, solve real problems & succeed. Therefore, well positioned to scale into other emerging markets.   Robust & energized entrepreneurship ecosystem in Kenya.   Good pipeline of local founders & able to attract great global entrepreneur talent.    Resilience, brilliance & drive of entrepreneurs. High human capital- smart, driven & hardworking communities.    Large qualified talent pool available.  There’s a large transformation of capital going into the continent.  Governments are inviting startups to increase innovation- 70% of global regulatory sandboxes are now in emerging markets.	Limited total addressable market-   40% of population in Nigeria is living below poverty line.    High Interest rates- difficult to access funds from institutions.    Broken funding pipeline- hard to raise funding pre-seed & great gap. Challenging for startups to raise small ticket sizes & this is limiting ecosystem potential as early-stage innovations are not able to survive the valley of death.     Funding gap at early stage still challenge in Africa unlike Silicon Valley. 90% of investment dollars in 2021 went to male founders.
OPPORTUNITIES	THREATS
Nigerian government launched Startup bill in There are many problems on continent- infrastructure.  Ecosystem is organizing- great organizations enabling contributing to the ecosystem e.g., enterprise support, business development support, incubators etc.  These organizations need to unite as a single voice to approach government & proactively influence legislation, regulation & policy affecting the ecosystem.   Regional integration efforts happening across the continent are opening massive markets. Increased infrastructure spending & regulatory harmonization to connect countries.  Large transformation of increased funding into the continent. In January 2022 $ 500 Million dollars in venture funding into Africa which is a huge increase.  In past 5 years increased funding from Silicon Valley & provide value through entrepreneurship. International ecosystem enablers are coming into Africa (Plug & Play, Y-Combinator etc.)	Talent poaching from international companies.    Young population is a double-edged sword; need to find ways to engage them meaningfully in economy by creating jobs.    Misconception that Africa is all about corruption & entrepreneurs are not as capable as international counterparts.