By Steven Grin and Rob Eloff
From London’s ‘Silicon Roundabout’ to Dubai’s ‘Silicon Oasis’, governments and businesses around the world are keen to brand their local tech industries as the next hotbed of innovation. With young, digitally-savvy populations, African cities are also joining in on the trend: ‘Silicon Savannah’, ‘Silicon Cape’ and ‘Silicon Lagoon’ have emerged as popular monikers for Nairobi, Cape Town, and Lagos. While these names might boost visibility, approaching business in a Silicon-style may constrain African entrepreneurs hoping to replicate Valley-level output. While Nigeria has emerged as the top destination for venture capital (VC) in Africa, Lagos isn’t Palo Alto — and it shouldn’t be. In the Valley, too much innovation has become about vanity and convenience for the top 10%. in African markets, however, tech can have a significant impact by filling product and service needs for the emerging middle class in sectors from banking and health to transportation and energy. Aspiring to the structure and ideas of Silicon Valley is not a recipe for the long-term success of Africa’s tech ecosystem. Instead, recognizing differences in funding environments, infrastructure challenges, and regulation can help entrepreneurs and investors foster new kinds of solutions better-suited to Africa’s needs.
- The funding environment
Because the Valley ecosystem is not constrained by resource scarcity, startups often use growth as a substitute for profitability. In contrast to the deep pockets of Palo Alto, founders in cities like Dakar or Douala are more likely to encounter predatory bank loans and an arduous road to secure seed capital given a short supply of local and diaspora capital. In 2017, African startups raised an estimated $195 million compared with $84.2 billion in the U.S. Without the same access to venture capital, successful local entrepreneurs must reach profitability as soon as possible with viable commercial models. As a result, a founder operating in Lagos is often more entrepreneurial than her counterpart in the Bay. P2P payments app Venmo was acquired by Braintree for $26.2 million in 2012; the company has yet to report a profit despite strong user growth and $30 billion in annual transactions. By contrast, Zambia’s Zoona, also founded in 2009, has processed only $2 billion in total transactions, but has been profitable since 2013.
- Infrastructure challenges
By 2050, 1 in 4 people worldwide will be African. As the region’s population soars and more people come online for the first time, entrepreneurs must design solutions better suited to the “next billion”. Transportation in Africa may be better addressed by Mellowcabs of Cape Town or SafeBoda of Uganda than by autonomous cars from the Valley. Similarly, startups like M-Kopa and Rensource may be better equipped to solve energy challenges than Tesla because they are entrenched in the environments for which they are building solutions. Customers, like entrepreneurs, develop unique ways to overcome infrastructure challenges that don’t necessarily translate to the Valley: in a region where your customer may not be found on Instagram, it’s the local founder who can understand the gap in the market and find opportunities to meet the customer where they already are. Tulaa, for example, is a B2B agriculture marketplace built to address the fragmented value chain for smallholder farmers. Tulaa layers a mobile-technology solution onto the last mile to aggregate farmers, suppliers and financiers.
- The regulatory environment
While investors may gripe about the regulatory obstacles to doing business in Africa, nascent legal frameworks are an opportunity to experiment in Africa’s tech ecosystem. Those who supported the U.S. Federal Communications Commission’s decision to repeal net neutrality in December argue that deregulation forces innovation in telecoms and internet companies; likewise, many American cities are struggling to regulate drone technology, Airbnb, and Uber without alienating the tech companies that create jobs and tax revenue. In the absence of prohibitive regulation, however, startups in Africa have greater flexibility to experiment with new models. Benefiting from limited regulation of cross-border payments, Flutterwave, for example, connecting siloed payments systems to process $2 billion in 2017 – a 900% increase over the $200 million it processed in 2016. Similarly, despite Kenyan banks’ attempts to contain competitor M-Pesa, the company flourished thanks to a loose regulatory environment for mobile money.
But for all their opportunities, African markets still present major obstacles, including lack of mentorship networks and difficulty recruiting talent. As a result, founders must be even stronger to overcome fundamental ecosystem challenges.
- Mentorship networks
Silicon Valley boasts a massive mentorship network: from Y Combinator cohorts to the PayPal Mafia, serial entrepreneurs and founders-turned-VCs are an invaluable resource to up-and-comers. According to VC Brad Feld, a great tech ecosystem requires a non-hierarchical network of entrepreneurs committed to a full generation of community-building — a luxury African founders often lack. In the absence of homegrown unicorns beyond Jumia, founders on the continent are not exposed to the positive externalities commonplace in the Valley and often navigate their entrepreneurial journeys without experienced guides. As a result, even many eagerly anticipated successes from Kopo Kopo to Wakanow have succumbed to mistakes that local advisors may have helped to prevent. This may soon change, however, thanks to the rise of hubs such as Co-Creation Hub in Lagos and MEST’s expansion from Accra to Lagos and Cape Town.
As the youngest, fastest-growing continent, Africa boasts an enormous workforce full of potential. The challenge in Africa’s tech ecosystems is not a lack of talent but a shortage of talented people willing to risk the rocky road of entrepreneurship. This is a far cry from the Silicon Valley ethos, where ‘go big or go home’ is encouraged. The lure of startup glory and equity often pales in comparison to dreams of financial stability or a small raise in markets like Uganda, where per capita income is $1,820. The experienced professional working at a mid-tier bank may not be willing to trade a pay cut for the chance to ride the startup wave. With a high supply of quality engineers, PocketGems and Dropbox don’t struggle to find top talent. Startups in Nigeria, Kenya, and South Africa, on the other hand, must contend with education systems that do not produce enough high-caliber technical talent and the flight of many gifted, promising minds to the West.
Ultimately, Silicon Valley investors looking to sub-Saharan Africa must leave their expertise at Immigration: the rules mastered in the Bay need to be rewritten for and by African markets. Social and structural differences should not deter those with an eye towards the continent: opportunities in these ecosystems are plentiful, but seeing them requires a little unlearning and contextual understanding.
Steven Grin and Rob Eloff are co-founders of Lateral Capital, a mission-driven venture fund focused on technology ventures in Sub-Saharan Africa