Navigating the Rise of Venture Capital in East Africa and the Horn Region

Insights from Magdi M. Amin shed light on the growing investment landscape and technological advancements.

The venture capital ecosystem in East Africa and the Horn region has seen significant growth in recent years, fueled by technological advancements and a burgeoning entrepreneurial spirit.

Despite a slight downturn in investment over the past two years, the overall trajectory remains positive, with Kenyan startups alone receiving around $800 million in 2023. This growth has been driven by factors such as increased connectivity, digital payment innovations and the emergence of groundbreaking ideas across various sectors.

In an exclusive interview with Magdi M. Amin, an East African VC expert and seasoned veteran of the World Bank / IFC, African Renaissance Partners offers insights into the current state of the venture capital ecosystem in East Africa and the Horn region.

Can you provide an overview of the current state of the venture capital ecosystem in East Africa / the Horn region and highlight key investment opportunities?

While many focus on the downturn in venture investment in the last two years, one needs to take a broader perspective to understand the opportunity properly. Venture in East Africa only emerged around a decade ago, triggered by the connectivity and digital payments revolutions created by the likes of Celtel and MPESA.

Kenyan startups received $20-30 million per year at that time. Growth took off around 2017, and while there was a decline in 2022 and 2023 along with global markets, Kenyan startups still received around $800 million in 2023. During that decade of growth, the venture asset class was created along with the technology and execution skills of entrepreneurs, and the ecosystem as a whole. We expect a return to rapid growth starting in late 2024.

Turning to the broader region, the connectivity and payment revolutions that took place in Kenya have now happened throughout East Africa, and we see groundbreaking ideas and business models being developed across the region. Yet VC is still very concentrated – the continent only receives c. 1% of global VC funding, of which 75% goes to South Africa, Egypt, Nigeria and Kenya, leaving very little for the other 50 countries.?

We see this as an opportunity to back an increasingly sophisticated innovation ecosystem, including startups, ready to tackle urgent challenges in East Africa, and in more global emerging markets. These companies have key roles to play as Africa takes more of a centre stage in future global economic development and will offer high returns and high impact.

East Africa’s rapidly growing countries and our target markets – Ethiopia, Tanzania, Uganda, Rwanda and Kenya – will be major players in this transformation. They are relatively small VC destinations currently but will become significant in the coming years – reflecting, again, that startups in these markets are currently severely undervalued.

Our goal at African Renaissance Partners is to change that for good and ensure East Africa’s venture ecosystem expands and develops. We see huge potential in supporting high-impact ventures using technology to solve developmental challenges in sectors such as renewable energy, fintech, agritech, and health.

We are happy to be a catalyst, but we want other VCs to join us in investing in the region to address the challenges and fully realize The Horn’s economic potential.

In your opinion, what steps can be taken to further develop and strengthen East Africa’s venture capital ecosystem, thereby enhancing its attractiveness to investors?

Policymakers are taking major steps to improve the ecosystem, as seen in recent announcements in Ethiopia, Kenya, Rwanda, and Uganda. However, to be considered worthy of external support, the region must do more to demonstrate its readiness for investment. Infrastructure improvements will be vital, as well as continuing to address macroeconomic imbalances.

We all have a role to play in building a more accurate narrative around Africa. For example, while rural images still dominate the public’s perception of Africa, it has been the world’s fastest-urbanising continent for years. Huge digital reforms have taken place across East Africa and The Horn – an opportunity for VC to drive advanced technology progress in the region, boost productivity, and enable economic diversification.

For those who know the region, the next step is to deploy more capital. Venture capital drives innovation, and economic transformation and creates funding momentum which begets further opportunities. Increasing regional funding levels will create a virtuous cycle where success stories prompt more investment, diversification, and regional economic prosperity – strengthening the overall ecosystem.?

Investors will only allocate capital to compelling ventures from a risk-return standpoint. They need to witness opportunities in the region and see success stories. Startups using technology to solve fundamental social and economic problems will enjoy long-term higher returns, as solving these issues creates more markets. Technologists supply innovation, but venture managers are crucial to scaling innovations to a point of real impact on people’s lives.

Furthermore, why should investors, both local and international, pay attention to this region’s potential for growth and innovation?

Countries with consistently fast-growing GDP and the right demographics and policies will become attractive VC destinations. This is certainly true for young, rapidly urbanising, increasingly politically stable East African nations, which are set to be the growth engines of the world as the global ageing process continues. Our core markets are Ethiopia, Rwanda, Tanzania, and Uganda – all identified by McKinsey as the top ten consistent growth economies.

