Evon Jeewan, a Corporate Finance principal at investment banking firm Bravura, teases out some of the golden investment opportunities in the African tech space which shine brightly against the gloom of pandemic-constrained global markets.
In the face of the global downturn with growth projected at -4.4% (IMF, October 2020), deep recessions and lowered investment over the long term, African tech companies are surprisingly enjoying market impetus. According to Evon Jeewan, a principal at investment banking firm Bravura, African tech start-ups have fared reasonably well regardless of the pandemic-stricken year that has collapsed and constrained numerous sectors around the globe. Within the depressed investment environment, might Africa yet reveal some golden investment nuggets?
In July 2020 SweepSouth, a local company that connects domestic cleaners to cleaning assignments via an online platform, announced an undisclosed amount in venture capital investment from Futuregrowth. This follows on the heels of the company’s successful R60 million capital raise in December 2019. In May this year, media giant Naspers invested R100 million in agritech business Aerobotics and in August committed to invest R1.4 billion in the next generation of local tech start-ups. In the same month, Ventures Africa reported that Kenyan human resources tech company WorkPay secured $2.1 million in seed funding; Zambian clean energy company WidEnergy Africa received an undisclosed amount from ShEquity; and Mali-based off-grid energy start-up Energy+ secured $1 million in grant, debt, equity financing, and enterprise development services.
It appears that the momentum which Africa’s tech sector experienced in 2019 has continued unabated into 2020. Last year investor interest in the untapped potential of African tech start-ups was at a high point. Forbes magazine reported that a total of 311 African tech start-up companies received investment in 2019 from 261 investors (which was a 61% increase from the number of investors in 2018).
The amount of investment provided to African tech start-ups in 2019 was noteworthy, with different reports suggesting a total investment of $406 million (according to a report by media outlet Disrupt Africa) to around $2 billion (according to a report by Silicon Valley based, Africa focused fund Partech). Notwithstanding the variance in numbers (largely due to the use of different methodologies) the important takeaway message is there appears to be consensus in the investment potential of African tech companies.
The sectors where opportunity lies
Fintech has long been regarded as representing attractive opportunities given its demonstrable force in shaping the structure of the continent’s finance industries. Fintech in Africa occupies a niche, country-specific space. There is a growing appreciation that African-developed apps are proving better able to meet the unique needs of locals and their usage habits than those developed in Silicon Valley.
Fintech is less about disrupting the traditional financial services on the continent than it is about building up what is an under-developed market, where 66% of the adult population are still unbanked. Consider the impact of mobile money service M-Pesa which was launched in Kenya in 2007 (and has since expanded to ten African countries). At the time, financial inclusion in the country stood at just 27% of the population. Today this has grown to 83%. In West Africa, mobile money agents were thirteen times more active in 2018 than the total number of bank branches and ATMs combined, according to The Mobile Economy West Africa report.
In the last few years there has been an increase in fintech start-ups that have begun to mature. The typical investor with a buy-out focus (later-stage investment) is now beginning to eye earlier stage investments due to the crowded space in later-stage investments where there is arguably more capital available than there are good assets. To avoid overpaying for assets, investors are beginning to look earlier into the curve where there are attractive companies and better valuations, albeit with a higher risk.
As the fintech space begins to overcrowd, investors with an eye on African tech are also exploring other opportunities. According to the co-founder of Disrupt Africa, Gabriella Mulligan, interest in the e-health space in Africa has accelerated in the last nineteen months, with the COVID-19 pandemic highlighting the work being undertaken in the health-tech sector. Mulligan says that there are huge opportunities here to prove concepts, gain traction, and achieve lasting change in healthcare.
Agritech is another area that holds a great deal of promise as a potential disruptor in Africa. Farming is key for most African economies and accounts for at least 15% of the region’s GDP but remains low as a share of global agricultural production. This despite the continent holding more than 60% of the world’s arable land. Currently the African agritech market is dominated by Kenya and Nigeria, with Ghana in third position. These three countries account for more than 60% of the active agritech start-ups in Africa.
Drought, irrigation, fertilisation, disease protection and market access are priority areas for farming. African tech companies are responding by developing innovative tech solutions to meet the needs of local (and country-specific) communities. In Kenya, for example, several companies are focused on smallholder farmers given that the country’s agriculture, which accounts for about a third of Kenya’s economy, is largely made up of this segment. (Note that this is a widely accepted statement although fact-checking organisation Africa Check Africa cautions on the dearth of available supporting data.)
Agritech company UjuziKilimo, founded in 2015, sends farmers interactive SMS advice, detailed agricultural action plans and best practices. Dubbed by Forbes Africa as “Uber for farmers” the company’s database provides weather updates and precision farming tips based on the information gathered from sensors that farmers insert into the ground to read the soil quality and pH values.
Nairobi-based iProcure, which has so far raised about $1 million in venture capital, provides a multifaceted market intelligence platform for supply chain management, monitoring sales prices in remote locations, and supporting built-in mobile payments. Warehousing assistance is also provided using predictive algorithms that ensure the consistent supply of essential commodities as well as last-mile delivery. In addition, iProcure helps retailers identify geo-located purchasing patterns in real time, in turn helping them offer targeted loyalty programmes and discounts to farmers.
In South Africa, Cape-Town based agritech company Aerobotics, which was founded in 2014, responded to the need for robust disease protection by developing a service that uses aerial imagery from drones and satellites combined with machine learning algorithms. This enables the detection and analysis of pests and diseases affecting individual trees and vines, helping to forecast yield. That this is a much-sought after solution is evident in the company’s steady growth in six years. The privately-owned company has eleven investors and is currently in its later stage venture capital raise, with the latest deal value amounting to $5.36 million. The company is also looking to expand its offering to the United States.
Early stage funding – risk and reward
To underscore the point made earlier, as private equity and venture capital jostles for a share of the African tech pie, early stage development could be where investment opportunities lie. Unlike later-stage funds which are invested in the scaling-up of the business, early stage investment is higher risk. Would-be investors must be aware that returns on early stage investment are highly variable and can take between five and seven years to be realised. Added to this, it could take some years before being certain that a start-up investment will generate any return at all.
The upside is that African tech market entrants are currently quite accessible. This is largely due to the surfeit of globally-funded, Africa-focused accelerator programmes and tech start-up competitions that are enticing local tech companies (with prizes of seed capital) to develop innovative solutions to the continent’s challenges. These programmes not only assist in raising the profile of African tech innovators but can also provide a good overview of the African tech landscape for would-be investors.
Investors faced with the unexpectedly gloomy prospects of tried-and-tested investment vehicles might do well to tease out the investment opportunities that African tech can provide. Through careful interrogation and the rigorous application of sound country and sector expertise, it is possible to unearth African tech’s golden nuggets of investment.