Unperturbed by the COVID-19 pandemic, international investors have continued to pour money into the African continent’s start-up scene — but that influx of cash is not being distributed evenly.
In fact, the vast majority of venture capital in Africa is scooped up by just four countries: Nigeria, Egypt, South Africa and Kenya, Africa’s “big four.”
According to the African Development Bank’s (AfDB) 2021 report, these four countries account for about a third of the continent’s start-up incubators and accelerators and receive 80% of foreign direct investment (FDI) into Africa.
The African tech start-up scene is growing
The seventh edition of Disrupt Africa’s African Tech Startups Funding Report revealed that start-ups in the big four raised a combined $1.9 billion in 2021 — about 92.1% of the overall total investments raised in Africa for that year. The latest figures are, in fact, part of a years-long trend of the big-four dominance in Africa’s start-up scene.
Funding secured by Nigeria, Egypt, South Africa and Kenya has continually increased over the years: from a 79.4% share in 2018, to 87.5% in 2019 and then 89.2% in 2020.
These figures stand in sharp contrast to the cash raised by countries like Ethiopia, the Democratic Republic of Congo and Tanzania, all of which still record a low level of start-up investment activity.
While capital funding is undoubtedly on the rise in Africa, it is becoming more concentrated in the big-four countries. According to the 2021 Disrupt Funding report, non-big-four African countries raised $170,607,500. That is just 7.9% of the continent’s total.
The report also indicates that more than 40% of that funding was secured by start-ups from Ghana, Morocco and Tunisia. According to one report, Algeria raised $30 million in start-up funding; Morocco raised $29 million and Tunisia raised $23 million in venture funding in 2021. These investments are relatively minor compared to the funding raised by the big-four countries in Africa year after year.
How Africa’s “big four” took the lead
According to the AfDB, the “big four” countries push ahead faster than other African countries when it comes to start-up investment and funding in large part as a result of their large economies and sizeable populations.
Nigeria, for example, with its GDP of roughly $440bn and population of 206 million, is projected to be the third largest country by population in the world by 2050. This makes Nigeria an attractive location for start-up investment inflows. Likewise, Egypt, Kenya and South Africa boast some of the largest economies in Africa, with $404bn, $110bn and $420bn GDP respectively.
The large populations — Egypt has 102 million inhabitants, while South Africa has 59 million and Kenya 53 million — of the big four countries serve as solid foundations for returns on venture capital investment. However, population and GDP alone are not the full story. There are other more subtle factors required to drive investment toward start-ups.
Countries like Tanzania and Ethiopia are yet to secure anywhere near the huge venture investments the big four regularly pull in, despite their sizeable populations of 59 and 115 million respectively. Island states like Mauritius and the Seychelles, which boast higher per capita incomes, are yet to increase their venture investments despite their high levels of wealth and favourable regulatory environments for start-ups.
Research shows that a lack of fintech innovation also contributes to the low levels of start-up funding in some African countries.
Indeed, the four biggest African tech hubs also attract the most fintech funding in the continent. Undoubtedly, African countries that lack fintech solutions are less likely to secure high start-up funding and investments. Other factors, such as the availability of economic resources, political and socio-economic constraints and poor financial systems also hamper the attractiveness of investing in many African countries. Indeed, the high levels of FDI in the big four allows them to access the continent’s investments and paves the way for them to further expand their dominance of Africa’s tech scene.
How the rest can catch up
To drive venture investments in the continent, it is critical that African countries begin to provide fiscal and non-fiscal incentives for venture capitalists to invest in the financial and tech sectors. African governments in non-big-four countries must also improve their legal and institutional environment so as to create a hospitable investment ecosystem for investors and start-ups. This would not only transform the investment landscape of non-big-four countries but would make them an attractive destination for start-up investments in Africa.
Countries can use the African Continental Free Trade Area (AfCFTA) as a tool to win investments. Through the AfCFTA, African governments in non-big-four African countries can attract increased start-up funding by reducing investment barriers and improving investment governance within their respective countries.
The success of Nigeria, Egypt, Kenya and South Africa is not only something for each country and its population to be proud of — it is also evidence that innovation will flourish anywhere, given the right conditions.
East to west and north to south, Africans are young, ambitious and smart. If given the right tools to dive into tech and the right regulations are introduced, the continent’s nascent tech scene will flourish.
This article was originally published in the World Economic Forum.