African startups are using technology to solve social and environmental problems, including access to healthcare, water and food. However, they face many challenges, and governments need to take action to unlock the full potential of this innovative industry. The following three challenges are key areas to focus on:
Lack of funding – Despite the fact that Africa is considered a continent of great potential, there is a gap in available funding. In sub-Saharan Africa, the average seed round is only $1.5 million. This is far lower than the average amount raised in other parts of the world, such as in Latin America, where the average is $5.7 million. There is also a lack of suitable funding vehicles. A solution is to diversify sources of funding, and governments should work to create a diversified investor base. Besides institutional investors, government-backed financing is another way to help address the funding gap.
Digital skills deficit – African startups need a strong set of digital skills to survive and prosper. Unfortunately, the region does not have the necessary human capital to provide these services. As a result, African tech startups are hampered by high operating costs and insufficient infrastructure. To close this gap, Africa needs to invest in its digital infrastructure.
Regulatory barriers – The complexities of policy making and inconsistent rules are inhibiting the growth of the tech startup ecosystem in many African countries. Some of these include cumbersome regulations and the cost of business registration. Governments should implement measures to streamline the process, such as expediting the application and licensing processes for registered members. Also, government-backed funding incentives should be extended to database members with high quality data. These incentives could be in the form of donor-backed funding incentives, exclusive opportunities, and government procurement contracts relevant to tech startups.
Funding – African startups need access to funding at every stage of their development. The funding gap is often exacerbated by the lack of a robust local financing system. Therefore, African governments should focus on implementing policy levers to attract investment. Among other things, they should encourage public-private collaboration to build regional and national databases. This will not only improve knowledge-sharing within the ecosystem, but it will also improve access to funding.
Creating a harmonised African market – Having a harmonised regional market will allow citizens to gain access to digital content at lower prices and provide investors with a better return on their investments. It will also boost the growth of African startups by providing them with a favourable environment to expand.
Diversifying the funding options – To help boost the startup ecosystem, African governments should consider introducing new financial instruments, such as innovative investment vehicles. One example is the use of pension funds to channel money to tech startups. Although pension funds can be risky, they can offer mutual benefits as well. Alternatively, governments could look to other sources of investment, such as private equity firms, which can play a crucial role in supporting startups during their growth phases.