The rise of Africa’s Digital Economy creates an opportunity for South Africa to shine

Amid the myriad global macro developments, it is easy to overlook the quieter revolutionary tides that are turning. One such is the rise of Africa’s digital economy – a trend that is now at an inflection point.

The emergence of a new generation of African tech entrepreneurs is heralding a new dawn of opportunities on the continent, with stories that are now as much about ingenuity, solving real problems and great technological achievements as anything else.  And international venture capital investors — led by the South African and Nigerian markets — are taking notice and investing in this trend.

Africa’s digital opportunities are large – and growing. The digital economy is estimated at $115- billion and is expected to grow six-fold to $712-billion by 2050, according to the June 2022 report published by Endeavor Nigeria. And, judging by recent investment patterns, investors are of the opinion that these trends are here to stay.

Not only has the funding in African tech start-ups increased 18 times from 2015 to 2021 but it has also grown at twice the pace of global venture capital funding in 2021 and Africa was the only continent where venture capital investment continued to grow in the first half of 2022. To put things into context, African start-up funding is currently where Southeast Asia and Latin America were five years ago and is tracking an accelerated upward trajectory. But what exactly is driving this growth and how can we, as South Africa, fully participate?

Africa is the last Digital frontier

Endeavor believes Africa’s digital opportunities are being driven by an interplay of three factors. For one, Africa is experiencing a once-in-a-lifetime demographic bonus – by 2050, the continent is predicted to be home to a third of the world’s youth (aged 15 to 35) and Africa’s youth is urbanising fast too. This fast-growing consumer market, dubbed the “next billion”, is attracting investor interest.

Second, smartphone usage is predicted to double, with one in six of the world’s internet users expected to be in Africa in 2025. This, coupled with the impact Covid had in accelerating the demand for digital solutions, has resulted in a fast-growing, young and digitally savvy population — a potent mix for super-charged digital growth.

Finally, Africa is still relatively undeveloped, with GDP accounting for less than 3% of the world, and mobile penetration levels far below global averages, making it one of the last digital frontiers. This means an opportunity for high growth rates as African technologies catch up and leapfrog.

Africa’s unicorn count is growing – but what about South Africa?

Africa’s digital opportunities are concentrated in four countries: Nigeria, Kenya, Egypt and, of course, South Africa. Together, these four account for 51% of Africa’s GDP as well as 50% of the continent’s professional developers and 73% of Africa’s accelerators. Since 2016, Africa has seen the emergence of 11 unicorns (companies with valuations of more than $1-billion). Of these, eight emerged from the top four countries, with five from Nigeria, two from Egypt and one from South Africa.

Pardon Makumbe, managing partner at CRE Ventures, believes the venture capital investment community needs to apply different principles when assessing these businesses in Africa — and not the usual parameters used for “Silicon Valley tech entrepreneurs” — as African start-ups are emerging market natives and need to be valued on this basis.

Somehow, South Africa hasn’t managed to excite the global venture capital community in the same way that Nigeria and Kenya have. South Africa has the scale, in both the formal and informal markets, and legacy of venture-like investing and tech-like entrepreneurs going back to Mark Shuttleworth, who founded Thawte in 1997 and sold it to VeriSign in 1999, so it is intriguing why South Africa’s tech ecosystem hasn’t blossomed yet. And as much as Melvyn Lubega and his team at Go1 need to be congratulated on becoming South Africa’s first $1-billion unicorn, the question needs to be asked why more South African start-ups are not on the list.

Regulatory barriers are hampering local start-ups’ growth potential

The opportunity that exists in Africa in the tech ecosystem cannot be understated and South Africa is in a perfect position to participate. However, regulatory barriers are crippling the current and future growth potential of our local entrepreneurs. This is a trend that has been witnessed with South Africa’s steep fall in rankings in the World Bank’s ease of doing business survey over the last decade.

What’s more, this could be changed with the stroke of a pen, requires zero budget from the government and would result in generating additional revenue for the country’s fiscus. We have internal policies that are decades behind entrepreneur-friendly jurisdictions, including a number of African markets – Tunisia, Nigeria, Kenya, Morocco – the list goes on. There are a handful of important policy amendments our government can make to ensure we unleash and nurture this growth and realise the economic development, especially job creation, for South Africa.

A case in point is Endeavor South Africa’s high-growth entrepreneurs. Since 2017, the 30 South African-founded, high-growth entrepreneurs Endeavor is supporting have grown revenue more than 50% a year, job creation more than 20% a year and increased capital raising by five-fold. Today, these 30 Endeavor entrepreneurs collectively deliver annual revenue of R10-billion and employ 16 000 staff, and in 2021, they raised R5.1-billion. However, regulatory barriers continue to hamper the global growth of these start-ups. The government needs to act now.

Timing is everything. We have a wonderful opportunity in front of us right now – we just have to play the ball.

Source:Mail&Guardian