The Rise of the Silicon Sahara

Our latest blog comes from second year trainee Geoff Dragon.

“Some men see things as they are and ask why. Others dream things that never were and ask why not” (George Bernard Shaw). For years the “developed” world has looked down upon Africa and meditated on why things are as they are; all too often neglecting to notice that those inside the continent were not only dreaming, but developing those dreams into a new reality. Now home to 7 of the 10 fastest growing economies, Africa is on the cusp of a technological awakening.

Despite a 30% reduction in the funding of technology start-ups globally during Q4, the funding of African start-ups increased by a reported $185.8 million during 2015. 81% of this funding has been invested in South Africa, Kenya and Nigeria, yet the advances are not confined to those three countries alone. While the amounts raised are still not large when compared to US and European investments, it is clear that the Silicon Sahara is rising.

Barriers to Success

This is not to say that Africa has rid itself of all its problems; it still faces challenges which technology alone cannot solve. Electrical outages, poor infrastructure and transport links limit the opportunities available to entrepreneurs. Although the aim is for 100% internet access by 2025, only 16% of the continent has access at present. Add into the mix the Government bureaucracy that still taints some corners of Africa’s growing democratic wave, and it is easy to see why it is such a challenge for budding-dreamers to turn their ideas into an incorporated reality.

Once an entrepreneur has successfully battled to incorporate their start-up, they are faced with a raft of new issues. The recruitment of good staff can prove a challenge, as many of the most talented minds flee Africa in order to be a part of more established incubators and accelerators in the US and Europe. There is also a distinct lack of large-scale investors and VC funds on the continent, although this is improving and WeChat South Africa have recently launched a new VC pot to fund start-ups in the mobile and communications space.

Reasons for Success To-Date

Despite the numerous barriers, Africa is on a steady path to success, thanks in no small part to her people’s heart, determination and technological prowess. A number of other factors have also contributed to this success, and empowered the advances on the continent. Examples include:

  • An expanding mobile phone network which has not only led to many throughout Africa being connected to each other for the first time, but to novel business opportunities in the communications sector;
  • A legacy of successes which have highlighted the attractiveness of African tech start-ups for investors. Amongst those paving the way are three Kenyan companies, now known globally: M-Pesa (a mobile phone-based money transfer, financing and microfinancing service), Ushahidi (a non-profit software company that develops free and open-source software) and now the solar energy start-up M-Kopa (who have recently received a $19million investment from investors including Al Gore, Steve Case and Richard Branson);
  • Ongoing engagement of technology giants such as Microsoft who, in 2013, launched their $75million project ‘4Africa’ which was aimed at increasing internet accessibility to the continent with the hope that this would impact on the number of entrepreneurs and start-ups;
  • The Global Entrepreneur Summit, held in Nairobi in 2015, which had the desired effect of raising the profile of African tech start-ups;
  • A growing maturity in business – Ory Okolloh, the Director of investments at the Omidyar Network (a London-based investment firm) recently noted that African businesses are now focused on supplying B2B, and are therefore gaining more positive revenues at an earlier stage, making them more attractive to investors. Linked to this, more companies are looking globally, rather than to their country/region alone, to carry out their business and to benefit from a market that is big enough to attract investors;
  • The creation of investment funds – one such fund, the Savannah Fund, accepts applications across all of Africa and invests between $25,000-$500,000 in return for 15% of a start-up’s equity, as well as providing that company with three to four months’ mentoring and training in how to run a successful business; and
  • Investment in technology hubs and tech-focused cities (as considered below).

Technology Hubs

The investment into, and emergence of, technology hubs and incubators across Africa is surely one of the biggest factors in Africa’s recent start-up surge. Africa is now home to over 90 such hubs which, despite 18 being found in South Africa, are spread across every region of the vast continent.

The MEST (Melt water Entrepreneurial School of Technology) incubator in Accra, Ghana arguably led the way, and was soon followed by iHub in Nairobi (a development funded in conjunction with the Savannah Fund). A revolution then followed with hubs emerging in a number of prominent cities such as Flat 6 Labs in Cairo, 88mph and Pawa 254 in Cape Town, and Bongo Hive in Lusaka, Zambia.

These hubs give opportunities and resources to hundreds of entrepreneurs who would not otherwise have access to the knowledge or means to make their ideas a reality. Importantly, these opportunities are open to anyone; as demonstrated by UNICEF’s Nairobi Innovation Centre which focuses on introducing both youth and women to the technology world.

