In recent years, a trend has developed at the end or beginning of every year. Tech-focused media in Afrika, as well as venture capital firms, focused on Afrika's digital startups release articles and reports on how funding of Afrika's technology-enabled startups is increasing year-on-year.
There's nothing wrong with this except you should read them with caution if you are looking to make important decisions based on these articles and reports.
This is because all of them mainly report on publicly disclosed startup funding. The second issue is: what is the specific definition of a startup, and by extension, an Afrikan startup?
However, the bigger issue, in my opinion, is that those compiling the reports of annual Afrikan startup funding do not know the magnitude of what they do not know - what I would like to call the iceberg problem.
The Iceberg Problem
Given that those who compile these reports on startup funding in Afrika rely on publicly disclosed funding in most cases, the size of startup funding in Afrika which takes place in private and is not publicly disclosed is not known to them.
Many startup funding deals take place privately in Afrika and are not disclosed publicly whether through press releases or the media.
There are various reasons why some of these startup funding deals in Afrika are not disclosed publicly which I will not go into in this article. However, it is important to highlight that such deals do take place and based on what I have read, they are not accounted for in existing Afrikan startup funding reports.
The other important issue which contributes to the iceberg problem in this context is what is defined as:
- a startup
- an Afrikan startup
- startup funding
I will not attempt to define the first 2 as it can be a never-ending debate, however, I will, in passing, say that I have seen in some reports companies that are older than 10 years with tens of millions of dollars in revenues being defined and included as Afrikan tech startups to have been funded in a particular year.
The third point on what makes up startup funding is important. At iAfrikan we receive various press releases and announcements from startups and venture capital firms announcing the latest funding received or made. The type of funding we have seen (as reported in press releases and announcements) ranges from equity-based funding, grants with no obligations, grants with some performance requirements, debt-based and loan funding, and a variety of other types of funding. Now, this is where startup funding reports in Afrika are sometimes inconsistent and don't scratch beyond the surface of the announcement or press release to ask what type of funding it was. This alone can skew what is being reported in a great way.
But, why is all this important?
Signal vs Noise
As I mentioned at the beginning of this article, when reading these Afrikan startup funding reports, you need to do so with caution especially when you are looking to learn about trends and insights for decision-making purposes. In my considered opinion, as I have briefly tried to illustrate with what I call the iceberg problem, these reports are far from being a signal in the ecosystem.
We don't have to look far for an example of this.
Several years ago, e-commerce in Nigeria was reported to be surging and continued to be thriving. Research and trend reports were published waxing lyrical about the size and potential of Nigeria's e-commerce market. What followed, was funding, lots of it, into Nigerian e-commerce platforms or anything related to them.
However, 2018 happened.
Konga, the poster child of Nigerian e-commerce several years ago, was sold to Zinox Technologies amid many negative speculations and rumors after it had secured several funding rounds of tens of millions of dollars over several years. Rumors, which still persist, are that Konga was sold for $10 million, however, Zinox have denied this.
Then, another long-standing Nigerian e-commerce platform, DealDey shut down during December 2018. This, following a period of inactivity on its daily deals site. This was followed by Gloo.ng announcing it is also shutting down its e-commerce business and pursuing other business activities. At the same time, Naspers announced it shutting down its online jobs platform in Nigeria.
The are many debatable reasons as to why e-commerce is not performing as many articles and reports had expected it to in Nigeria, and we won't discuss them in this article. What we will focus on though, is how most (if not all) the Afrikan startup funding reports did not see this coming given the methodology they use and how they gather data.
More importantly, I would like to suggest we move away from using Afrikan startup funding reports as some sort of signal for the health and growth of the various Afrikan startup ecosystems.
What I would suggest is looking at:
- traction (customer growth, customer retention, etc.)
- revenue growth of individual startups or in a sector
This way, I think, we can mostly avoid the iceberg problem that funding reports have and get a clearer picture of how big the markets are and how well, or not, they are performing.
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