Tech start-ups in Africa battle to get financing

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