Mega-Rounds Impact on The African Tech Ecosystem

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The compounding return of startup success for the ecosystem

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* This article is sourced from Forbes. [ Summary by Ighlaas Carlie ].

Mega-Rounds Impact on The African Tech Ecosystem

2021 has been a good year for African Fintech companies. Tyme Bank, Flutterwave, OPay, and Chipper Cash have all had mega-rounds (Fundraising round of more than $100 million).

This is big news - The African Fintech market may be at an inflection point. Like most aspects of tech, there is an exponential component. The Startup markets in other regions of the world follow a similar pattern as the one Africa is still at the early stages of - slow to reach 3 to 5 scaled tech startups, and then a snowball effect as many others suddenly emerge at high valuations in the following years.

China's first unicorn - Startup valued at over $1 billion - scaled in 2010. Five years later, there were 5 more, followed by 21 the next year. While some ecosystems may take longer and/or are slower to exponential increase, the pattern is clear.

The question then is, why does this happen?

1) Success becomes the Rule, not the Exception

Daniel Dines, CEO of UiPath - reportedly the fastest growing enterprise company ever - co-founded the company in Romania. When asked whether more successful startups would come out of Romania soon, he stressed the importance of reaching critical mass - when there is enough momentum from a few successful startups to invigorate the industry. One company, no matter how successful, could be dismissed as an outlier. Having multiple successful startups - even if it's just 3 to 5 - in an ecosystem demonstrates repeatability and feasibility.

Entrepreneurship does not have an assuring culture. It is not a stable career path, which discourages many potential founders from pursuing startup success. Having more successes in a specific market changes the narrative. It shows that not only is startup success possible, but that there is an industry around it which can act as a comfort to aspiring entrepreneurs, their families, and across the social landscape.

And in Africa, you can no longer that the market exists.

2) The Development of Talent

The power of critical mass also enables scaling the training of startup talent.

As startups scale, they become a knowledge resource for innovative talent. An example of this is the so-called Paypal Mafia, a group of uber-wealthy founders that combine to pool their experiences together. Prominent members include Elon Musk and Peter Thiel.

And in Africa, the startup 'mafias' are slowly emerging. Jumia, a pan-african tech company, has already started a number of new businesses.

A powerful thing happens with network effects. When there is one scaled company you don’t get critical mass. But with many, the impact becomes exponential. Connections between people develop into relationships like mentorship, founding teams and angel investments.

There also appears to be some progress in matters of diversity - although tech startups still have a long way to go in this aspect.

3) De-risking the ecosystem

Critical mass effectively reduces the risk of Startup failure. The risk is, of course, still really high, but having a number of successful startups makes the ecosystem much more hospitable for new startups.

High-skilled employees - data scientists, product managers, engineers, etc - lack job security in emerging startup ecosystems, which makes it tough as a founder to entice talent. If there are many startups, these employees are able to find other jobs if a startup goes bust, which allows them greater freedom in taking that risk.

As Amanda Lannert, CEO of JellyVision, explained when discussing Chicago, “The Chicago ecosystem is rapidly changing because we’ve had many recent success stories. Potential recruits considering moving to Chicago have to make the calculus about what happens if things don’t work out. If there are many successful technology companies, the risk is lower. And so, a rising tide rises all boats.”

For a founder in Africa, if things don’t work out, there are more and more established companies that can hire.

Building startups becomes de-risked as well. For many founders in emerging startup ecosystems: they have to build the full stack – a range of enabling infrastructure just to offer their core product. But as more and more startups get built, the infrastructure improves, which allows founders to focus on a more specific product.

This is what happened in Silicon Valley in fintech. It used to take years to launch a neobank. But today with Banking-as-a-service enablers, it can be done in months, with a fraction of the resources.

Lastly, a critical mass of startups in a sector de-risks it for venture capitalists and helps open the floodgates.

Africa’s risk-return in the startup world is seemingly improving.

What does this mean for Africa?

Venture capital across Africa is on the rise: in 2015, there was less than $300m total across the continent. In 2019, before the pandemic, it reached $2b across 250 rounds. Because the region has so many key challenges left unsolved, this leaves a big opportunity for entrepreneurs and technology to create meaningful solutions.

The ongoing success of Chipper, Flutterwave, Airtel Money, Tymebank and Opay changes things. Each story alone is a piece. But the bigger story is that they are happening together.

A rising tide raises all boats. And in this case, the rising tide creates role models for the sector, trains the next generation of founders and de-risks the whole ecosystem.