Tuesday, June 01, 2021, 01:44 PM / by FBNQuest
Research / Header Image Credit: IFC
Africa technology is delivering growth
Africa's technology sector has thrived over the last decade, following funding by venture capital firms. Technology firms turned the continent's challenges of weak infrastructure, low internet penetration and lack of financial access into opportunities using technological and innovative solutions to address challenges. In 2020, 347 African technology startups raised a total of USD1.43bn in 359 equity rounds, representing a volume growth of +44% y/y compared with just 55 equity rounds in 2015. Startups like Nigeria's Paystack, Ethiopia's Ethswitch and Francophone Africa's Bizao are also helping to migrate Africa into the digital arena.
Technology hubs are accelerating the sector's growth
Creating technology hubs across the continent has accelerated the technology industry's growth over the last few years. According to the GSMA, in 2019, hubs on the continent totalled 618, recording a 40% growth. These hubs provide crucial input into the ecosystem for early-stage technology entrepreneurs and freelancers, offering funding, innovation access, accelerators, incubators, and co-working spaces. Across the continent, the highest hubs per country are Nigeria, South Africa, Egypt and Kenya.
Nigeria, Kenya and Egypt lead in funding
Nigeria is the most funded market, followed by Kenya and Egypt. Together the three accounted for over 60% of total equity funding for African startups. We note the six technology verticals, namely fintech, agritech, enterprise, offgrid-technology (energy and resources), healthtech, and e-commerce. The industry accounted for forms c. 76% of total equity funding in Africa, each receiving over USD100m in investment flows. However, Fintech led other sectors with an equity funding of USD356m (25% of total) in 93 deals last year.
Solid investment case
The investment case for technological investment in Africa is compelling with the following advantages: economic growth, supportive demographic trends, low internet penetration (<40%), low bank penetration (<50%), and card penetration of c. 15%. These factors highlight the investment opportunity and the potential upside. Nigeria's newest unicorn startup, Flutterwave, announced that revenues doubled while active merchant growth increased 2x y/y. Although Africa has not had many IPOs in the past, current events suggest the continent holds a ready pipeline. Flutterwave indicated the possibility for a future listing on the NYSE.
Banks' digital payments business offering creates latent value
Nigerian banks have utilised their digital banking platforms to enhance financial access to previously excluded parts of the population. We believe Nigerian banks' digital payments and agency businesses offer latent value within banks' corporate structures due to their dominant share of digital transaction volumes. The digital payments business of a large Nigerian Bank could be worth NGN100bn (USD244m), conservatively.
Expectations of strong double-digit growth
We expect the sector to continue to post strong double-digit growth y/y. We believe growth opportunities will continue to stem from the needs of consumers, like the financially excluded and underserved segments of the population. Fintech will likely dominate the emphasis on financial inclusion by governments and regulators and activity (investments and revenue) in the tech industry. We anticipate that Fintech will focus on smaller segments such as consumer lending, insurance and asset management. We expect other sectors (Agritech, Healthtech) to continue to rise.