Realizing Startup Economy in Tanzania, Lessons From Other Africa Startup Ecosystems.
In the past few months, I have been studying different startup ecosystems in Africa, identifying some salient features of the ecosystem and what Tanzania can learn from them. Primarily I looked at the five countries that attract most of the VC capital coming into the continent and with the most startup success stories. The countries abbreviated to KNGS; Kenya, Nigeria, Ghana, South Africa and most recently, Egypt.
These countries have few things in common that make them stand out in the African startup ecosystem. They share some of the traits, while they also have salient features. The analysis shows that Africa’s Internet economy can reach $180 billion by 2025, accounting for 5.2% of the continent’s gross domestic product (GDP). By 2050, the projected potential contribution could reach $712 billion, 8.5% of the continent’s GDP.
The total amount of VC funds coming to the continent has increased more than five times in the last five years. Compared to $400 million received in 2015, in 2019, the continent attracted $2 billion, according to Partech Partners. The number is varying depending on the source but all shows Year on Year (YoY) increase in capital coming to the continent primarily targeting startups. The four countries Nigeria, Kenya, South Africa and Egypt attracting the lions share of the capital.
Startups are also the future of the continent. With African governments and traditional businesses struggling to create employment, startups can be one of the solutions to that problem. Studies show additional 450 million jobs are needed by 2035 to cater for young people looking for work. Hence we must build resilient startup ecosystems to capitalize on the Startup Economy to address unemployment issues. It is also difficult to quantify the direct impact of the Startup economy in other crucial sectors in Africa, such as Education, Health, Agriculture, Finance, etc., because of the massive impact of startups in those sectors. There are currently over 400 active fintech companies in Africa disrupting the financial sector and promoting financial inclusion. Data shows 277 fintech startups in the continent have raised ~900 million in the past six and a half years.
Some of the issues Tanzania can learn from matured African startup ecosystems towards realizing the startup economy include;
Investing in Talents and Digital Skills.
In the Google and IFC report, the report identifies that the four countries Nigeria, South Africa, Kenya, and Egypt, produce a significant number of youths with engineering skills required to accelerate the growth of the startup ecosystem. The talents are produced by both academic and non-academic institutions, including digital platforms and skills programs. Both Kenya and Nigeria are known for supporting the establishment of digital skill programs and platforms to increase the number of enterprise-level engineers. South Africa leads in the number of developers with 120,000 developers followed by Nigeria and Egypt both with 85,000 developers. Kenya has 60,000 developers.
In Kenya and Nigeria, the private sector is highly involved in the skilling business. Programs and platforms such as Andela and Moringa School produce talents that are highly needed for the market. For Tanzania to catch up with the Startup Economy, this is the first area that needs fixing. There is a need for more world-class digital skilling programs and platforms to help produce high-quality talent for local, regional and global startup ecosystems. Also encouraging academic institutions and youths to capitalize on digital skills programs offered by global tech giants such as IBM Digital Nation Africa and Google Digital Skills For Africa Program. Great startups need great talents, and currently, we are not doing well in that area. Universities and TVETs can play their role, but there is a need for more private sector involvement to bridge the gap between what the market needs and what these institutions offer.
Diaspora and Expatriates
Startups are global businesses; they flourish through a strategic collaboration between different startup ecosystems. One of the salient features of the Kenya startup ecosystem is the number of expatriates engaging with the ecosystem. People might have different opinions about how they engage with the local founders and the investment dynamics, but still, they offer a substantial strategic advantage to the local ecosystem. It is not a secret that people invest in people who look like them. The market needs to be more lucrative to expatriates and foreigners and encourage cross border collaborations to increase interest from regional and global investors.
Also, Tanzania needs to revisit the role of Diaspora in supporting local businesses. One of the reasons for the success of Nigeria’s startup ecosystem is the role played by Diaspora communities. The country is among the African countries with the most substantial linkages to the US and the UK startup ecosystems, encouraging investment opportunities to their local ecosystem. There is a significant number of Nigerian startups in Silicon Valley than any other African startup ecosystem. Tanzania needs to build strong diaspora communities and create an environment to effectively allow Tanzanian Diaspora communities to participate in the local ecosystem. Some legal and regulatory structures act like obstacles. Revisit them to encourage opportunities, linkages and exposure capital between Tanzanians living abroad and the local startups. Innovators can work on innovations to allow Diaspora to invest back home while the government can fix regulatory issues.
