Africa’s Startup Scaling Challenge
A look at pain points that make venture scaling in Africa hard.
I had the opportunity to sit on a panel moderated by David Van Dijk at the 10th Anniversary of the Dutch Good Growth Fund (DGGF) organised by Triple Jump at the RAI Amsterdam this October 2024. Given that the early stages of business ventures involve various phases where entrepreneurs must adapt and refine their approach to navigate challenges and capitalize on opportunities, the session was titled “Managing risk-return-impact profiles: Transitioning from the ‘valley of death’ to early-stage growth continuum” .
Our discussion explored the challenges of starting and growing a company, focusing on scaling issues, mismatched funding options, capital allocation hurdles, uneven investment distribution, local funding mobilization, and the potential for missed development opportunities due to demographic factors with case studies from across the world — literally!
My role in the panel which I fully embraced was to bring a local African early stage investment viewpoint to the discussion. The main thrust of my contributions which I share here in this article based in part on our ABAN Angel Investment Survey Report 2023 is that when it comes to scaling a company in Africa, the continent’s unique set of opportunities are replete with challenges that makes the process complex.
Digital ventures and others scaling in Africa face the challenging cocktail of infrastructure deficits, talent shortage, lack of access to growth capital and market fragmentation as primary hurdles that are pervasive no matter where on the continent they are operating in. However, startups (and SMEs) that navigate these challenges successfully, and there are an increasing number of them, have the potential to tap into some of the fastest-growing and most dynamic markets in the world.
While there are pockets of support from the likes of the African Development Bank (AfDB) and the African Continental Free Trade Area (AfCFTA) for growing local early stage investment ecosystems, more needs to be done in terms of building infrastructure, providing scalable capital, and harmonising regulations. Addressing these pain points will unlock Africa’s potential for startup growth and long-term sustainability.
1. Infrastructure Deficits
Many of our African countries face significant infrastructure deficits, including unreliable electricity, poor road networks, and limited internet access, particularly in rural and underserved areas. Although digital adoption is growing, access to data, digital services, and broadband internet remains limited in many parts of Africa. Mobile penetration is improving, but the cost of data remains high relative to income levels. Logistics and supply chain challenges are also common, increasing operational costs.
Scaling digital ventures requires seamless access to infrastructure to support production, distribution, and digital services. Infrastructure gaps in energy, transportation, and broadband prevent such startups from reaching new markets efficiently, raising costs and introducing delays. Ventures looking to scale their digital products and services struggle with limited internet penetration, particularly in rural areas. The cost of delivering digital services increases, while customer acquisition is slower due to fewer users being online consistently.
While initiatives such as the African Union’s Programme for Infrastructure Development in Africa (PIDA) which focuses on large-scale infrastructure development across transport, energy, water, and ICT including the trans-African highway network with the aim of improving regional transportation links and energy access, which in turn support the scaling of digital ventures and SMEs are underway, such infrastructure improvements are slow, unevenly distributed, and often require significant private-sector collaboration to make real progress. Our governments and telecom providers need to collaborate more to make internet access affordable and widespread. Programs to improve digital literacy and infrastructure should be prioritised to enable more consumers to access and use digital services effectively.
2. Talent Shortages
Access to skilled labour, particularly in technology, engineering, and management, remains a challenge in Africa. The talent gap is exacerbated by brain drain, where highly skilled workers leave for better opportunities abroad. Scaling ventures require a highly skilled workforce to manage growth, but the lack of local talent in fields like software development, data science, and advanced management hinders such expansion. Startups are having to spend heavily on talent acquisition, training, and retention, which limits their pace of scaling.
Although tech hubs and innovation centres like Nairobi, Lagos, and Cape Town are developing talent pools, the pace is not fast enough. More investment in STEM education, vocational training, and university-industry collaborations is essential to boost the talent pipeline. Additionally, creating incentives for African diaspora professionals to return could alleviate the brain drain.
3. Access to Growth Capital
While early-stage funding in Africa is improving, startups often struggle to secure post-Seed (i.e. Pre-Series A, Series A, B) or growth-stage funding. The risk appetite and financial capacity among local investors is limited, and the international investment community remains hesitant about African markets due to perceived risks some would argue are justified as many African countries experience high inflation rates and volatile currencies, which tend to erode profit margins and make scaling internationally challenging for local ventures. Currency devaluation also impacts purchasing power and the affordability of goods and services thereby reducing the size of the markets.
Growth-stage companies need significant capital injections to expand regionally, enhance technology, and scale operations. This lack of funding makes it difficult for African startups to maintain momentum as they scale, with many returning to bootstrapping, which constrains growth potential. Startups scaling across borders must also manage currency fluctuations and inflation risks, which can disrupt their business models, particularly in high-growth industries where margins are already thin. Raising foreign capital also introduces risks related to currency exchange rates often with devaluation of the local currency.
Local angel networks, venture capital firms, and accelerators are growing to fill the local funding gap but remain concentrated in the diamond hubs of Nigeria, Kenya, Egypt and South Africa. More innovative funding solutions like blended finance, mezzanine capital, and local currency lending need to be developed to address capital shortages. Our governments need to foster public-private partnerships to de-risk investments in high-potential startups using both financial and knowledge capital. Regional financial instruments that offer hedging options for currency risks could be introduced. The ABAN/AfriLabs Catalytic-Africa platform offers a tested option here.
4. Fragmented Markets
I have often said and will continue to repeat that Africa is not a homogeneous market, with diverse cultures, languages, and socioeconomic conditions. The difference in consumer preferences and levels of economic development across regions creates challenges in addressing it as a single market. In addition, Africa’s regulatory landscape is nationalistic or regional, fragmented, with varying legal frameworks, compliance requirements, and business environments across countries. Navigating these complexities can be costly and time-consuming for startups looking to scale regionally or across the continent.
As scaling requires adapting to multiple markets, each with different customer needs, consumption habits, and price sensitivities, Startups must localise their products and services, which often increases costs. Lower purchasing power in smaller markets limits the potential for revenue growth necessitating cross-border expansion. However inconsistent legal structures, import/export tariffs, taxes, and complex business licensing requirements add operational burdens mean that Startups often need to hire legal experts or establish costly local offices to navigate regulatory hurdles.
Again, the AfCFTA is a step in the right direction, aiming to create a single market across 54 countries, but it is still in its early stages. Governments can enhance this by simplifying regulatory requirements, offering incentives, and providing clearer paths to compliance for startups scaling across borders. While efforts are being made to create unified digital markets and foster intra-African trade, startups often have to navigate these challenges alone. Regional incubators, market entry support, and more accessible market research could help founders better understand and strategize for market fragmentation.
I trust that helps
TD
