To Augment Tech’s Transformation of Sub-Saharan Africa, Impact Investors Should Focus on the Startup Ecosystem

Women in Accra, Ghana, participated in a January 2017 entrepreneurial training program from #HerFutureAfrica that helped them develop their business ideas. (Courtesy of Africa Technology Business Network)

Innovative startups in Sub-Saharan Africa are transforming the region with technological advances that have increased people’s access to education, healthcare, and financial resources, generating millions of jobs in the process. Entrepreneurs have been helped along through initiatives such as the World Bank-funded XL Africa and the £32 million ($39 million) tech acceleration program from Britain’s Department for International Development (DFID). Despite those and other support programs, Sub-Saharan African tech sectors are still struggling to overcome structural challenges.

The problem? The majority of funds are directed towards individual startups, while too little is going toward the ecosystem as a whole. Impact finance, which directs capital towards social and environmental ends, has the potential to help address these issues, but is making the mistake of mimicking the investment strategies of mainstream venture capitalists: Impact investors overwhelmingly put their money toward new and "sexy" tech solutions, while ignoring the foundation-building work done by ecosystem intermediaries like universities, tech hubs, and research and development institutions.

Albert Opoku, the co-founder of an innovation hub in Kumasi, Ghana, has experienced the problem firsthand. When he and his team couldn't get support for their own startup, they thought others might be encountering similar struggles. So they decided to start HapaSpace, which helps a growing pool of young local entrepreneurs with incubation, acceleration, networking, and training. Hundreds of hubs like HapaSpace are at the heart of Sub-Saharan Africa’s rapidly growing tech markets, but "no one is investing” in them, Opoku said.

Our organization, the Africa Technology Business Network (ATBN) is a social enterprise working to support African technology innovators by connecting them to global networks and resources. In 2018, we examined the challenges faced by Sub-Saharan African tech sectors. We conducted 35 one-on-one interviews and obtained 75 survey responses from leaders across sectors of the Kenyan and Ghanaian tech ecosystems. We subsequently held three roundtables with 120 participants in Accra, Nairobi, and London.

Valleys of the Investment Landscape

We found that while impact finance is indeed playing a crucial role in developing Sub-Saharan African tech ecosystems, a number of challenges persist. These include:

• Individual-focused investment patterns create a culture of competition between ecosystem players, placing the burden on them to compensate for the structural gaps within the ecosystem. Lacking the public funding and support that ecosystem players in developing economies enjoy, hubs must compete for the few ecosystem-focused grants that exist. In order to find additional revenue, they are renting out office space and offering consultancy services. As a result, they don't collaborate or share knowledge. This competitiveness hinders their ability to wage successful joint-advocacy campaigns for infrastructure investment and for innovation-friendly policies from local governments.
• While there is a view that public funding is better suited to finance infrastructure and ecosystem development, there is little support from local governments, leading to a dependency on external funders and organizations.
• There is a chronic shortage of funding, especially during the early stages of idea validation.
• There is a bias towards entrepreneurs with urban, male, internationally educated, or expatriate backgrounds. Why? Public and private investors looking at Sub-Saharan Africa worry about a lack of reliable infrastructure, weak regulations, and a deficient precedent of foreign investment in tech. This increases their perception of risk and the cost of due diligence. Investors compensate by gravitating toward people with backgrounds that hew more closely to their stereotypes of success. Our finding echoes research by Village Capital, which estimates that 71 percent of the region’s startup investment from 2013 to 2016 went to only four businesses, all run by expats.

Building a Healthy Investment Ecosystem

Based on our analysis, we believe impact-oriented investors should increase their support for hubs and ecosystem intermediaries. Strong ecosystem intermediaries are likely to promote a multiplier effect, in which a single hub nurtures hundreds of start-ups and entrepreneurs. Intermediaries also can encourage sustainability and scalability by building local capacity and skills, allowing for long-term independence and continued growth.

The Indigo trust has taken successful steps towards this end. The Impact Program, in conjunction with Capria Venture LLC, is building the capacity to support intermediaries through a curriculum of in-person and online interactive skills training for entrepreneurs in low-income countries.

We’ve developed these recommendations for how impact finance can shift its efforts and build long-term, locally led development in the years to come:

1. Foster Collaboration

During our roundtable with ecosystem intermediaries in Nairobi and Accra, participants said competition for scarce funding was one of the biggest barriers to their cooperation. Collaboration is crucial for tech to succeed in Sub-Saharan Africa. Meetings, conferences and knowledge sharing platforms may not lead to immediate measurable returns, but investors must recognize the importance of these activities for strengthening and nourishing long-term ecosystem health.

The Segal Family Foundation has effectively implemented this approach. Through technical training workshops, informal happy hours, and a conference-style annual meeting, it has generated a wealth of networking opportunities for its diverse partners.

2. Fund Local, Diverse Teams

In order to deepen its impact, impact finance should actively develop teams that reflect the local population, even if the perceived risk and due diligence costs are higher. Local innovators are more conscious of the needs of their communities, and thereby best equipped to address them. And they are more likely to reinvest their resources into local economies and drive further growth. Sub-Saharan African female entrepreneurs are particularly under-funded, similar to global trends which show that less than 2 percent of venture capital goes to women-led startups. Initiatives like ATBN’s #HerFutureAfrica program are working to help bridge this gap by supporting women to develop their businesses and access to investor networks.

Village Capital’s peer selection process exemplifies a strategy for overcoming investor bias. A cohort of entrepreneurs is given a clear set of criteria to evaluate each other’s businesses openly and transparently, with the top-ranking businesses going on to receive funding. By empowering entrepreneurs who have a good understanding of their local markets to peer review each other’s ventures, this approach allows for selection of investees on the strength of their businesses rather than on foreign investors’ often culturally biased perceptions.

3. Cooperate With Local Governments 

Our analysis found a need for supporting Sub-Saharan African tech sectors in a manner that does not weaken, but rather strengthens national governments and their collaboration with system intermediaries.

Recent investment by the Rwandan government presents an optimistic case study of ways regional governments can drive innovation. Since 2000, the government has made significant investment in the construction of information and communications technology infrastructure and the services necessary to operate it. Klab, a leading tech hub in Kigali which has helped nurture some of the country’s most successful tech companies, received support in the form of free space from the government as well as funding from external partners like Indigo Trust. This exemplifies how such partnerships with local governments can accelerate growth. Consequently, Rwanda’s local tech ecosystem is thriving and is attracting a growing number technology companies and organizations serving the region.

While foreign investors should be conscious of constraints on local public sectors, they should nevertheless seek to strengthen public institutions and policies. Funding for local infrastructure, networks, and capacities can mitigate the risk of structural dependence across Sub-Saharan Africa tech sectors.

Stronger Tech for a Stronger Region

Impact finance is playing a crucial role in enabling innovation for economic and social development across Sub-Saharan Africa. Redirecting investments towards the formation of collaborative networks, knowledge-sharing, local hub support, and infrastructure will create short-term impact and drive sustainable growth. That in turn will help continue the progress made to solve the region's stubborn social ills and allow the technology sector to flourish.

Read the authors' full report: "Catalysing Local Innovation Ecosystems in Kenya and Ghana: The Role of Development Finance."

Read more stories by Maya Adereth, Eunice Baguma Ball & Stav Bar-Shany.