Africa’s start-ups show potential but lack access to capital

Africa’s start-ups show potential but lack access to capital

Thanks to the success of its mobile phone market, Africa’s tech start-up scene has developed rapidly, with tremendous market potential. Nevertheless, lack of capital and high service costs could stand in the way of potential entrepreneurs.

There has been a marked increase in investor interest in Africa’s technology sector and for good reason. The market is growing at a rapid pace with an increasing number of tech start-ups appearing on the scene. The process will take time however, as the development of this sector is slowly starting to pull investor interest away from the traditional commodities market in Africa. This in turn will facilitate less dependence on the continent’s exhaustible raw materials—a milestone for the African economy.

Success in the mobile phone sector helped create an opening for tech start-ups. The African mobile phone market is the fastest growing in the world and has connected the continent. According to the World Bank, mobile phone subscriptions in Africa have reached 650 million, roughly equal to two-thirds of the entire population of Africa, trouncing figures for the U.S. and the EU. Mobiles have become accessible to rural farmers and high-tech businesses alike, a significant development for a continent, which has a lack of infrastructure.

Recognising gaps in the market for local information and internet services, entrepreneurs across the continent are jumping to fill the space. Among last year’s success stories is Ghafla!, Kenya’s biggest entertainment website, which in just three years has achieved remarkable success and recently tabbed 9.5 million views per month. During its initial stages, the start-up received $25,000 from the investment firm 88mph. The website now earns this amount each month and enjoys sponsorship from Orange and Kenya Power, among others.

Another tech start-up which has received a lot of attention is Wild Fusions. The founder of the company, Abasiama Idaresit, began to drum up business for his digital agency by approaching people on the streets of Lagos. Wild Fusions has since developed into Africa’s leading digital agency in Ghana, Kenya and Nigeria and became the first Google Certified Adwords Partner in Ghana and Nigeria. Now valued at $20 million, Idaresit’s tech start-up highlights the massive potential for investing in such a business.

Despite the huge potential for tech start-ups on the African continent and the wide scope for growth, entrepreneurs face a number of difficult challenges. There is a high level of risk for investors, so finding the capital to start a business from scratch has been a barrier holding back many potential successes. Lack of capital—necessary for staffing, office space and service costs—is the biggest obstacle many entrepreneurs face, particularly since investors initially require a long track record and a viable product. The lack of trust which runs even more deeply for intangibles, such as internet based services, further adds to this hindrance of the tech sector.

In addition to the challenge of finding capital, service costs themselves are extremely high, and electricity and internet connectivity is expensive. According to the International Telecommunication Union (ITU)’s March 2013 study on internet connectivity in Sub-Saharan Africa, the  “proportion of the minimum wage represented by the broadband Internet access tariff varies from 6.75 percent in South Africa to 59.96 percent in Mali. Within that range, it is 24.85 percent in Senegal and 52.35 per cent in Ghana. Over one-third (34.70 percent) of the minimum wage in Sudan, and almost two-thirds in Mali, must be spent to obtain a wired internet broadband connection.” Furthermore, internet connectivity itself is extremely poor, which in turn maintains its high running cost. The ITU proposes optimising bandwidth costs and constructing the infrastructure required for basic broadband to cope with mass users.

To make the most of the economic benefits of ICT, the internet must be accessible to the entire African population, alleviating the current impediments and disparities. The role of government in contributing to this development is significant and must be kept high on the agenda. Together with the infrastructure required for start-ups to flourish and an increase in the accessibility to investment, bright young African entrepreneurs can continue to rapidly expand the technology sector. The risk may be high, but as last year showed, the rewards can be remarkable.

About Author

Elizabeth Matsangou

Elizabeth works as International Account Manager for an environmental technologies company and has previously worked for a political consultancy company in Westminster and for Intelligence Squared, a forum for live debates. She received a BA in Philosophy, Politics and Economics from the University of Essex and an MSc in International Relations from the London School of Economics.