Why Ethiopia’s Budding Startups Appeal to Global Capital?

Mar 18 , 2023
By Aman Nasser

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Ethiopia's startup ecosystem is in its early stages of development; but, the country has been one of the fastest-growing economies in the world, with a tech sector that continues to be developed by the government and foreign investors, writes Aman Nasser, an undergraduate student researcher at Georgetown University.

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Ethiopia has been overshadowed by its African counterparts, as 92pc of total tech investments in the continent two years ago went to Nigeria, Kenya, South Africa, and Egypt.

Africa's tech startup ecosystem has grown tremendously over the previous decade, with startups raising five billion dollars last year, double the amount made the year before. This figure represents 10 times more investment made than five years earlier. As deals get too expensive in the four countries, venture capital firms shift to other countries in the continent. Ethiopia should arguably be their top choice.

Nonetheless, several factors make Ethiopia's startup ecosystem unique and attractive to investors.

One of the most significant factors is demographics. With a population of over 100 million, Ethiopia has the second-largest population in Africa. A substantial segment of its inhabitants is young people; about 41pc is below the age of 15, while a quarter is between 15 and 29. A large percentage of youth often precipitates significant change within a country, whether political, social, or economic.

Higher education enrollment numbers have consistently increased, incentivising investors to trust potential entrepreneurs and founders.

Although Ethiopia has lagged behind its neighbouring countries in information and communications technology (ICT), the sector has been catching up tremendously, aided by government intervention and foreign direct investments, resulting in its infrastructure providing the resources and capital for startups.

For instance, the Digital Ethiopia 2025 Program and the Startup Act of 2020 signify the country’s interest in digitising and modernising its economy. The government has been proactive in the growth of the ICT sector, launching its initiatives, such as establishing an ICT park on the outskirts of Addis Abeba to bring in ICT service companies and the institution of a national broadband network through the Ethio telecom.

While some may argue that the state monopoly it imposed may hinder performance, the federal government has opened the market to players like Safaricom and opened sales of Ethio telecom’s shares to foreign and domestic private buyers, signalling steps for improvement.

Foreign investments into Ethiopia's infrastructure have been solid and consistent, with companies like Huawei, ZTE, and Ericsson present. Although support from the United States (US) has been waning, Chinese influence has been strong. While the reasons for this intervention may be questionable, the fact that a major world power invested in Ethiopia gives the country credibility in its future growth.

The ICT development, aided by government initiatives and foreign investments, gives Ethiopia the necessary resources for entrepreneurship and startup scaling, which are attractive features for venture capital firms and angel investors.

Ethiopia has several players meant to contribute to startup growth and scale, including Blue Moon, a hub that matches startup ideas and founders with support and seed funding; Growth Africa, an African startup accelerator that helps entrepreneurs scale their budding ventures; Startup Factory Ethiopia, the country’s first venture builder working on anything from building companies to developing leaders; and, X Hub Addis, an incubator for potential entrepreneurs, providing them with mentorship and coworking opportunities with other founders.

While there are only 60 startups in Ethiopia, several standouts demonstrate the success entrepreneurship may have in the country, especially in fintech, ICT, software and data, food tech, and e-commerce.

For instance, ArifPay is an electronic payment platform for Ethiopian consumers, part of a digital payment revolution in Africa. Belcash is another payment platform that differentiates itself from its advanced counterparts by allowing payment for most Ethiopian mobile phone users without internet connectivity.

Although Ethiopia is still in the early stages of developing its startup ecosystem, several promising factors make it an attractive destination for investors. With government support, increasing higher education enrollment numbers, a young population, and a growing ICT sector aided by foreign investment, its startup ecosystem is poised for significant growth in the coming years.

One of the main developments in the sector has been the expansion of mobile and internet infrastructure. Last year, internet penetration reached 25pc, an enormous expansion compared to the mere 0.4pc in 2008. However, the rate is undoubtedly lower than that of Ethiopia’s neighbours.

Other factors suggest that there will be continued growth.

Venture capital firms’ apprehension due to COVID’s economic impact and the recent civil conflict should be understandable. Gladly, both effects are coming to an end, presenting an opportunity for those brave enough to provide budding entrepreneurs with the capital needed to scale. A highly concentrated group of countries is acting as investors' main recipients. If Investors are willing to change their strategies, Ethiopia’s trajectory for innovation and economic growth in the tech sector is one of a kind.

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PUBLISHED ON Mar 18,2023 [ VOL 23 , NO 1194]

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