A new regional survey of tech start-ups across East Africa reveals that while investment levels remained relatively stable over the last 12 months, the heart of Africa’s start-up ecosystem perceives many roadblocks as having the potential to disrupt the region’s growth trajectory.
The survey, “A Deep Dive into East Africa’s Start-up Ecosystem: Challenges and Opportunities”, polled seed business (25,9%), Series A business (28,7%), Series B business (25%) and scale-up businesses (20,4%).
The survey found that access to funds over the last 12 months remained relatively stable compared to the previous period, as 25% indicated that year-on-year investment levels remained similar, whilst 25% and 19% of respondents indicated respectively a slight increase and a slight drop of investment levels.
Although 28% of respondents indicated that Covid-19 had slowed down investment levels across the East African start-ups landscape, making it the largest impacting factor for those young businesses, 17% of answers collected indicated that the pandemic had also boosted the digitalisation journey of the region, with a potential to create more opportunities for tech start-ups across the board.
The region remains a dynamic hub for start-ups which explains how 74% of tech start-ups only needed to meet up to five investors before securing funds. This number drops even further for seeds businesses as 52% of them needed less than three investors before securing new investments, a number that seems closely intertwined with their reliance (54%) on friends and family for fundraising. By contrast, 22% of series B businesses only managed to access new funds after reaching out to more than 10 different investors.
The report also establishes that whilst start-ups get investments from 2,1 different types of funding sources on average, the more established the start-ups become (series A, B and scale-ups), the more they can rely on crowd-funding, government-backed loans and bank loans as well as VCs to raise money. By contrast, seed businesses have an average of 3,7 different funding sources, with 54% of those young businesses relying on friends and family for funding.
Across all funding stages, entrepreneurs carefully plan the way they are allocating their funds. The survey unveils that the top three priorities of funding allocation focus on investing in equipment (26%), entering new geo markets (21%) and developing products (16%). Scale-ups especially put a strong emphasis on business expansion as 35% of them use funds to expand to new geographies.
Talent recruitment still receives 14% of the funds received across all funding stages. But attracting new talents doesn’t seem to be perceived as the biggest priority for fund allocation.
While there is huge tech potential in the region, there are still significant roadblocks that need to be addressed for the region to maintain its competitive edge as a tech start-up powerhouse. After a few years of business disruption, East African start-ups seem tuned in to potential impacts of events happening on the global stage on the region. This is how 55% of respondents identify the risk of a global recession and / or national economic situations as a potential threat, with 32% identifying this as a very high barrier.
Fifty-six percent of respondents also identify the reliance on international VCs as a high risk for business growth, an interesting figure to look at considering survey answers were collected shortly before the SVB crisis unfolded.
Most importantly, 59% of respondents perceive the lack of access to investors as a business barrier. In light of the SVB crisis, East African start-ups’ appetite to diversify their sources of funding is likely to only increase.
Positive developments are also underlined as part of this exclusive report, with many opportunities for growth being identified by start-ups. The report highlights that greater networks of supporting incubators (57%), a widening of the pool of industries receiving funds (56%) as well as the rise of local VCs/funding opportunities (55%) all represent excellent prospects for growth for East African tech start-ups. The report also highlights that 74% of respondents identify sustainability as very relevant for their business mission.