How do you define an African tech startup? It’s a question that has come to bug Partech Africa’s Tidjane Dème, particularly when counting how much money is going to the continent’s nascent tech sector.
Four years ago when French venture capital (VC) fund Partech decided to set up a subsidiary in Africa to begin investing in the continent’s exciting tech companies, Dème, who is a partner at Partech Africa, and his team were struck with how little data there was on Africa’s tech sector.
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They wanted to know which sectors were hot, which countries netted investments and who was getting what money. But there just didn’t seem to be any information out there. At least, nothing that was reliable. The big problem was the methodology of many of these reports. It just wasn’t transparent, says Dème.
And so, they decided to carry out the research themselves. The result is four annual reports on VC investment going to tech firms serving Africa (see this story).
‘Partech Africa began surveying investment in African startups itself, because the methodology of other reports was not transparent’
For Dème the first thing to get right when tracking the numbers was what they were measuring.
To get this right, there were two critical questions they needed to answer – what is a startup and secondly, what is an African company.
What is a tech startup?
Some might point out that a startup is an independently owned private company of just a few years old (Ventureburn defines a tech startup roughly as one which is no more than five to seven years old).
But Partech decided to go with the Lean startup definition that defines a startup as a firm of any age that is involved in “resolving uncertainties” in the structure of the market or business model.
Dème argues it’s difficult to put an age limit when defining a startup, as the question that arises naturally is well, what age do you go with? He has a point.
Ventureburn’s rough seven-year definition is based on that used by the Indian government’s Startup India initiative, which was launched in 2016.
All good. But, in February last year, after complaints from some entrepreneurs, the government amended the definition to include any technology firms of up to 10 years (Ventureburn still sticks to the seven-year definition — Ed)
Better then, he reckons to just drop the age thing all together.
Partech’s focus is on technology firms, but Dème said key challenge has been to ascertain if a business is really a tech firm or not, adding that many “masquerade as tech”. Key here, he says, is whether tech represents a key value for the business in questions.
What is an African firm?
An obvious one would be to rely on citizenship, but this is often of no use, points out Dème, because many Africans have dual European citizenship.
Perhaps a better bet would be to rely on where the company is registered. But this too, proves difficult, as many Africans register businesses offshore, for example in Delaware or the UK, as it’s easier to tap investment like this.
Partech’s solution is to look at what market the startup is serving – to meet its criteria of being an African company, firms must have a product or service that is aimed at serving primarily African customers.
This means a startup could be registered outside of Africa and have founders who don’t come from Africa – if it serves African customers.
For some that might sound ludicrous. It means including expat founders, most of whom come from the US and Europe and have been able to access a large amount of capital for their startups that aim to solve African problems. Is this fair? Are these African startup?
In Dème’s definition, they certainly are.
Africa needs more local investors
While he’s careful not to go too much into the issue, at the risk of being seen as discriminating against foreigners, he is able to point out that expat-funded business accounted for a substantial portion of the $564-million in investment raised by Kenyan tech firms in 2019.
In fact, were it not for expat-funded businesses, Kenya would not have been placed so high, at second place following Nigeria (with $747-million), for African countries and tech investment. Expats then are bringing investment into Africa, which is a good thing, notes Dème.
However, he says it would be a “tragedy” if the money that expat founded startups are able to raise from their fellow US or Europeans is not followed by investment raised from local investors. It’s a key point of contention for Dème.
While the size of investments may be growing each year, very little of it goes to new companies. Few of these source funding locally, most have to get seed money from foreign investors.
“The ecosystem needs a lot of seed money managed by local investors smartly,” he says, emphasising the importance of the money coming from local — rather than offshore sources.
And he reckons as the amount of money going to tech companies and startups grows, such firms can expect better support from the authorities. He points to his own country, Senegal and its Startup Act, which was passed in late December.
The question now is, how to get foreign money to help foster local investors.
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Featured image: Partech Africa partner Tidjane Dème (Supplied)