Introduction
Innovations are a dominant force in economically transforming societies. Schumpeter (1934) coined the idea of creative destruction, where the introduction of new (innovative) products and production processes wipes out the markets for existing products or production processes, leading to innovation rents for innovative entrepreneurs. According to Schumpeter, creative destruction is a continuous and main driver of economic growth and transformation in capitalist societies. In his early work, Schumpeter expected creative destruction to come mainly from newly established entrepreneurs operating in competitive markets. Innovation processes are, however, erratic and risky. The uncertainty of innovation processes induces innovating entrepreneurs or firms to control their external environment by growing in size. Larger firms are better able to control their external environment. Moreover, they have more financial means and they are able to spread Research and Development (R&D) costs over a higher turnover, thereby reducing fixed costs per unit product. The idea of large firms being in a better position to produce innovations is referred to as Schumpeter ii (Schumpeter 1942), which juxtaposes the “older” Schumpeter i, which expected newly established entrepreneurs to take the lead.
Schumpeter’s ideas refer to capitalist economies in Western Europe and Northern America. Are they relevant for African economies when we try to understand successful entrepreneurship in today’s Africa? For a long time, the
In sum, the innovation landscape in many African countries is changing dramatically. However, to date, little empirical knowledge exists on how
Setting the Context: Changing Innovation Landscape in African Economies
The innovation landscape in many African countries has undergone dramatic changes since the beginning of the twenty-first century. Among others, four major developments or drivers stand out: the fast spread of new information and communication technology (ict); the transfer of R&D activities of multinational enterprises (mnes) to Africa, the rise of Global Value Chains (gvcs), and changes on the demand side due to population dynamics. These developments are briefly explained below.
One of the biggest changes has been the fast spread of new ict across the African continent. In Africa, internet access, the use of computers, and mobile networks have grown dramatically during the last two decades. The new ict has opened new opportunities for African domestic firms to gain relatively easy access to technologies that could help them to embark on innovation-driven growth trajectories. The notions of the Third Industrial Revolution and the Internet of Things have been introduced, which would enable a democratisation of technology across regions and societies (Howard 2015; Rifkin 2011). Across African countries, many examples can be found of individual entrepreneurs who have managed to set up innovative companies with the use of open access ict applications (see also in this chapter). This could make innovative domestic firms potentially less dependent on technology transfer, for instance through Foreign Direct Investment by mnes. At the same time, the new opportunities offered by ict developments should be looked upon with care. The 2016 World Development Report warns for a digital divide, in which a happy few reap all the benefits while a majority of people lag behind (World Bank 2016).
A second global trend in recent years has been the internationalisation of R&D activities by mnes (
unctad 2006). This leads to “polycentric innovation”, which designates the global integration of specialised research and development capabilities across multiple regions to create novel solutions that no single region or company could have completely developed on its own (Singh 2011; Radjou 2009). Greater product and technology complexity has increased costs and risks for innovators such that these can barely be dealt with by relying on one firm’s own limited resources and capabilities alone. In addition, the globalisation wave of the last two decades has opened more possibilities for cross-national alliances that contribute to creating competitive advantage in foreign markets (Lavie and Miller 2008). This trend of polycentric innovation can also be observed in some African countries. Notably, countries like Nigeria, South Africa, Kenya, Rwanda, and Senegal have become “hubs” for mnes, such as ibm and Google, but also non-ict companies like Philips, Siemens, and Unilever, to establish innovation centres, in addition to innovation centres that emerged locally. However, little is known about the effects on and entrepreneurial opportunities this offers for domestic firms. On the one hand, there is an optimistic view that polycentric innovation can indeed lead to more chances for domestic firms; on the other hand, there is a critical view that points out possible crowding out or exploitation of (informal) domestic firms (see Knorringa et al. 2016 for this discussion). Both views lack empirical evidence though when it comes to the African continent.
The rise of Global Value Chains (gvc) is a third significant global development that also involves African farms and firms (Kaplinsky 2011). Generally, it is thought that for those domestic firms that succeed to integrate into a gvc, this could have a significant effect on innovation capabilities and grasping associated entrepreneurial opportunities (Fu et al. 2011). For domestic firms in Africa, gvcs not only represent a new market for their produce, but they also play a growing and crucial role in acquiring knowledge and enhancing learning and innovation. However, also in this case, we know very little about how this works out for domestic firms in Africa. For example, Fu et al. (2011: 1209) observe that “the literature has not yet clearly settled how innovation systems and gvcs interact, and how this interaction is likely to affect enterprise learning.”
The fourth big change is related to the population dynamics of Africa and the emerging class of middle-income consumers, which have led to the rapid growth of consumption in Africa, creating new markets for both international and domestic firms. High population growth in many African countries, in combination with persistent high income inequalities, have led to a dramatic growth of the number of consumers at the so-called Bottom/Base of the Pyramid (BoP). The idea that a “fortune” can be found at the BoP (Prahalad and Hart 2002) has been firmly rooted during the last decade in corporate business studies and practices. The World Resource Institute estimates the current BoP market in Africa at $us 429 billion. In addition, there is a growing and emerging middle class that is receptive and willing to spend money on quality products, provided these are suitable, well made and reasonably priced. Since the 1980s, the middle class has tripled in Africa and currently constitutes 30 per cent of the population.
4
In 2008, annual consumer demand in Africa was estimated at $us 680 billion. Forecasts predict that this figure will be $us 2.2 trillion in 2030. This will lead to a rising demand for good quality but relatively low cost products, services, and systems. In the innovation literature, the concept of frugal innovation has been introduced to identify these innovations.
