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Fintech is Not Enough: Why Startup Investments in Africa Must Diversify Across Sectors

Africa is often referred to as one of the largest untapped venture markets in the world. The continent has over 1.3 billion people, some of the world’s fastest-growing economies, and vast potential for tech innovations to serve its rapidly growing population. A good indicator of this potential is the fact that sub-Saharan Africa is the world’s fastest-growing mobile phone market. These prospects fuel increased interest in tech startups on the continent — the startup ecosystem raised $1.43 billion in 2020 compared to $366 million in 2016. The number of total equity rounds annually has also increased, from 55 in 2015 to 359 in 2020, across multiple sectors. However, most of this funding focuses on just a few sectors, like fintech and off-grid tech, and such concentration could create a bubble that prevents the continent from exploring its potential across other tech sectors.

Over the years, fintech has consistently attracted the most investments. Based on Partech‘s annual funding reports which began in 2015, between 2017 and 2020, fintech accounted for 30% of the yearly total equity funding to tech startups in Africa on average. Off-grid tech is another area that receives fairly consistent interest — it trailed behind fintech, but still averaged 15% of total funding in the same time period. However, investments in other sectors lag far behind those two, with edtech at 6% of total funding and entertainment at just 1.5% on average. Agritech only just emerged as a funded vertical in 2020 (prior to this, there was no disclosed equity funding to agritech in Africa), claiming 13% of the year’s total startup funding, while equity investments in martech only amounted to 1.4% and 0.7% respectively in 2018 and 2019. Yet despite their relatively low amounts of equity funding, each of these sectors holds great untapped potential.

 

WHY AFRICA’S STARTUP ECOSYSTEM NEEDS MORE DIVERSIFICATION IN FUNDING

Unfortunately, without venture investments, businesses in these sectors remain limited, ill-equipped to drive the innovative experiments that will solve some of Africa’s most essential challenges at scale. For the startup ecosystem to thrive in Africa, a healthier strategy is needed — one in which investors consciously invest in diverse sectors. In 2020, Africa’s $1.43 billion in startup investments fell far short of India’s $10 billion (in a country with a similar population), and Southeast Asia’s $8.2 billion (in a region of about 650 million people). A look at startup investments in India and Southeast Asia — markets that are similar to Africa but more mature — shows more of this diversification across sectors. Their similarity to Africa in terms of population size and economic growth dynamics indicate that these markets could serve as models for the continent.

Bloomberg reports that in 2020, only three sectors took home 75% of India’s $10 billion in startup funding. However, a closer look shows that consumer tech — which attracted almost half the funding for the year — includes a variety of verticals like food tech, gaming, media and entertainment, health tech, and edtech. Additionally, the sectors Bloomberg branded as “Software as a Service” and “Others” include startups deploying solutions across different sectors, and a substantial portion of the funding went to these companies. Similarly, Southeast Asian startup funding is dominated by super apps such as Gojek and Grab, which are used across multiple sectors, invariably reflecting a healthy diversification in the types of digital ventures receiving funding. Interestingly, if you exclude the giant investments in Grab and Gojek, Southeast Asia’s top-funded verticals in 2020 included travel, biotechnology and ad tech, further illustrating the region’s diversity of funding recipients.

Spreading out investments across sectors allows investors to hedge their ecosystem bets, ensuring that startups in more than a few sectors can explore their potential and have a shot at producing Africa’s next unicorn. Investor insights and expert opinion may point to certain sectors as high potential, informing the rush to fund these categories of companies. However, blind spots exist in data, and context often changes. The pandemic has shown that regardless of informed predictions, the future cannot be accurately predicted. It is impossible to foretell with airtight certainty which startups will excel, considering that startups are inherently experiments to discover successful and scalable models.

 

THE POTENTIAL OF AFRICA’S UNDERFUNDED SECTORS

Nevertheless, it is possible to make educated assessments of different sectors’ comparative growth potential, and to that end, data shows immense potential in some sectors investors have typically overlooked. Moreover, as they are not flush with capital, these sectors may present a bigger opportunity for investors seeking to break new ground.

For example, smallholder farmers constitute at least 60% of the population of sub-Saharan Africa, and about 23% of the region’s GDP comes from agriculture. According to McKinsey, “Africa could be two to three times more productive if it intensified its agricultural productivity.” Agritech is key to boosting this productivity, and the data corroborates this assertion. Nevertheless, in 2018 the total addressable market for the digitalisation of agricultural services was estimated at $2.6 billion, yet it only netted $143 million.

Likewise, edtech funding climbed globally in 2020, but funding to edtech in Africa did not reflect the increased demand for remote learning that was driven by the pandemic. Global edtech venture capital funding in 2020 was around $16.1 billion, up from $7 billion in 2019. Meanwhile, investments in African edtech fell from $124 million in 2019 to $39 million in 2020. For Africa to realise its potential, investors must make it a priority to fund innovation in education for its burgeoning youth population.

Martech is another globally fast-growing vertical which is relatively untapped in Africa. According to research by BDO, WARC and the University of Bristol, it is estimated that the martech industry worldwide grew 22% from 2018 to 2019, reaching $121.5 billion in value. Africa’s relatively nascent and growing digital economy — along with its position as one of the fastest-growing consumer markets in the world — means that businesses will need to increasingly optimize their connection to consumers by leveraging digital tools. Africa’s digital economy is predicted to reach $180 billion in value by 2025, and its consumer expenditure is expected to hit $2.1 trillion by the same year. In light of those projections, the martech sector is poised for growth. And with adequate capital, innovators in the space can dedicate resources to building efficient solutions that connect brands to the African consumer.

Beyond martech, edtech and agritech, Africa has countless problems seeking solutions. With the right mix of funding and innovation, food tech, entertainment and media, gaming, and artificial intelligence are other verticals that show promise. Founders and venture capitalists need to consciously extend their resources outside fintech to build a robust and complementary technology ecosystem on the continent.

 

Elo Umeh is the Founder and CEO at Terragon Group.

 

 

Source: https://nextbillion.net/startup-investments-africa-diversify-sectors/