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.

• The growing African digital industry is giving rise to new market opportunities, driving the establishment of entrepreneurial activities across the African continent. Countries such as Nigeria, South Africa, Egypt and Kenya are especially flourishing.
• The continent’s steadily growing internet penetration rate is opening up new opportunities. The fintech industry is Africa’s fastest-growing start-up sector aimed at providing digital financial services to a largely unbanked population.
• Africa is home to seven unicorns, of which five were founded in Nigeria and three in 2021 alone. This speaks to local and international investors' resounding potential in Africa-based start-ups.
• Male-owned businesses continue to attract the most funding, despite the overwhelmingly greater presence of female entrepreneurs in Africa, who continue to face higher barriers than men.
• Emerging start-up hubs such as Nigeria and Kenya are witnessing the greatest success in early funding stages, specifically seed and Series A. While the growing number of exits is encouraging for young aspiring entrepreneurs, pre-seed funding mainly sourced from Angel Investors continues to be a limiting factor. ​ ​

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.