African Internet, software and ecommerce startups are meeting increasing success in obtaining early-stage funding and generating revenue, according to a report from by startup funding initiative VC4Africa.
The number of applications for VC funds on VC4Africa has grown by 640 percent in just three years, according to VC4Africa research team leader, Thomas van Hale. "Over 70% of the respondents already generate revenue and 44% is successful in securing external capita, van Hale said by email.
"This is a critical economic contribution when taking into account that 43.3% of the Sub-Saharan African population is under the age of 14. In many ways, the future of the continent will be shaped by the continued success of its entrepreneurs," Van Hale said.
The report breaks down insights across five indicators: employment, performance, investments, investors and ecosystem. The average team size for VC-backed startups increased by 54 percent, resulting in 5.7 jobs per venture, according to the survey. This is expected to quadruple by the end of 2015. In addition, total invested capital more than doubled compared to last year's research: from US$12 million to $26.9 million.
Companies in computer software, Internet and e-commerce appear to be grabbing the lion's share of startup funding. Nigerian startups captured 23 percent of startup funding, followed by businesses in Kenya (22 percent) and South Africa (11 percent). Companies in Ghana garnered 8 percent of total African startup funding, followed by companies in Cameroun (6 percent), while Egypt and Ugandan companies received 5 percent each. The largest investments are made in South Africa, the greatest number of investments are made in Nigeria, and Kenya secures the largest total amount of external capital.
The report says 44 percent of the ventures are successful in securing external capital investment, while average capital secured per venture increased from $129,348 in 2013 to $205,374 this year -- a 59 percent jump.
Forty-nine percent of the ventures polled started generating revenue in their first year of operation; 34 percent expect to book more than US$100,000 in annual revenue by their fourth year .
The survey also found that ventures that participate in sector events, or join an incubator or accelerator, secure on average $126,090 in external investment -- that's 23 percent more than their counterparts who do not participate in such programs. Ventures that have established a partnership with a multinational company secure 150 percent more capital on average, and are 57 percent of those are more likely to break-even by their third year of operation.
However, despite the considerable gains, a key challenge noted in the report is what it described as the existence of the "missing middle" problem. Especially in leading markets like Kenya and Nigeria, founders increasingly succeed in raising the first $100,000 from external investors, the report says. The challenge now is to reach entrepreneurs across markets and to receive later-stage growth capital when needed.
The survey was sent to 1,300 entrepreneurs and 257 entrepreneurs responded; of the 600 investors that participated, 71 responded. On issues considered before making investments, investors cited management and team as the most important factors they consider. A country's level of economic growth and size of market are the most important factors when deciding where to invest.