Rise of African start-up cities

31 May, 2019 - 00:05 0 Views

eBusiness Weekly

The geographical focus of innovation and entrepreneurship is shifting and cities in the United States are no longer the predominant location for high-tech start-ups. Instead, they have spread globally and the past decade has witnessed a dramatic growth of start-up ecosystems around the world (Florida, Hathaway 2018).

This is true also for Africa, where lively start-up scenes have emerged in cities such as Nairobi in Kenya, Lagos in Nigeria, Cape Town and Johannesburg in South Africa, Accra in Ghana, as well as Cairo in Egypt.

This article outlines the drivers of this development and compares recent dynamics across these six cities.

The boom of African start-up cities was largely driven by technological advances. Over the last decade, high-speed internet has become available in many parts of the continent and the number of Africans, who use mobile phones, has started to increase at a fast pace.

The cost of building digital products have fallen and mobile payment services have been introduced, which allows start-ups to charge their customers for them.

In fact, fintech start-ups have raised most investment in Africa:

In 2018, they received $284,6 million, which is double the amount of capital received by start-ups in the cleantech sector ($143,5 million) and almost triple the amount received by start-ups in the e-commerce sector ($97,7 million) (Kazeem 2019).

Financial inclusion creates further opportunities for start-ups and as more Africans become members of the formal economy, a wheel is set in motion, which is hoped to drive incomes up. The aspiring middle class of Africa’s youthful population provides huge market potential, which attracts African start-ups. In addition, there is a huge need for innovative solutions, as many gaps exist in areas such as affordable healthcare, education, infrastructure, agriculture, clean water and sanitation.

Given Africa’s resource constraints, low cost, high impact solutions are required and due to their potential for scalability, technology start-ups play a crucial role.

The growth of African ecosystems has been remarkable in terms of support and investment, which is becoming available at fast pace.

Since Africa’s first innovation hub, the iHub in Nairobi, opened in 2010, there has been a fast diffusion of similar business incubating organisations across the continent, which provide office space, business support, and network access and aim at to build a community of like-minded people.

In only one year, from 2017 to 2018, the estimate of 314 active tech hubs has increased to 442, which represents a 41 percent increase (Brookings 2019). Lagos is considered Africa’s top ecosystem, as measured by the number of active tech hubs, which is 31 hubs. Cape Town (26 hubs), Nairobi (25 hubs), Cairo (23 hubs) and Accra (16 hubs) are the four following cities in this ranking (ibid.).

Venture capital investments have increased similarly fast.

In 2018, African start-ups raised $725 million across 458 deals, which is an almost four-fold increase in total start-up funding and more than doubling of deals (Kazeem 2019).

A recent report (Florida, Hathaway 2018) provides data on the level of individual start-up cities. It points out that in the period from 2015 to 2017, the highest numbers of deals have been closed in Cape Town (72 deals), Nairobi (55 deals), and Lagos (39 deals).

In comparison to the previous period (2010-2012), in all six cities a tremendous growth in the number of venture deals has taken place: Lagos experienced an increase by 200 percent, followed by Johannesburg and Nairobi with rates of 189 percent, and 162 percent, respectively.

Looking at the amount of total capital invested in the period from 2015 until 2017, start-ups in Cape Town ($326 million) and Nairobi ($323 million) have raised the highest sums.

For Nairobi, this corresponds to an increase by an impressive 990 percent, as compared to the preceding period (2010-2012). As a result, Nairobi is ranked 7th among all start-up cities worldwide with regard to five-year growth in venture capital investment. Technological development has enabled entrepreneurial opportunities, which carry great hopes for economic growth and social development.

However, despite positive trends in terms of available support and funding, African entrepreneurs continue to struggle with major challenges.  These, for instance, include burdensome bureaucracies, the brain drain of the best talent, a low customer spending ability, and a lack of infrastructure.

Moreover, the fact that innovation hubs have spread so fast, does not imply any conclusions regarding their success or impact (Friederici 2019). And while venture capital investments have increased significantly, it can still be challenging for promising start-ups to raise funding, as the actual sums of available capital are still very low in comparison to other global start-up hubs.  — Observer Research Foundation.

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