Inevitably, capital gains are imperative for investors, but the social and economic impact of innovation must appeal too. Only around 50% of East Africans are connected to electricity grids. This is a great opportunity for technology to fuel increases in living standards via distributed, renewable energy. Each investment will bring us one step closer to solving the region’s core socio economic issues. Successful entrepreneurs will generate wealth for redeployment into society, widening their impact and rewarding investors – bringing tangible gains for all parties.

In 2023 we invested in Emata – a Uganda-based startup offering affordable loans to farmers. Agriculture is responsible for 23% of sub-Saharan Africa’s GDP. The contribution could be even higher if the region’s smallholder farmers had better access to growth capital. Africa’s agricultural finance gap is $240 billion, and many farmers rely on expensive bank loans to support their operations. Emata addresses this by offering automated, no-collateral loans to smallholder farmers while working closely with cooperatives and farmer-based organisations. These partners help Emata easily structure loan repayments from farmers.

We’ve observed a growing interest from international investors in the Horn of Africa. What do you think is driving this trend, and what specific factors make the region attractive for foreign investment?

Various factors are fueling growing investor interest, both regional and international. At a basic level, underinvested markets such as East Africa offer the opportunity to be one of the first movers in a high-potential area, to grow regional champions and thus generate exceptional returns – before other, less aware investors have the chance.

The Horn of Africa also offers favourable demographics and socioeconomic fundamentals such as a young and dynamic population; an expanding middle class of prospective consumers; rapid urbanisation and infrastructure developments, and increasing geopolitical stability. This environment of transformative growth and consolidation is positive for investors appraising likely returns.

Ethiopia is a good example. It is Africa’s second-largest country by population with 126 million people, and 58% of working age. The economy has grown at a yearly average of 9.3% for the last 20 years and is now Africa’s third-largest economy ranked by purchasing power parity. The Ethiopian market presents a huge opportunity for innovative products to tap into its economic potential.

By 2050, Africa will have the world’s largest working-age population – bigger than Europe and North America combined. Funding can raise the productivity of the expanding young population in countries including Ethiopia – of whom some will become successful entrepreneurs themselves – and generate investor returns. Backing African ventures will ignite a virtuous cycle ensuring such workers deliver higher returns on global capital and create stronger African economies.

The upsides of investing in East Africa and The Horn – with its growth potential – are increasingly obvious to venture investors, hence the growing interest in the region. There is growing confidence that every investment has the power to make attractive returns and change millions of lives.

Are there any notable success stories or recent developments that have caught the attention of international investors?

Our portfolio is full of success stories. We have invested in an AgTech recording over 250% quarter-on-quarter growth (Emata), a Global Startup of the Year award winner (Kubik), and an asset management startup already cashflow positive and operating internationally (Charis UAS).

Kubik transforms plastic waste into building materials that replace cement. This reduces an average house’s carbon footprint fivefold – making housing both affordable and green, while mitigating homelessness and climate change. With 40,000 people either born in, or moving to, African cities every day, the World Economic Forum projects annual plastic waste volume will grow from 18 million tons in 2019 to 116 million tons by 2060 – illustrating the necessity for innovative solutions such as Kubik’s.?

Charis UAS is a Rwandan manufacturer of AI-based drones used to simplify site management for infrastructure projects. These drones capture high-frequency 3D images to help asset managers monitor projects and ensure they are being built to specifications, preventing cost overruns, or preempting material shortages. Charis is already cash-flow positive and can expand intercontinental.

These are our success stories, and the wider region boasts many others. The hope is they will pave the way for other innovative startups to follow – with international investor backing.

Could you discuss some of the innovative technologies that are emerging in East Africa and how they are tackling significant challenges and pain points in the region?

Necessity is driving entrepreneurship and innovation in high-impact sectors. East African startups, including the above, are demonstrating their capacity to solve major challenges in areas including access to finance and digital payments; clean energy use; logistics and infrastructure; AgTech; and EdTech.

It is now more commonly accepted that private, technology-focused companies can provide solutions and leapfrog legacy infrastructure. We’re seeing AI increasingly at the centre of these solutions. A prime example is agriculture, a sector only increasing in importance as Africa’s working-age population spirals – but also perennially underfunded by risk-averse local banks. Emata is helping to solve this problem through its algorithms.?

Access to energy is another major pain point, with African national grids leaving an average of 30%-50% of national populations behind. The increasing ubiquity of solar mini-grids in underserved areas, plus more mobile connectivity and digital payments, is unlocking a previously unreachable consumer and producer base – with the potential to boost continent-wide GDP. Another startup we’re looking at harnesses AI in utilities to connect sources of renewable energy with demand, and storage, to more efficiently utilise available power.?

These are just a couple of examples of innovative technologies emerging in the region – showing technology’s potential to overcome challenges previously impeding economic development. Via these solutions, a new world of economic opportunities is being unlocked.

