2023 was a brutal year for Africa’s tech ecosystem as funding dropped by almost 50% and startups closures filled the headlines while those with runway slowed down expansion plans.
Moreover, in a recent article, Stephen Deng, a cofounder and General Partner at DFS Lab argued that the ecosystem has not lived up to the potential that was projected a decade ago, with key factors underpinning the ecosystem’s growth failing to meet expectations.
For example, one of the factors that has driven tech in Africa over the years is the leapfrog narrative, which says that consumers would quickly jump from traditional technologies to new technologies. This narrative emerged in the telecommunication sector where Africans barely used landline telephones but jumped straight into mobile phones.
Deng points out that leapfrogging hasn’t quite panned out quickly enough in key sectors, notably cleantech and ecommerce. We take a look at ecommerce where several startups emerged to adapt the Amazon model in Africa, including Jumia, Konga, and Takealot.
“Between 2012 and 2015, companies like Jumia, Konga, and Takealot raised almost $900 million in venture capital. In 2014, Jumia’s $150 million raise was half of all venture funding in Africa that year,” Deng said.
“Ten years later, Jumia was able to go public but had its share price drop by as much as 90% and is now going through a massive reinvention. Konga was allegedly acquired for ~$10 million after raising ~$80 million. Takealot, operating in Africa’s most mature ecommerce market in South Africa, cannot find profitability.”
According to Deng, the sector has not lived up to the promise of African consumers leapfrogging traditional retail to ecommerce.
“Over the ten years since 2014, Africa’s ecommerce rate as a share of total retail continues to hover well under 5%. In South Africa, it’s around 7%, the highest on the continent. In 2014, analysts and survey respondents thought that this number would jump to 50%+ by 2020.”
When diagnosing the reasons for this performance, Deng warns that investors and operators on the continent are not really adapting to the real situation on the continent and are rather copying and pasting what has worked in Silicon Valley.
Much of the capital in the last decade, which coincides with Zero Interest Rate Policy (ZIRP), came from global investors new to Africa, bringing with them ‘Silicon Valley’s ZIRP era archetypes and models.’
In 2021, 77% of active investors in Africa were international. The significant drop in deals in 2023 largely stemmed from the retreat of North American, European, and Asia-Pacific investors.
Africa’s tech founders may have molded their companies into the shape of global investor demand in the last few years, but Africa’s markets have been shaped by the evolving needs and limitations of its buyers and sellers, irrespective of tech’s vision for the continent.
– Stephen Deng
Looking at Africa from a first-principles perspective (without comparison), Deng argues that Africa’s rate of digital adoption is slower than the American market.
“We believe ZIRP-era venture capital vastly under-estimated this factor in African tech and over-estimated market readiness for the digital-first solutions they were most comfortable with.”
But this does not mean there are no opportunities, he adds that there’s an incredible amount of value in between the old and new tech. Besides, Deng and his DFS Lab believe that when adoption eventually happens, the returns can be ‘dramatic.’
According to Deng, the opportunity in Africa exists in embedding technology into physical systems which they call ‘cybernetic,’ sort of what is happening with products such as M-PESA and MoniePoint, which are digital wallets backed with armies of physical agents.
“We continue to believe that it’s this mix of online & offline, digital & physical, legacy & next-gen, that will frame the next opportunity set of venture capital on the continent.
At its core, cybernetic commerce is a tech-enabled extension of Africa’s informal (and semi-informal) markets, the part of the continent that accounts for 50% of its GDP and 83% of its employment.”
Follow us on X for the latest posts and updates
Join and interact with our Telegram community
__________________________________________
__________________________________________
