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Bootstraps or bust – starting a tech business in Africa

October 9, 2012 • Features, Startups

Industry analysts make an interesting point about fledgling technology businesses in Africa: unlike markets generally perceived to be more developed, like the US, where capital is available, but ideas are scarce – in Africa there are many solid business ideas, but money is tight.

 

There is opportunity for tech startups in Africa. (Image: File)

The continent”s ICT sector is still regarded as attractive and potentially lucrative. Just on the mobility side alone Africa is reported to feature the world’s fastest growing mobile market, with the expectation that the number of active mobile users will grow to approximately 735 million with mobile penetration second only to Asia.

Businesses like MXit and Pagatech stand out amongst the broad African tech startup community. But, research shows that the continent is not short of entrepreneurs willing to dabble in ICT. Names like Dropifi from Ghana and iROKO TV from Nigeria also feature strongly.

Many of these startup companies have emerged from humble beginnings and have risen above challenges, including substantial overdrafts and lack of capital.

There are ways for a venture to get off the ground before there is a secure revenue stream in place – outside venture capital or the involvement of angel investors being two of the more common approaches. Other options include going the ‘bootstrap’ route or using your own money and/or those of other members of the funding team, or soliciting funds from hot contacts, namely friends and family.

Many start-up businesses that target the continent’s expanding ICT sector have to rely on a combination of tenacity and innovation to manage budgets and survive.

Local industry expert and analyst Arthur Goldstuck, Managing Director at World Wide Worx, believes that South African start-ups generally understand and accept the bootstrap scenario.

Arthur Goldstuck, MD, World Wide Worx. (Image: File)

“South African start-ups are generally resigned to pulling themselves up by their own bootstraps. True venture capital is hard to come by in this country – what is labelled VC is usually little more than private equity, and requires companies already to be generating significant revenue and making a profit. Neither tends to be a characteristic of start-ups. As a result, the local outfits have to be lean, mean – and clever. The best of them tend to be ingenious in the way they manage costs as well as build up a client base. However, most have no sales or marketing capacity or ability, and that is ultimately their downfall,’ says Goldstuck.

The lack of marketing a strategy and effective engagement to boost sales is considered one of the top reasons why African tech startups struggle.

Gezahegn Leta, ICT Projects Manager at Bunna International Bank S.C in Ethiopia, says access to finance represents a major challenge to startup companies within the country. Amid a climate of limited incentives and vigorous regulation, there is light at the end of tunnel in the form of global equity firms and innovation within IT.

“The current global economy impacts on startups that are in need of capital injection to fund their ideas and convert them into viable businesses.  Equity capital injection is somehow new, not only to the industry but also to the country at large. This means that local startups face serious challenges. The good news is that the country is witnessing the arrival of global equity firms ready to help change the situation for the better,” he says.   

The continent can hold its own in terms of creative, attractive technology business concepts says Louis Lourie, Marketing and Sales Director, Dac Systems.

Lourie has experienced the highs and lows of venture creation and sustainability. He said that when he, together with his two founding partners, sold their interest in Cenit System Integrators to debis Systemhaus, it felt like he was losing a child!

“Some of the coolest technologies in the world today, for example m-pesa, Mixit and of course Thawte Consulting, were developed in Africa and their business models are now commonplace in the tech landscape worldwide. The petri-dish for these new developments is the entrepreneurial company, the place where the passion for the new idea is so great that the obstacles simply do not seem to matter. Perhaps the biggest value of the tech startup companies is that they show the way for many would-be entrepreneurs,” says Lourie.

This seems to reinforce the notion described earlier that local start-ups have awesome ideas and are effectively managed to utilise every resource – but are tripped up because of a lack of funds.

Marnus Viljoen, Chief Technology Officer at FOXit, says startups are the heart and soul of the ICT market – and that Africa has many advantages to offer startup businesses.

FOXit is a South African company and national provider of solutions, service and support focused on project and portfolio management in business. It is also a participant in the Finweek/Aurik BizAccelerator Programme, a business development initiative run jointly by the Finweek and Aurik.

“The most important thing for a new company is to minimize its overheads and only expand when they are truly able to maintain the expansion. Africa has a fantastic supply of skilled resources and with its constant expansion in infrastructure, continues to be a fantastic place to enter the ICT market,” says Viljoen.

Dawie de Wet, CEO of Q-KON, suggests that it is startup ICT companies that form the nucleus and stimulus for growth and development in ICT, with mobile payment platforms in Kenya and online music services in Nigeria as examples of this entrepreneurial spirit. However, there is a need for local entrepreneurs to help create the right environment conducive to attracting investors.

The established company is taking satellite connectivity to the African market in a major way and is directly focused on the connectivity market on the continent and the dynamics involved in this marketplace.

“Africa’s profile of high risk market development, limited public stock exchange activities, changing regulations and weak legal structures all adds up to weaken the appetite for investors. Everybody agrees that Africa holds huge potential, and business plan scenarios can readily be drawn-up, yet investors want the risks covered and require contingency plans to be in place. Both these examples express the sentiment that an appetite for risk is a stronger pre-requisite than strong capital resources. For entrepreneurs in Africa it means you need to start and demonstrate success, clarify the market, eliminate some of the risks, and then investors will be more than willing to work with you. It’s a little bit like, when you do not need the funding so badly anymore – that’s when you will be able to get it.”

It is all about intent and purpose says de Wet.

“Investors who believe in the long term sentiments of the business will be a golden asset to start-up operations, while shareholders that need to show dividends “back home” and return quarterly profit will ultimately lead to the demise of the company. There is a general saying “Africa is not for sissies” and to this I want to add that “Africa is not a get rich quick scheme”. In the right environment a start-ups can absolutely flourish and accelerate to greater heights.”

There is currently a debate within the industry about a mindset that seems to be focused on showering accolades on companies that have received funding from venture capitalists and investors, rather than those who have generated their own funds and sustained their operations – despite the difficulty.

The argument put forward by author Alyson Shontell in an article “Why do we all praise startups when they receive funding?”,  is that there is a tendency in the market to acknowledge and praise startups on the amount of funding they are able to attract from investors – instead of building up entrepreneurs who are able to start up and sustain a business with little or no funding.

 Perhaps the case in Africa will add impetus to this ongoing discussion.

Chris Tredger, Online Editor 

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