African startups need more money

African startups have raised more money in Q3 2021 than they did in 2020. Yet that is not even enough, and neither does it suggest a bubble in African startup investing. 

Like all capital markets, Africa is downstream of loose western monetary policy. Interest rates are low and investors are hungry for yield. Despite being high risk with many countries facing economic distress, African Eurobonds are 4x oversubscribed . There is money sloshing around the global economy looking for a place to rest. Why not Africa’s startups?

Skeptics say these companies cannot justify these sky-high valuations. The true market is small, customers cannot pay, and property rights are inconsistent. That may be true, but even in the worst case scenarios, the impact will be limited. Some Many investors will lose money, sure, but they knew the game before they started playing it. No singular implosion will be the reason investor sentiment turns. Case in point: Jumia. Even in the depths of its rollercoaster public market journey, African investment continued growing. 

It’s also not that much money. Relative to Africa’s population, economies, infrastructure deficit, or any other metric, startup fundraising has a long way to go. No African country is as developed country as Japan that lacks for nothing

Africa’s startup problems need asset heavy solutions. Your startup wants to build Electronic Health Records software? You need to pay for internet, electricity and on-site support.It is not enough to build a successful drug procurement platform for pharmacies, you must alsooperate your own.. There’s no USPS for Africa’s Amazon to piggyback on. In the West, you optimize your Facebook ads to find a seam and you’re off to the races. Some asset-light companies exist, but these are the exceptions that prove the rule.

Fundraising has positive externalities. When done right, these vast sums of money will buy African services, hire Africans and build infrastructure and services for Africans. In the US, the 2000s dot-com bubble built the infrastructure for a new generation of internet companies. Wages for skilled workers will go up as productivity increase. More young people will be attracted to a career in technology and consider starting a business themselves. 

Finally, the opportunity is massive. People are coming online faster than ever. Africa’s internet usage growth over the last 20 years is many times larger the “Jeff Bezos number”. Data costs are falling and will continue to do so, even as more of this young, mobile-first population comes online. The world is only just starting to pay attention. African entrepreneurs need the capital to build for these people. Keep it coming.

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