Covid-19 slows investments in East African start-ups

A recent survey of tech start-ups across East Africa reveals that whilst investment levels remained relatively stable over the last twelve months, the heart of Africa’s start-up ecosystem perceives many roadblocks as having the potential to disrupt the region’s growth trajectory.

The survey conducted by East Africa Com and tech news portal Connecting Africa is part of a benchmark survey mapping barriers faced by regional start-ups as well as opportunities to power nascent tech businesses in the region.

The report establishes that whilst start-ups get investments from 2.1 different types of funding sources on average, the more established the start-ups become (series A, B, and scale-ups), the more they can rely on crowd-funding, government-backed loans and bank loans as well as VCs to raise money.

By contrast, seed businesses have an average of 3.7 different funding sources, with 54% of those young businesses relying on friends and family for funding.

The report also highlights that 74% of respondents needed to meet up to 5 investors before securing funds. This number drops even further for seed businesses as 52% of them needed less than 3 investors before securing new investments, a number that seems closely intertwined with their reliance (54%) on friends and family for fundraising.

By contrast, 22% of series B businesses only managed to access new funds after reaching out to more than 10 different investors.

Talent recruitment still receives 14% of the funds received across all funding stages. But attracting new talents doesn’t seem to be perceived as the biggest priority for fund allocation.

The survey unveils that the top three priorities of funding allocation focus on investing in equipment (26%), entering new geo markets (21%) and developing products (16%). Scale-ups especially put a strong emphasis on business expansion as 35% of them use funds to expand to new geographies.

Whilst there is huge tech potential in the region, there are still significant roadblocks that need to be addressed for the region to maintain its competitive edge as a tech start-up powerhouse.

After a few years of business disruption, East African start-ups seem tuned in to potential impacts of events happening on the global stage on the region. This is how 55% of respondents identify the risk of a global recession and/or national economic situations as a potential threat, with 32% identifying this as a very high barrier.

56% of respondents also identify the reliance on international VCs as a high risk for business growth. Most importantly, 59% of respondents perceive the lack of access to investors as a business barrier.

Positive developments are also underlined as part of this exclusive report, with many opportunities for growth being identified by start-ups. The report highlights that greater networks of supporting incubators (57%), a widening of the pool of industries receiving funds (56%) as well as the rise of local VCs and funding opportunities (55%) all represent excellent prospects for growth for East African tech start-ups. It also highlights that 74% of respondents identify sustainability as very relevant for their business mission.

“We are proud to present these survey results which help us keep the pulse on East Africa’s vibrant tech start-up scene to better assess how our programme and networking experiences can help deliver solutions for promising tech businesses to access funding, be agile and resilient, whilst remaining both innovative and competitive” said Ciara McDonald Heffernan, head of events for East Africa Com.

“Start-ups are a driving force towards economic growth in East Africa, but now more than ever we are determined to focus our efforts on creating a favourable environment for tech start-ups to thrive.”

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