Shallow roots for Africa’s start-ups

Africa is in the beginning of a start-up ecosystem, but is still in shallow soil, especially in the funding processes. RUSSELL SOUTHWOOD takes a look at the challenges that need to be overcome in order to survive the financial cycles.

Africa now has in place the beginnings of a start-up ecosystem but the soil it grows in is still very shallow. To break out and expand it has some real challenges ahead so this week I take a look at how it might survive the inevitable funding cycles.

When I started in the tech sector in Africa 15 years ago, the energy for change came from a very small group of young ISP people. They created a reform movement in the telecoms industry from within the private sector but by working with civil society organisations found the funding to spread their impact and survive. All this time later, that movement exists in parts but is now largely a historic curiosity rather than a powerhouse of ideas.

That same energy for change is now found in the African start-up movement. Individuals like Erik Hersman founded Ushahidi and launched iHub, inspiring others to launch incubator hubs in their own countries. Kresten Buch, 88 Mph came to the continent and launched its accelerator programme, now in three countries. Strong individuals (too numerous to mention individually) give birth to movements that then find funding.

The start-up movement is composed of many different pieces including incubators, the start-ups themselves, the competitions circuit and the funders. The latter have turned something small but promising into something larger but fragile in nature.

Donor funding clones ideas quickly (“rolls out” to use the jargon it lifted) and the start-up ecosystem is very much the flavor of the moment. But social impact funding has a played a significant part, particularly the largest in the field in Africa, the Omidyar Network.

Social impact and donor funding mixed with VC capital has created a two-headed beast that sometimes gets confused between doing good and making money. Donor funding creates people who want to get donor money and shape their ideas to fit this funnel. Unfortunately donor funding fashions are cyclical and as the Arab saying goes:”The dogs bark and the caravan moves on.

For international VC funders, they came to Africa because it was the last great “virgin land” for making investment plays globally. But this tide also rises and falls in a cyclical fashion: those of us with long memories can recall the funding that went into things like the ISP Africa Online and the excitement it generated along with other smaller deals at the time.

When the tide of interest rises, things look good but when things fail or the international finance system hits rock bottom, the investors move back. Within this ebb and flow, the continent’s own giant Naspers has moved in and out of Sub-Saharan Africa following more or less the same pattern. The VC investors are looking to find things that they can see grow and exit successfully from. The more established companies on the acquisition trail want successful growth. The only way to break the cycle is to have start-ups that are successful and once VC investors exit, they want to come back for more. Or for the bigger company buyers to invest more because what they bought actually made them money.

If iROKO is the Netflix of Africa (as it says it is), then success will be when it’s bought by Netflix or Amazon or somebody who thinks its financial performance matches this pithy description. Everything else is hype‚Ķ.

If innovation competitions by themselves changed the world, then parts of Africa would already be Switzerland. Sadly this is not the case but the relationship between change, money and energetic people is something I will return to in future.

* Russell Southwood of Smart Monkey TV produces Digital Content Africa, essential reading for those interested in what African content they can now get online. View the archive at http://www.smartmonkeytv.com/channel/newsletters