Legal and Regulatory Environment
All four countries have constantly revisited their legal and regulatory frameworks to remove obstacles that hinder the further growth of the ecosystem. Kenya and Nigeria are actively working on establishing startup acts. Startup acts are the next form of policy Innovation in Africa. We are glad in Tanzania, The Tanzanian Startup Association (TSA) is on the same mission working with the government on the Tanzania Startup Act agenda.
Unlike traditional SMEs, the needs of the startups are cross-cutting issues, sometimes requiring interventions from multiple ministries and public agencies; hence it’s imperative to have its law. For a startup to excel, the legal and regulatory environment should be kind on immigration issues, investment issues, ICT issues, copyright laws, etc. The biggest obstacles for further growth of the Tanzania Startup ecosystem are the rigidity of our legal and regulatory frameworks on essential issues facing startups. Having a Startup act relevant and localized to meet our needs will be a big step in the right direction.
Local Investor and Mentor Networks
Nigeria is currently building one of the most robust local investors networks. The founders turning investors to local ecosystems following their successful exits is the best thing happening to their ecosystem. One of the biggest challenges facing startup ecosystems in Africa is the involvement of the local investors in the early stage of the business when a startup needs seed-stage funding support. Local investors have a low appetite for intangible assets and new forms of business.
Most great startups die before even they see the light of the day. We need to encourage local solid mentors and investor networks by creating incentives to high net worth individuals and Corporate Venture Capital (CVC) to invest in startups. Corporate involvement in the local startup ecosystem is crucial if we are to create enterprise quality level startups. Countries like South Africa have strategically found ways to engage corporates and incentives them to work with startups through different incentives, including things like Section 12J, providing tax relief for corporates investing in early-stage businesses. While there have been some issues recently with Section 12J, it is one of the approaches worth testing and deploying to address funding gaps for startups. Another approach is to encourage the public funds designed for youths to be structured so that startups can benefit from them. One of the challenges with the existing funds is that they want youths to form groups before accessing the funds, which doesn’t work well with startups that usually start with one or two people before bringing others into the team.
Investment Landscape and Exit Strategy
Investors invest if it is clear how they are going to exit. Most investors struggle with the exit strategy from our ecosystem. Government should sit with key stakeholders to understand how to develop systems and structures that will ensure local, regional and global individuals and institutional investors can exit once they have invested in Tanzanian startups. Currently, investors are forced to invest in Tanzanian businesses if they can only be guaranteed to exit from the company outside Tanzania.
The government loses the significant income that would have been generated from the exit process. The trend is not a Tanzanian problem but an African problem. African startups are increasingly domiciling overseas and in tax heavens. If we can create smooth exit mechanisms for investors, other African startups will want to exit in Tanzania. It will also help attract investors, individuals and institutional investors to establish offices in the country and encourage more capital to flow in the country.
Media Engagement and Positive PR
You can’t play down the fact that different countries have different strategies to promote their startup ecosystems, some by accidents and some intentionally. We need to encourage more positive news emerging from our Startup Ecosystem and celebrate our heroes — people who have closed major deal rounds, have a significant impact on society and startups that have attracted significant capital from investors. We need to attract global tech firms and companies to develop an interest in Tanzania and establish strategic offices.
Investors look for activities in the ecosystem before they develop an interest in a specific ecosystem. Fewer activities mean less investor interest. Countries like Kenya, Nigeria, and Rwanda are doing outstanding work in this area. Local media houses, digital news platforms, the government and the community, should commit to promoting the investment landscape in the country by sharing stories and promoting what is happening in our local startup ecosystem.
Innovation Hubs (Accelerators and Incubators)
It was fascinating to learn that the four countries with the highest number of technology hubs are the same countries that attract most of the VC investment in the continent. They are the same countries that produce a significant number of digital talents. The role of innovation hubs in creating skills, nurturing early-stage businesses and establishing strategic partnerships can not be underestimated.
The hubs might have some flows here and there because of their maturity curve, but they still play a crucial role in the ecosystem. We need to encourage more technology hubs and help the existing ones improve their services to startups. Most of the hubs are new. Some of them are younger than the startups they support. Strategic engagement between the government and the private sector to support the hubs is highly needed to transform the hubs into launch engines of talents and startups in the ecosystem.
These are some of the critical issues that I have identified that are helping other ecosystems flourish and have competitive advantages in the African startup ecosystem. Other vital pillars include; Digital Platforms and Infrastructure, encouraging connectivity and integration between different players in the ecosystem, Consumer Digital Literacy, encouraging larger market sizes for startups growth, Digital Blueprints, laying down government priorities and plans towards digital transformation and Dialogues; events and meetups igniting conversations on reforms and strategies towards capitalizing on the digital revolution and the startup economy.