What are some of the potential barriers or challenges that may hinder the adoption and scalability of these innovative technologies in East Africa?

The missing ingredient is funding. Capital enables innovation that creates solutions to problems facing Africans. There is simply not enough capital being deployed in East Africa currently.

East Africa’s urban infrastructure is deficient in many essential services – 18% of urban dwellers cannot access electricity, while 66% of city inhabitants lack access to sufficient water and sanitation infrastructure.?

Overcoming these infrastructural deficits is a huge task. Private capital has a crucial role to play; nurturing and empowering the East African innovators addressing challenges unique to their region – to create a more hospitable environment for the next generation.

Although risk perceptions of Africa are still significant, the reality is a virtuous cycle of innovation ready to be ignited. Africa’s rising status in the global economy means the upside of investment is tremendous. International investors would do well to bear this in mind.

What industries or sectors are these technologies primarily focused on, and what impact do you foresee them having in the near future?

Innovative technologies are geared to solving regional pain points – tackling inefficiencies in essential services such as energy, transport, agriculture, and banking – and often in new, sustainable ways too.

Alongside these new technologies’ impact, they also enable exciting developments in the creative economy and education – vital sectors equipping future African generations with the skills and knowledge required to share in the continent’s growing global impact.

The long-term benefits of these shifts are already visible. Tech-led solutions are replacing the centralised, top-down developmental approaches of old with ground-up, localised, tailored, economically sustainable, and scalable solutions – highlighting African entrepreneurs as key players in the continent’s economic growth.

What role do you believe government policies and regulatory frameworks play in supporting the development and deployment of these technologies in the region?

Very little is possible without supportive policies and regulatory frameworks. This is another unique advantage favouring East Africa and The Horn: governments are receptive to the development and deployment of technologies and their policies strongly support the emerging digital economy.

A key common denominator in Africa’s fast-growth economies is the complementary relationship between emerging tech-based entrepreneurial ecosystems and consistently supportive and innovative regulators. Tech advancements and applications are booming; for instance, ICT-based business in Ethiopia grew sixteen-fold between 2012 and 2019.

However, more can be done. Africa’s security and governance challenges and infrastructure deficits cannot be ignored, but emerging regional markets can, and will, reward governments for supporting innovation, investing in human capital, and making wise public infrastructure investments.

From your perspective, what are the essential factors that startups in East Africa need to achieve sustainable growth?

We focus on three attributes of the founding team before we perform detailed due diligence on the business. Firstly, the founding team needs to be laser-focused on solving a key problem with which we are aligned – whether it is financial inclusion, climate, or education – and to have had first-hand experience with that problem. If a team is proposing education technology, we need to see that someone on the team has worked within the education sector.

Second, the team needs solid execution skills, including in the technologies they are deploying, and the managerial capacity to grow a solid business. Ideas and ambition are plenty, but what is scarce is the ability to execute.?

Third, we look for a balance of integrity and ambition. We want African entrepreneurs to have the ambition to climb the highest mountains – not only Kilimanjaro but also Everest – but not to cut corners in doing so. It’s a long-term partnership.

Are there any specific strategies or best practices that you believe are particularly crucial for their long-term success in a rapidly evolving market?

There are two essential criteria for a startup’s long-term success in this market: it must show awareness to identify problems facing ordinary people; and possess skills and expertise to bring the solution to life.

Adaptability is equally crucial. Founders and businesses must be able to flex and pivot their products and offerings.?

Startups also need inherently sustainable business models from the outset. As founders in The Horn are more resource-scarce, they have an ‘adversity advantage’ – embedding resilience and adaptability to sustainable growth by sheer design.

Any East African startup demonstrating these traits will, in good time, receive the capital they deserve and see their enterprise grow substantially as a result.

In conclusion, the venture capital ecosystem in East Africa and the Horn region presents a compelling opportunity for investors looking to tap into the continent's burgeoning innovation and entrepreneurship.

Despite challenges such as limited access to funding and infrastructure deficits, the region's favourable demographics, supportive regulatory environment, and rapid urbanisation make it an attractive destination for investment.

As the region continues to mature and evolve, there is a growing recognition of the transformative potential of technology-driven solutions to address pressing challenges in sectors such as finance, energy, agriculture, and education.

By fostering a culture of innovation, investing in human capital, and creating conducive regulatory frameworks, governments and policymakers can play a crucial role in unlocking the full potential of East Africa's entrepreneurial ecosystem.

Ultimately, the success of startups in the region will depend on their ability to identify key problems, execute effectively, and adapt to a rapidly evolving market landscape.

With the right support and investment, East African startups have the opportunity to not only achieve sustainable growth but also drive meaningful social and economic impact across the continent.

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