Investors in Africa’s tech sector will win by solving real world problems, not just the digital ones

The Next Billion
Quartz africa
The Next Billion
Quartz africa

Technology investments are usually viewed through the lens of disruption where new ways of using data or delivering services are introduced and create new markets and/or displace existing businesses.

But what if there was no real existing service and that which existed was both inefficient and poorly deployed? In this regard technology can also act as a catalyst or enabler to improve asset utilization, getting the most out of existing infrastructure and catalyzing investment to grow capacity and address market gaps. This is particularly the case across Africa.

 The principle of creating successful tech investments in Africa is not the false dream of technology replacing building block infrastructure. Why is this important? ‘Technology-only’/pure-play digital businesses in Africa, for example, local social networks, have had limited success. This is because the poor enabling environment (low penetration of smartphones and broadband, unreliable electricity, and poor levels of education) hindered scalability and rapid distribution—though this is slowly changing. The level of disposable income and market dynamics in Africa can also produce an equilibrium price that is lower than expected.

In contrast, businesses that put a digital overlay on traditional brick and mortar businesses that exhibit the characteristics of being under-capacity and poorly deployed today, appear to have much more traction. An example of this is Uber in Lagos. Uber has recently delivered a million rides and its growth on the continent is further fueled by the lack of public transportation options and unavailability of vehicle financing. This ‘asset optimization/ monetization’ play is arguably of more value in African cities with limited public transportation infrastructure and historically low private investment to expand capacity.

This approach to thinking about technology investments in Africa opens the door to a different way of assessing the investment landscape. The principle of creating successful technology investments in Africa is not the false dream of new technology replacing building block infrastructure. Instead it is new technology initially catalyzing undersupplied basic infrastructure and then creating unique services critically required while judging the realistic pace of infrastructure deployment. Digital technology should act as an enabler that significantly reduces the cost of service delivery and a mechanism for expanding the reach of any given service to a larger market than was originally possible.

In addition, it is critical to be focused on a) there being sufficient penetration of required technology infrastructure, b) areas of service which are grossly underserved as a result of the lack of brick and mortar infrastructure and c) businesses where the unit cost of service delivery can be sufficiently compressed to suit the pocket of the emerging economy consumer.

Multiple sectors in Africa are in dire need of such transformation, including agriculture, healthcare, finance, energy and education to name a few. E-commerce is a clear area where the lack of formal retail infrastructure creates an opportunity for the birth of large scale digital retail groups able to further leverage their captive market to provide complementary services (e.g. consumer credit). Another interesting area is telco asset optimization, specifically beyond infrastructure towers, where a number of companies are providing voice and data utilization improvement services to telco’s struggling with low and reducing margins.

There has been significant growth in the deployment of private capital over the last decade and a half in Africa, with over $56 billion raised in this period and growing. Digital technology investments have however, taken only a tiny fraction of this capital with telecom infrastructure, consumer and financials taking over 50% of invested capital.

A pan-African fund with a focus on technology and technology-enabled businesses will be well positioned to lead this space. The technology opportunity requires innovative thinking with patient capital prepared to overcome the inevitable teething hurdles and business model variations caused by less predictable market dynamics.

The trends highlighted are not Africa specific but similar to what we see in other parts of the world. What is different is the ability to understand how these trends will work in Africa. Disruption in this context needs to reflect the variances in infrastructure and market needs. Private capital will be looking to spot and invest in these opportunities. It should be a defining decade for Digital Africa.

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