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Startups

How Fintech is Driving an African Startup Funding Frenzy

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Last year, according to research from African tech startup ecosystem news and research portal Disrupt Africa, was the best on year on record for investment in the burgeoning space. Yet 2018 is on course to beat it hands down.

In 2017, tech startups on the continent raised more than US$195 million, but that figure was smashed months ago, with 2018 on course to be the most successful year on record for African tech startup fundraising. The full year's numbers will be reported and analyzed in the coming weeks.

Of note during the first three quarters of 2018 was the growing dominance of Nigeria, which, by September of this year, had accounted for almost 30% of the total number of startups that had raised investment. With more than a quarter of 2018 still left to go, seven more Nigerian businesses had raised funding by September than during the whole of 2017, with the West African country also streaking clear of usual rival South Africa in terms of total funds secured.

However, the deeper story behind Nigeria's growth as an investment hub is the tale of a sector, rather than a country. Startup investment in Nigeria, as in the rest of the continent, is being driven by fintech. Just less than half the Nigerian startups to have raised in 2018 are active in financial technologies, while more than three-quarters of the country’s 2018 funding during the first nine months of the year was accounted for by just six fintech companies -- SureRemit, Lidya, Kora, Mines, Paga and Paystack.

Nigeria is a huge market: It has a population of about 186 million people, yet around half of its adults are 'unbanked,' offering fertile conditions to fintechs. The Lagos startup support ecosystem, led by the Co-Creation Hub incubator, is one of the best on the continent, and the government is becoming more supportive as it focuses on diversifying an oil-reliant economy.

But fintech is on the charge elsewhere in Africa. Over $80 million, more than 40%, of the total money raised by African startups up to September had gone into fintech, with other major financial services markets existing in South Africa, Kenya and Egypt. What is behind this increasing growth, and the importance of fintech within Africa's startup space? Much of it is the size of the problem that African fintech startups are trying to solve, and the opportunities opening up for them to do so.

Tidjane Dème is general partner at Partech Partners, which earlier this year launched a $70 million Africa VC fund and lead a round in South African fintech company Yoco that was announced in early September. (See SA fintech startup Yoco secures $16m Series B funding, Fintech Startup Yoco Turns Smartphones Into POS Terminals and Orange Digital Ventures Invests Again in Yoco.)

Dème sees two main drivers for growing investment in the sector.

"Financial inclusion is still largely unsolved. Despite huge progress, access to financial services for individuals and SMEs is far from being solved. This is a big driver for economic improvement and has a huge potential for transformation," he said.

"The basic infrastructure offered by mobile, internet and mobile money lowers barriers and creates opportunity to innovate in this space. The combination creates interest from both entrepreneurs and investors."

There has, however, been a subtle shift in the type of fintech companies securing major rounds. Whereas in previous years business-to-consumer (B2C) and consumer-to-consumer (C2C) platforms, solving the most basic problem of allowing people to easily send and receive money, were most popular, the major rounds this year have been increasingly business-to-business (B2B), notably Yoco, which develops PoS systems for merchants, and Mines, with its credit-as-a-service offering for institutions. More money is being invested in these startups because there is more money to be made from B2B plays.

"The B2B segment remains largely untapped. There is a huge opportunity in digitisation of PoS and the upside that can be generated from the data this creates," Dème said.

Whether B2B or B2C, however, payments remain key. The most recent 'Finnovating for Africa' report released by Disrupt Africa found payments and remittances companies were the best represented within the broader fintech ecosystem, and that hasn't changed.

Shola Akinlade, CEO and co-founder of Nigerian merchant payments startup Paystack, which secured an $8 million Series A round in August, says this is because Africa’s payments problem is so large. (See Nigerian fintech startup Paystack raises $8m Series A round.)

"A number of players in the fintech space have shown that these problems can be solved with technology. Naturally, money follows innovation, and I think that's why we're seeing an uptick in investments in Africa," he said.

Sizeable funding rounds for companies like Mines, however, suggest non-payments startups are beginning to appeal to investors also, as attention turns to building a complete, interlinked ecosystem.

"In our view, a holistic financial system is made up of savings, payments, credit and insurance. I think the attraction for a particular branch rests with which area speaks to the greatest need for its addressable market," said Mines managing director Adia Sowho.

Whatever the space, generally fintech startups need more funding than most in order to achieve scale, as business models largely depend on relatively small commissions.

"Take a fintech company that earns from a thin slice of transaction revenue -- volume is its key to profitability. Generating volume requires time to educate the market, build a variety of use cases, and drive growth. Until volume is built, fintech startups with this model would need funding support," Sowho noted.

For investors, pumping funds into the fintech sector offers the perfect opportunity to marry impact with return on investment. Akinlade does not think the two can be separated, as one typically creates the other.

Yoco CEO Katlego Maphai agrees based on his experiences with the investors his startup has engaged with.

"All investors we have brought on board are equally driven by the real impact a business like ours can have on the growth of the continent's SMEs, as they are about the potential to make good returns. Profits and purpose could and should go hand in hand," he said.

As ever in a startup space -- especially Africa's -- one major question remains: When can these investors putting their funds behind fintech companies expect to see returns? Dème said this is very hard to predict, but not an immediate concern.

"Ultimately, the African markets are attracting a lot of interest from global players and we should not worry about the exit prospect of a great, scalable and fast-growing startups in Africa more than anywhere else," he said.

Sowho said a few factors make any generalisation in this case difficult. "Exits are often private and investors have differing criteria in response to different market factors in Nigeria. But I would check back in on the pre-seed and Series A players in five years' time and see what strides they have made within that time period," she said.

Significant strides are clearly expected, as investor focus on fintech continues to drive a revolution in startup funding across Africa.

— Tom Jackson, co-founder of Disrupt Africa, special to Connecting Africa

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