Tech fever: Why haven't African investors caught the IT funding bug?

When African startups are looking for a fresh injection of funding, they often to have to look beyond their own borders. But could the situation be about to change?

When Chris Asego and his colleagues set out to launch a new technology startup two years ago in Nairobi, they began looking around for capital. They found a handful of angel investors and venture capital firms prepared to put money into Asego's Eneza Education, which provides academic tutoring material to any student with a mobile phone.

But none of Eneza's investors are Kenyan. Three out of five are American, and the other two are based in Tanzania. Asego didn't think it was worth looking for local investment. "To be honest, we didn't even try," he says, explaining that Kenya's own venture capitalists have a reputation for shying away from tech entrepreneurs like him.

"I would imagine they feel safer investing in things like real estate," he says. "They would think there is less risk. Kenyan investors - they are really hidden somewhere, and finding them is hard."

Asego isn't the only entrepreneur feeling abandoned by local investors. Despite the media buzz Africa's tech industry has been generating, Africans themselves seem reluctant to buy into it. As most young IT companies will attest, it is often much easier to get venture capital from the West than from investors at home - although, as the tech industry matures, this may slowly be changing.

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Asego is convinced that a shortage of tech investors is inevitable in countries in which the industry is so young. "If it's something that's new in the country, people will tend to shy away from it. It's something they didn't grow up with," he says, adding that startups he knows in neighboring Uganda are facing similar challenges finding local investors.

While they might not be active, local investors do seem to be keeping an eye on the tech startup scene. They often appear at pitch events, says Asego, but "they are at the window, just peeping in to see what's going on. They are waiting for a success story, but not that many want to be pioneers and take risks, and fail".

"I'm sure if one or two local investors would invest in a company that would be successful, it would spread like bushfire," he adds.

Ben White, founder of VC4Africa, a social network of investors and entrepreneurs, explains that part of the problem lies in the fact that the current generation of African tech entrepreneurs is also the first. Most angel investors were once successful entrepreneurs themselves, he says, and they tend to put money into companies they know they can help develop through their own contacts and mentoring.

But in places like Kenya, he explains, "The individuals who have money are invested in very traditional industries. They're not necessarily as tech savvy as your ideal angel investor in California. They haven't built startups before. They haven't seen startups before. So certainly there's a disconnect there."

"In developed angel markets you have generations of startup entrepreneurs," adds White. "You don't have that in the African space."

But as most people in the industry agree, things are starting to change. The African investment community is growing, says White, with firms like the South Africa-based 4Di Capital playing a bigger role in getting new startups off the ground. Local government support is also picking up, particularly in Kenya where the IT sector has become an important part of national development strategy.

White also argues that some African investment ecosystems are more friendly to tech startups than others. One example of a more vibrant private sector investment scene, he says, is Nigeria. "The market in Kenya looks very different than Nigeria, where you don't have many NGOs and it's only the private sector that's visible in the startup scene," White says. Most Western investors tend to avoid Nigeria, and as a result the country's robust tech sector has had no choice but to rely on local capital.

Nor, he thinks, is the situation in Kenya as dire as local entrepreneurs think it is. "In Kenya a lot of the earlier deals were done by Western VCs who maybe had some foresight, and could see that there were possibly some interesting market opportunities," says White. "That early experience might feed a bigger perception than what might be the reality."

Among VC4Africa's investors, which number around 600, some of the so-called Westerners interested in Africa's tech industry are not as foreign as they might seem. Many are actually part of the African diaspora, a fact highlighted by VC4Africa's recent report, 2015: Venture Finance in Africa. And regardless of their origins, most venture capitalists prefer to find local partners before investing on the continent.

Crucially for a tech scene so dominated by apps, the domestic telecom giants have also begun to take a more active interest in startups. In November Kenya's Safaricom unveiled its $1m Spark Venture Fund to support promising ICT startups with up to $250,000 each. Airtel has recently done something similar in Nigeria, while in Rwanda the Millicom Foundation offers mentoring and business advice to the country's 'digital changemakers'.

Despite their relative lack of experience with tech startups, home-grown networks of angel investors have nevertheless been cropping up across the continent. Cameroon, Egypt, Ghana, Ivory Coast, and South Africa all boast their own angel investor networks, White points out, although one has yet to appear in Kenya.

But at the end of the day it might not matter that many African startups are funded through channels other than traditional, local angel investors or venture capitalists. Kenyan entrepreneurs may complain about it, White says, but it may simply be a sign that the country's investment ecosystem is unusually well-balanced.

"I think for a healthy industry you need all the players - you need the mobiles, you need government, you need public, you need private," he says. "Everyone needs to be involved in building a healthy ecosystem."

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