If there is one lesson from economic history, it is that innovation is the key to human flourishing. One would think, therefore, that innovation is at the forefront of government policy. But, sadly, that is often not the case: in fact, as Deidre McCloskey and Alberto Mingardi argue in their excellent new book, The Myth of the Entrepreneurial State, a response to the Maria Mazzucato’s popular The Entrepreneurial State, the state is often a barrier rather than a boost to innovation.
It is this lack of innovation in the public sector that has contributed to the rapid growth of a relatively recent institutional innovation: the tech incubator and accelerator. Josh Romisher is CEO of the Nedbank Stellenbosch University Launchlab, an incubator for new start-ups. Having lived and worked in America, Europe and Asia and having spent significant time in Kigali and Abidjan, he has seen many of these ecosystems in action. I ask him why African incubator programmes have not delivered on their immense promise, yet.
‘Many incubators in Africa are funded by development finance or by governments or universities. Most of them are run as non-profits, operating on a substantial grant. They then spend that grant funding over time because no one pays them for services. Five years later they realise they haven’t built a sustainable business, and they are out of money. They aren’t building a sustainable business as an incubator and, unfortunately, are not producing enough great companies as their track records demonstrate.’
Nairobi-based Wanjiku Kimani, a venture partner at The Baobab Network, an early-stage venture (and profit-oriented) tech accelerator with a portfolio of firms across the continent, suggests this business model is changing, albeit slowly. ‘Africa’s tech start-up space is still quite nascent. The growth in accelerators is a reflection of the general growth of the tech sector. For instance, our insights team scoped 504 venture capital investment deals in Africa, compared to around 130 deals in 2015. The number of start-ups in the ecosystem is growing and we are seeing more investments going into African companies. I see the sudden increase in accelerator activity as a response to the demand for investor-ready start-ups.’
I ask both Kimani and Romisher what the main constraints are that start-ups still face on the continent. Are there barriers that almost all start-ups face, or are they largely industry and country-specific?
‘There are obviously some sector-specific challenges, but tech-enabled start-ups generally share the same pain points’, says Kimani. ‘Start-ups are often faced with i) difficult macroeconomic conditions ii) fragmented markets with poor infrastructure iii) consumers that are expensive and difficult to serve because they have limited purchasing power and a preference for offline touchpoints. Covid has accelerated some behavioural shifts, but the challenges still remain with regards to limited access to affordable capital from traditional financial institutions and venture capitalists as the VC market tends to have a bias for well-networked founders with elite credentials. Start-ups also find it difficult to acquire good talent.
Romisher highlights an additional constraint. ‘In the US or Europe, you can be very specialized in a market, you can do something as a small piece of a bigger market, be very, very specialized and have easy access to your customers. You can push it out through an app, you can deliver it through Amazon – there are many options. The rails have been built.’
‘In Africa, things are not that specialized – you basically need to build the entire value chain. For example, if you’re offering a product, you may have to offer financing, you may have to offer service, you must physically sell and deliver it, because there’s no one else to do it for you. This makes a venture way more costly and way more difficult.’
I ask Kimani about the exit options for start-up founders on the continent. Is the ultimate aim to sell to international firms or is it to truly build an African multinational?
‘Both. We have seen an increase in mergers and acquisition activity among African companies and a few large acquisitions from international firms. For example, Stripe acquired Paystack Nigeria for $200m, Kenyan based startup Ajua, acquired another Kenyan startup, WayaWaya, and our portfolio company, Mangwee from Zambia, was acquired by a Ghanaian fintech startup Zeepay.’
One critique against tech accelerators is that they benefit those that are already affluent and who can afford to take the big risks that might deliver the big rewards. How does one mitigate against such increases in inequality?
‘Generally, local investors still have a strong preference for traditional assets such as land and real estate. We would therefore first need to see a shift in investment behaviour. One way to mitigate against higher inequality is for founders to share the upside rewards of their companies with their employees.’
These employees are often young people, hoping to build a better world. I ask Romisher why it is important for an incubator like the LaunchLab to be associated with a university?
‘If you go around the world and look at the history of start-up ecosystems, you’ll notice that they’re all associated with a university, they all must have a university at the heart of it for several reasons. One is that universities have an irrational optimism. You have a bunch of young people thinking they can change the world and that’s what you need to be an entrepreneur – to be irrationally optimistic.’
‘Universities also offer a massive amount of relatively inexpensive human capital. They have plenty of people who want to work with start-ups and want to give their time and their expertise because they love the subject or they‘re passionate about the research that they’re doing. So, for instance, at LaunchLab, we have a mentor network of over 25 people who work for free – many are university alumni, many are very, very experienced. They want to give back to the university, they want to help build the future.’
And, as McCloskey and Mingardi argue, if we want to build the future, we have to look towards entrepreneurs rather than bureaucrats. But bureaucrats can help. Says Romisher: ‘We need to make it easier for entrepreneurs to get visas to South Africa. We will attract the best entrepreneurs in the world if we can make it seamless, inexpensive and easy for them to come and build businesses here, and we need to make them feel welcome. This involves thinking hard about intellectual property, financial controls and labour laws. But South Africa already has all the attributes to be the epicentre of entrepreneurism in Africa’.
Economic history shows that where entrepreneurs are allowed to innovate, prosperity follows. As tech incubators and accelerators gather pace across the continent, there is much to be optimistic about.