http://www.iol.co.za/business/news/tech-start-ups-in-africa-battle-to-get-financing-1.1606252#.UoRU9uIyKSo
Lagos - When Abasiama Idaresit started a
digital marketing firm in Nigeria’s economic capital three years ago, he
quickly learnt how brutal life can be in a market where tech start-ups
are in their infancy.
Nobody would lend him money to
hire staff or pay for office space, so Idaresit spent eight months
hustling the streets of Lagos, trying to convince clients his plan to
help them develop online campaigns was a winner.
“During those first eight months, I
didn’t make a dime… I was demoralised. At some point I wondered if it
was worth it,” Idaresit said.
It took a money-back guarantee
before a retailer of baby products gave Idaresit a break with a $250 (R2
600) contract to develop the shop’s online presence. Within two months,
the retailer’s revenue began growing by $1 000 a month. Then it hit
$100 000.
Idaresit’s firm, Wild Fusions, is
now a Google Adwords partner valued at $20 million, with revenue
doubling year on year. It helps brands like Samsung, Unilever and
Ecobank develop online marketing strategies for African audiences.
Wild Fusion’s struggles are
typical for start-ups in Africa, as the continent wakes up slowly to the
opportunities of technology. In other emerging markets such as Asia and
Latin America, a tech start-up with a smart idea in a booming economy
might expect to attract investor interest, especially if competition is
slim.
Business
leaders and investors say the sector in Africa is held back by lower
internet penetration as well as scarcity of early-stage capital and a
lack of management expertise.
Many start-ups in the region are
caught in a catch-22 situation, says Churchill Mambe Nanje, who launched
an online job search engine in Cameroon called Njorku.
“To hire the best talent to
develop a start-up, you need capital. Finding capital is hard because
you need to have a track record and a viable product but to get those,
you need capital,” says Nanje, whose company has been profiled by Forbes
Magazine as one of Africa’s best start-ups.
Part of the problem is that
internet use, despite mushrooming in the past decade, is still low. Only
16 percent of Africa’s 1 billion people use the internet, below a
global average of 36 percent, the International Telecommunication Union
(ITU) says.
The information and communications
technology (ICT) sector added just 7 percent to Africa’s gross domestic
product last year, according to an African Development Bank report.
Economic gains from rising
internet usage are likely to be strong. For every 10 percentage point
rise in broadband internet penetration, economic growth rises 1.4
percentage points, according to the World Bank.
Experts
say ICT could help Africa overcome poor infrastructure, satisfy rising
consumer demand, boost regional trade and diversify economies.
But the problem is affordability.
In its 2013 report, the ITU said that, although Africa had one the
highest mobile broadband growth rates, services cost between a fifth and
half of average income compared with just 2 percent to 5 percent in
other developing countries.
In South Africa, the strength of
the tech sector reflects the country’s relative affluence. It has
produced several billion-dollar companies, some of which have been
snapped up by international tech giants.
In east Africa, Kenyan tech has
also seen rapid growth. One highlight is mobile money transfer system
M-Pesa, launched by the country’s largest telecoms operator, Safaricom.
M-Pesa has enabled 67 percent of
Kenyan adults to access banking. Its transactions total about $1 billion
a month and its revenue rose 20 percent to 12.5 billion Kenyan
shillings (R1.48bn) in the first half of this year.
West Africa’s tech sector lags in
terms of prominence and investment, experts say. It needs better and
cheaper internet access and broader adoption of smartphones.
In
Ghana, the number of cellphone subscriptions roughly equals the
population but only 3.5 percent of the population is online, according
to Kwaku Sakyi-Addo, the chief executive of the Ghana Chamber of
Telecommunications.
The scarcity and costliness of
finance also impedes success. Banks in Ghana can charge up to 28 percent
interest for a business loan.
Venture capital firms such as
Intel Capital, JPMorgan, Summit Partners and Rocket Internet have
occasionally financed African ICT firms but business leaders say the
sector needs much broader sources of finance.
One reason for the lack of funding
is the risks investors face, says Maurizio Caio, a founder of UK
venture capital firm TLcom Capital.
Few tech entrepreneurs in Africa
have a long track record to attract investors, says Caio. Crucially,
there are hardly any examples of investors successfully exiting via an
initial public offering or a sale, partly due to underdeveloped capital
markets across the region. – Reuters