5 Challenges That African Start-Ups Face in Business

In the world of business, beginnings are never easy, however, Africa presents some unique challenges to new businesses due to the uniqueness of the continent’s emerging markets. Africa is the most diverse region in the world, a continent of 54 countries with over 130 major ethnic groups, 3,000 languages, all the major religions of the world and many more traditional belief systems.

A recent report—World Population Prospects: The 2015 Revision, Keys Findings and Advance Tables—by the United Nations, estimated that more than half of global population growth between now and 2050 is expected to occur in Africa.

Specifically, of the additional 2.4 billion people projected to be added to the global population between 2015 and 2050, 1.3 billion will be added in Africa.

Additionally, an article found on the Business Insider projects that after 2050, Africa is projected to be the only major area that has a continually growing population. In 2010, the African population was approximately 1.049 billion and the continent is projected to house 39% of the world population in 2100.

The entrepreneurial drive in Africa is significantly larger than the rest of the world with new businesses springing up at an exponential rate. In 2014, a report created by the GEM Global Entrepreneurship Monitor showed that sub-Saharan Africa had the highest number of people involved in the early-stage entrepreneurial activity (TEA), with Zambia and Nigeria leading the world rankings.

These statistics prove that the demand for employment and a steady source of income will also experience a dramatic exponential increase. With these facts in mind, it is important—now more than ever—to examine the entrepreneurship ecosystem around the continent to highlight and mitigate the challenges inhibiting growth and development.

Over the past five years I have lived in Lagos, Nigeria, managing one of the most ambitious entrepreneurship programmes on the continent – the Tony Elumelu Foundation Entrepreneurship Programme, a 10-year, $100 million commitment from its Founder, Tony O. Elumelu, to identify, train, mentor, and fund 10,000 entrepreneurs from across the continent. Since the programme was launched in 2015, we have supported 4,470 African start-ups in 54 countries from the over 300,000 who applied.  I have travelled across the 54 African countries and seen first-hand some of the major challenges that start-ups face in Africa. They include:

1.   Start-up Capital

Perhaps the most obvious of all the challenges, most start-ups in Africa have difficulties in raising capital. Entrepreneurs and small business owners cannot easily access finance to expand business, and they are usually faced with problems of collateral, high interest rates, extra bank charges, inability to evaluate financial proposals, limited financial knowledge, making it difficult for small businesses to access finance. To address the inability of entrepreneurs to get start-up capital from banks due to collateral requirements, banks across the continent need to work with entrepreneurs to help them prepare viable business proposals in accordance with their lending rules. Over the five years, I have seen that many banks are responding to this challenge and setting up SME help desks and developing relevant products for the emerging African entrepreneurs. Government agencies are also beginning to engage to provide credit support to help de-risk bank lending, reducing the need for collateral as well as the cost of borrowing.

Organisations like Google, The Tony Elumelu Foundation and Seedstars World (to name a few) are also playing an active role in providing funding for these green entrepreneurs but this challenge is still very far from being resolved.

2.   Infrastructure

While the funding challenges are slowly being mitigated, Africa still has a very huge gap to fill in terms of infrastructure. For a business to thrive successfully, basic needs like good roads, a proper transportation system, internet services and constant power, need to be provided by the government.

Unfortunately, for many African countries, these factors are still unresolved and they affect a business’ ability to deliver quality goods and services in a timely manner. Some start-ups have been able to surmount some of these challenges by investing in back-up generators and subscribing to internet services providers.

Nonetheless, many start-ups cannot afford to make these investments and the ones that can, would be able to make more profitable investments if these issues are resolved.

3.   Government Policies/Enabling Environment

As with most areas of life, everything rises and falls with leadership. In Africa, there are numerous government policies and regulations that make entrepreneurial activities difficult depending on the sector. It is the duty of political leaders and policymakers to constantly review their business policies across all sectors to create an enabling environment for businesses to thrive.

Thankfully, some African leaders have realised this challenge and have begun to take steps in a positive direction. In countries like Rwanda, Ghana, South Africa, Nigeria, Kenya to name a few, have created a single location where entrepreneurs can find and file all necessary paperwork to legally register their business.  They are also making it possible for online businesses registration which helps to reduce the cos, time to file, and help reduce prevalence of corruption. These are basic enabling requirements which the governments across the 54 African countries can easily address.

Operating costs is a major hurdle for African start-ups from high cost of power to being able to obtain the necessary machinery, equipment, technology, or raw material needed to operate their business. The governments can do much to enable African start-ups from long term lease agreements on land and equipment. Other major policy areas that need to be addressed in Africa to enable start-ups to thrive include Intellectual property rights, support with legal disputes, incentivised tax laws and access to funding.

4.   Competition

One of the biggest challenges that start-ups face is competition, particularly in sectors already dominated by a brand or a number of brands. Usually, customers prefer to relate with companies that already have a reputation of trust in any given sector. Although this can be a major stumbling block, it is not one that is insurmountable. The solution is for the start-up to ensure that within their sector, their business idea is unique, creative and consistent.

Trust in business is earned over an extended period of time and cannot be bought. It is important for start-ups to patiently and earnestly build their customer base with goods and services that are unique to them.

5.   Market Access – Intra Africa Trade

Intra Africa Trade (which can also be referred to as cross border trade) tends to be very challenging, slow, expensive and generally inefficient. This is mostly due to local laws and regulations within various African countries that govern cross border payments and domestic banking systems. Generally, the lack of a universally acceptable regulatory system within the continent, inhibits the fluidity of conducting business transactions.

Fortunately, these conditions have slowly begun to change as governments and transnational payment bodies are creating standardized data formats to aid seamless transactions.

Currently being driven by the President of Rwanda, Paul Kagame, and signed by 44 African states; the goal of this agreement is to create a single continental market for goods and services, with free movement of business persons and investments with the purpose of accelerating intra-African trade.

Conclusively, none of the challenges facing that African start-ups and green entrepreneurs face are insurmountable. However, government bodies, policymakers, investors, and all other key players in the entrepreneurship ecosystem need to realise that the responsibility of developing the African economy is a collective one and we all must play our roles.

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