How a new wave of tech startups is driving development in Africa
Researcher at the German Institute for Global and Area Studies (GIGA)
Leapfrogging is often seen as critical to Africa’s economic development. This phenomenon is perhaps most evident in the spread of off-grid solar energy systems and mobile broadband networks across the continent.1 Building on this improved connectivity, a new wave of African technology startups has recently emerged, increasingly driving leapfrog development through locally adapted “home-grown” digital technologies. Indeed Africa’s tech sector has recently become one of the fastest growing tech ecosystems in the world, with tech being one of the fastest growing sectors in Africa.2 At the time of writing, eight startups have already achieved “unicorn” status – a valuation of USD 1 billion or more.
Funding raised by African startups across African region, 2015–2022
A new wave of African technology startups
The recent increase in funding for startups reflects the growing dynamism of Africa’s tech ecosystem. West Africa and East Africa clearly attract the lion’s share of funding, with startups in North Africa catching up more recently, and Southern Africa showing some modest growth (see figure above). Importantly, a single country accounted for the bulk of funding in each of these regions: Egypt in North Africa, Kenya in East Africa, South Africa in Southern Africa, and Nigeria in West Africa (see figure below). For these leading countries, startup finance may soon equal FDI inflows if current trends continue.3
Funding raised by African startups across African countries, 2015–2022
In the African tech sector, three specific aspects stand out: First, platform business models are increasingly important (see next figure). Importantly, however, African platform businesses often (have to) make significant investments along the value chain, such as in logistics and transport, rather simply connecting supply and demand. Second, it is common for African startups to leverage existing customer relationships to offer multiple products or services. In particular, non-fintech startups often embed financial services such as payments, loans, and insurance, traditionally offered by banks and other financial institutions, in their non-financial apps and platforms. Third, African startups typically rely on large networks of agents, who are already known and trusted in their communities, to sign up new customers and take orders from them.
In the African tech sector platform business models are increasingly important.
Share of African platform and software businesses startups, 2000–2022
Most African tech firms operate in sectors that remain underdeveloped, targeting underserved individuals and businesses. Just as off-grid solar and mobile broadband systems have increased access to affordable electricity and internet, start-ups are using digital solutions to improve access in sectors as diverse as finance, retail, transport, agriculture, education and health.4
Financial services startups are leading the African fintech revolution, raising more than USD 4 billion in funding since 2015, to bring mobile-based financial services to millions of unbanked and underserved people.5 Taking a mobile-first approach, startups are driving the expansion of affordable mobile payments between individuals within and across borders (e.g. Wave and ChipperCash), the provision of higher value added financial services, such as savings and loans to previously un(der)served customers (e.g Opay and Kuda Bank), and the digitization of formerly analogue business transactions through application programming interfaces (e.g., Paystack and Flutterwave), allowing businesses to integrate payment processing into their websites and mobile applications.
Commerce, which is largely dominated by small-scale informal retail, has become Africa’s second most popular sector for tech startup investment, raising around USD 2 billion since 2015. By aggregating supply and demand on their platforms, e-commerce startups are increasingly providing access to products and services that were previously unavailable in the region. For instance, startups such as Copia Global are using agent- and platform-led business models to connect manufacturers with remote households, organizing the direct delivery of goods to them. Others, such as Wasoko and Kippa, focus on connecting small, often informal, retailers to manufacturers for better access to supplies and capital.6
E-commerce startups provide access to products and services that were unavailable in Africa.
African startups also use locally adapted digital solutions to improve access to other products and services. Platform-based ride-hailing startups, such as Safe Boda and Gokada, provide efficient and affordable motorbike transport options that were previously unavailable in many African countries.7 Agtech startups such as WeFarm, Twiga Foods and Hello Tractor are connecting smallholder farmers to vendors, suppliers and each other to enhance access to information, markets and machinery. Edtech startups such as uLesson, and healthtech startups such as mPharma, are using digital platforms to facilitate the delivery of high-quality education and health care.
Harnessing the potential of digital technologies for development in Africa
The rise of African startups and their locally adapted digital technologies presents a significant opportunity for leapfrogging in Africa. However, to further support this trajectory, there is a need to gain a deeper understanding in three specific areas. First, what are the preconditions that foster a vibrant tech ecosystem, for example in terms of regulation, startup and antitrust laws and digital skills? Second, how are impacts distributed across socioeconomic and firm characteristics, and is there a need to protect or compensate some groups? Third, what is the role of international and multinational partners?
Answering these questions can help Africa harness the potential of its emerging tech sector for development.8