What is a successful African startup, Anyway?
I’m writing this reflection after a question that I was asked by my good friend and former colleague, Paul Mandele, on why no successful startup stories are emerging from Tanzania.
I also used to think this was a valid question that requires an answer that consistently shows that nothing is happening in Africa until I started to question myself, “What is a successful African startup anyway?”. Is it a startup that as; raised a significant amount of capital, created a good number of direct and indirect jobs, or provides a solution to a social problem, or contributes a significant amount of tax to the government?
We did a traceability study with the Commission For Science and Technology Tanzania (COSTECH) of two technology hubs in Tanzania, Buni Innovation Hub and Dar Technology Business Incubator (DTBI), to study the impact of the two hubs and trace the status of the graduate’s businesses. While very few raised a significant amount of VC money or even received enough media attention, some startups pay up to half a Billion Tanzanian Shillings of Taxes annually to Tanzanian Revenue Authority (TRA), some had created more than 15,000 indirect jobs, and some through their technologies have tripled the amount of revenue collected by local municipalities.
In the past few years, the problem we face in Africa is over obsession with startups valuation and the amount of capital startups raises. We are living in a “Silicon Valley” bubble that a successful startup is the one that has been able to attract a considerable amount of capital and receive enough media attention. We all love the concept of “Blitzscalling”, but it can be too expensive for African startups – no one will allow you to burn cash continuously on a mission to find a business model that works. In this part of the world, just because you know the meaning of “Runway” doesn’t mean you are already successful. Some people have even questioned if this all startup investing Silicon Valley model is a giant Ponzi Scheme. That is not for me to comment. Less than two per cent of global VC money comes to the African continent chances of you die before raising your next round are higher than any other place on the planet. Some questioned why even some of the major successful exits are not happening in the continent. Why are we still so obsessed with measuring the African startup’s success by only the amount of capital attracted?
Blitzscaling is what you do when you need to grow really, really quickly. It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale. This is high-impact entrepreneurship — Reid Hoffman
I was reflecting with Josiah Kwesi, the CEO and Co-founder of iSpace Ghana, on the role of regional and global VC funds coming to the African continent. My question was straightforward for someone who has been in the Ghanaian Startup ecosystem and as an active player to what extent he feels the money has impacted grassroots startups that emerge from the local hubs. His answer was no surprise; the VC fund is overrated in Africa, especially in the grassroots startup ecosystems. For years local innovation hubs have been living a lie of making money by taking equity from startups they are hosting, but today, this is still a daydream for many local hubs.
Learning from our work at Sahara Accelerator, you have a better chance of making money from a local startup by matching them with a strategic partner, established SMEs or Public Agencies more than introducing them to an Angel Investor or Venture Capitalist. It is a systematic issue, so many things need to work in Africa before a significant number of startups and investors can benefit from the regional and global VC money. We can still pursue, but we need to be realistic on how we address the funding gap in the continent through other means of financing.
It is not a secret that SMEs have a better chance to survive in Africa than startups. What about finding innovative ways to link the two? If you link a medicine delivery app to an established SME involved in the pharmacy value chain with the right negotiation tactics, you have a better chance of securing commission on revenue or profit. Established SME owners can be mentors, business partners and investors at the same time. Startups can play the role of tech-transfer experts to these SMEs. This is just one of the models. If we reflect furthermore, innovative approaches can emerge, but no, the only thing we want is to replicate the Silicon Valley model. Next time you organize a marketplace or a Demo Day, instead of just inviting Angel Investors and VC Firms, identify strategic value chain partners that can create value for the startups you are incubating or accelerating.
To be clear, I don’t have any issue with Africa or the global VC ecosystems. We need to find alternative innovative ways to finance our businesses to bridge the financing gap. We shouldn’t discredit successful local startups and entrepreneurs just because they haven’t raised money from global VC firms, reputed individuals, or institutional investors.
Let’s continue the conversation on Twitter @Afruturist