Technology Cities

The emergence of more tech-focused cities has also played a crucial rule in the rising wave of tech-focused start-ups receiving funding from investors. South Africa’s Johannesburg (home of the successful JoziHub) is slowly becoming a free Wi-Fi city, while Casablanca in Morocco was the first city to adopt 3G. The Yaba suburb of Lagos, Nigeria (given the name ‘Yabacon Valley’ by its residents) is the home to many start-ups, banking and education facilities. Meanwhile, Kigali in Rwanda has adopted ‘Vision 2020’, an initiative to build seven tech hubs in the city by 2020.

The Kenyan and Ghanaian governments however are dreaming of even greater accomplishments, with both revealing plans for the development of special-purpose technology cities. As part of its ‘Vision 2030’ (the Kenyan government’s strategy to make Kenya a middle-income country), Kenya has unveiled plans for Konza Technology City, a $8.5-9billion dollar technopolis. This follows in the footsteps of Ghana’s announcement of HOPE (Home, Office, People, Environment) City, whose $10billion development is expected to be complete some time in 2017.

Although many have questioned whether these developments are necessary, IT technology and start-ups are already growing in the two countries at a rapid and organic rate. The plans should surely be seen as a positive step by two countries dedicated to maximising the potential of their technologically-minded entrepreneurs.

2016 and beyond…

There is no doubt that 2015 was a stellar year for African tech start-ups and with investor confidence at an all-time high; 2016 looks likely to be equally impressive, if not more so. So, what are some of the trends we are likely to see? The following six themes are the ones I think you should to watch out for:

  • Corporate VC funding will continue to increase: The lack of VC funding options for start-ups looks set to change as VC initiatives spring up in all regions of the continent. These include Barclays’ Techstars Cape Town Accelerator (an initiative that has already seen Barclays invest in and partner with three tech start-ups), Safaricom’s Spark Fund, Microsoft’s 4Africa Fund and Grovest (a newly announced $12.8 million fund which will invest in South African start-ups with a view to buying, building and flipping as quickly as possible). It remains to be seen whether these corporates view their African VC funds as a long-term commitment or a mere pet project, but I am optimistic that it is the former;
  • There will be a larger focus on government-supported innovation: Some African governments have been slow to get to the start-up party; traditionally much of the funding received has come from overseas investors with China having a big influence. However, as changes in strategy cause the African governments to shift focus and become innovation drivers, initiatives such as Enterprise Kenya, Egypt’s government funded ITIDA fund (a $100 million fund aimed at ICT start-ups), and South Africa’s ‘Growing Black Diamonds’ paper (which examines how to increase black entrepreneurship in the country), are all indicative of the change to come;
  • Coding schools will continue to thrive: Coding schools have emerged across the continent as Africa looks to develop its tech stars of the future. The three biggest schools are Nigeria’s Andela, South Africa’s CodeX and the Moringa School in Kenya. Not only do these schools look set to continue to thrive, I would not be surprised if new schools rose to prominence in the near future, especially given the plans for the two technology cities as mentioned above;
  • FinTech investment will increase: In 2015, 30% of the money invested across the continent went into the FinTech industry. This has been supplemented by presence of accelerators from both Barclays and Alphacode (Rand Merchant Insurance Holdings’ financial services accelerator) on the continent;
  • But solar technology will stay the African leader: With the solar sector receiving 33% of 2015’s start-up funding, and with M-Kopa’s recent $19million investment, the solar industry is going strong in Africa as start-ups continue to find new ways to harness solar power to provide a cheap and renewable source of energy to Africa’s population; and
  • Bitcoin will become less successful: In 2013 bitcoin was booming in Africa with Bitpesa leading the way in African bitcoin trading. Fast forward two years and not only is the use of bitcoin declining, but the Central Bank of Kenya has gone public in is “distaste for digital currencies”, driving a final nail in the bitcoin coffin.

 

  • The key questions are, of course, whether Africa’s booming technology industry is sustainable, and how many of their current start-ups can scale-up to form the large organisations of the continent’s future. Only time will tell in this regard, but we should note that Africa is the second largest continent in terms of population and land mass. It now looks as though her massive, previously untapped, potential is finally being realised. The rest of the world should pay attention, Mama Africa has awoken and its start-ups look set to have yet another auspicious and successful year.
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