Africa’s start-up ecosystem has taken off in recent years, driven by the emergence of a young African tech-savvy generation that is heralding a new digital age full of new opportunities. This appealing start-up ecosystem has not gone unnoticed by the international community, with Angel Investors, Venture Capital (VC) firms and, to some degree, Private Capital (PC) firms increasingly investing in the scene.
Necessity-driven entrepreneurial activity is driving the African start-up economy. Africa’s struggle with high unemployment, lack of new developments, and poverty pushes the increasingly younger African population to entrepreneurship. Small-medium enterprises (SMEs) are one of Africa’s largest employers, and, while on a downward trend, 75% of the sub-Saharan African population is self-employed as of 2019. However, digital and technological innovation in the African market is driving the growth of opportunity-driven start-ups, enabling African tech start-ups to flourish and attract international investment. Nigeria, South Africa, Egypt and Kenya are Africa’s leading start-up hubs due to their established start-up ecosystems, higher educational levels and supportive platforms aimed at helping entrepreneurs access capital more accessible.
According to StartUpBlink, which ranks and assesses start-up environments based on several different indicators (accelerators, supportive legislation, coworking spaces, infrastructure, etc.), South Africa, Nigeria and Kenya are the leading start-up hubs in Africa. The continent, specifically those three countries, has displayed continuous growth since 2017 (CAGR of 45%), reaching new heights during the 2020 COVID-19 pandemic. This growth continued and exceeded precedented levels in the following year. The continent saw a 128% YoY increase in the number of deals from 2019 to 2020 and 104% YoY growth from 2020 to 2021, reflecting a maturing of Africa’s start-up ecosystem. The number of start-up deals recorded in 2021 alone corresponds to 70% of the total volume of deals recorded on the continent between 2014 and 2020. The cumulative value of start-up deals in Africa reached US$5.2 billion in 2021, reflecting a 373% YoY growth. African start-ups raised more in 2021 alone than combined in the preceding seven years. The growth in volume and value of deals in Africa paints an optimistic picture for the start-up ecosystem's future and growth opportunities in the entrepreneurial space.
Africa remains one of the fastest-growing start-up ecosystems globally, shaped by key trends that are showing no sign of future abatement.
Global VC funding has started to fall below US$ 40 billion in May 2022, down 20% compared to May 2021 and far below the global peak of US$ 70 billion in November 2021. Africa, however, has maintained its positive growth, continuing its growth trajectory, reaching US$ 1.8 billion in the first quarter of 2022, up 150% from the previous year. Kenya alone attracted more funding in Q1 of 2022 (US$ 482 million) than it did in all of 2021 (US$ 412 million).
And while Africa’s VC deal accounts for a mere 1% of the global venture funding, the growth is expected to sustain, at least in the short-term, due to the nature of the African start-ups. African start-ups are geared toward solving significant challenges, such as addressing the low banking and energy access rates, which is driving the adoption of Fintech and Energy Tech start-ups in the market. Historically, the year’s second half has seen more VC funding for African start-ups compared to the first half. In 2021, the year's second half saw more than double the funding funnelled to start-ups in Africa compared to the year's first half. The Africa start-up ecosystem is on track to continue its sustained growth. While Fintech will likely remain VC’s main focal point, start-ups in other sectors, especially education, logistics, blockchain and sustainable energy, are rising, at least doubling the VC raised from 2021 to 2022.
By Patrick Prestele
Consultant - Frost & Sullivan Africa.