5
Successful frugal innovations ask for a good understanding of living conditions, preferences, and aspirations of the BoP and the emerging middle class. Domestic firms that operate in local environments have a comparative advantage to
The “missing middle” and Success Factors for Firm Performance
The above developments, which underlie the changing innovation landscape in many African countries, have renewed attention for the role of innovation and technology in private sector development, and the private sector is also increasingly recognised by both African governments and donors as an important engine of growth. The above developments are thought to offer opportunities and threats for different groups of entrepreneurs in Africa. Our argument is that the opportunities offered by the changing innovation landscape are increasingly grasped by an emerging class of entrepreneurs, of which a number of cases are presented in this chapter, and whose group is usually referred to as “the missing middle” in the private sector development literature. This is a group of entrepreneurs that neither has the full characteristics of micro- and small enterprises, nor the full features of corporate business.
Staley and Morse (1965), in their classic book Modern Small Industry for Developing Countries, introduced the idea of modern small- and medium enterprises as a key element in a dynamic industrial structure and as an intermediate category between the modern large corporate sector and a large group of more traditional artisans and other informal sector businesses (Fafchamps 1994). This was and still is an important observation as most African economies, at least in some of their key sectors, continue to be characterised by a so-called dual industrial structure, with a small segment of large, often (partly) foreign-owned corporations on the one hand, and a large segment of informal businesses on the other.
In between these two segments, what is missing is an intermediate segment of dynamic and modern small- and medium-scale businesses, domestically owned and significantly contributing to innovation in the domestic economy.
6
This is not only or even most importantly simply a matter of the desire to have more formally registered small- and medium-scale businesses in a country, more registered production, employment and export earnings. The often
This classification is clearly not clear-cut in practice, and empirical research shows in between categories and processes of graduation from one category to another. For example, Staley and Morse (1965) already recognise that some informal sector “artisans could manage to modernize and grow into dynamic small industries” (Fafchamps 1994: 2). Moreover, research has emphasised that within the informal sector one might distinguish between growth-oriented entrepreneurs and survivalists (Berner et al. 2012; Tellegen 1997), while others see again an intermediate category within the informal sector, so-called constrained gazelles (Grimm et al. 2012). These studies also show that individual graduation from one segment to another is possible, but is an exception, not the rule (Berner et al. 2012). More likely are somewhat longer-term intergenerational graduation processes, in which better-educated children of informal sector entrepreneurs are able to become co-owners or managers of formal dynamic small- and medium enterprises.
The above insights will be used to assess whether the case studies presented in this chapter provide indications that these new successful businesses can actually be seen as the frontrunners in the emergence of a dynamic intermediate segment of formal small- and medium enterprises that are “filling” the middle. One way to do this is to look at success factors for firm performance. These are often divided into internal and external factors. Internal factors include issues like leadership and entrepreneurial ability, attitude to risk, availability of working and investment capital, marketing and management knowledge and know-how, the availability of appropriate technology, and the skill set of the workforce (Nichter and Goldmark 2009; Philips and Bhatia-Panthaki 2007).
The list of external factors is even longer and ranges from rather direct to more indirect contextual factors. Rather direct are the forward and backward linkages, the ability to link up in larger and (inter)national value chains, tax regimes, industrial policy, and government attitude and policy towards smes. More indirect but still potentially very important in influencing firm performance are issues like macro-economic conditions, public sector capacity and willingness to cooperate with business, the legal framework and implementation, targeting by donors and government, and level and appropriateness of services offered by the financial sector (Philips and Bhatia-Panthaki 2007).
Data
VC4A Database
This chapter largely builds on findings and cases that have been selected from a dataset collected by VC4A (Venture Capital for Africa). VC4A is a global peer-to-peer network of African and Africa-focused entrepreneurs, investors and others. Since 2013, VC4A has reached out annually to its community of entrepreneurs and investors with a survey, to find out more about their progress. The end of 2015 VC4A survey was completed by 462 entrepreneurs from the VC4A community, in 41 African countries. The majority of the cases presented in this chapter was selected from this dataset.
At the time of the survey, the VC4A community had over 20,000 members spread across 159 countries, and over 2,000 African start-ups presented their companies on the VC4A website. The founders of these start-ups were included in the survey. VC4A indicates that most of the ventures in its network are purposed for growth, “either by leveraging technology or through the application of a disruptive business model.” VC4A also indicates that “most of the companies are early stage and require investments between usd 10K and 1 million” (VC4A 2016a).
In the survey, VC4A asked entrepreneurs to report on their revenue, profit, team size, capital requirements, progress in fundraising, and other indicators. Below, we present some descriptive figures to give an idea of the composition of the 462 entrepreneurs listed in the VC4A database and to show that the VC4A companies in general, and the specific cases further discussed in this chapter, are in a different “league” than companies that, for instance, emerge from surveys among micro- and small enterprises in the informal sector. An overwhelming majority of companies is registered and part of the formal sector, and they represent a variety of examples of missing middle companies.
A striking feature of this missing – or, should one say, emerging – middle is the high level of education of the entrepreneurs. 91.7 per cent of the respondents have a university degree level of education, 7.7 per cent has secondary school and less than 1 per cent only has primary education as the highest completed level of education. 25.3 per cent has an mba on top of their university degree. The high level of education suggests founders of African innovative growth ventures also have access to resources and networks. Also striking is the number of female founders. More than 25 per cent of the ventures have a
Sector-wise (founders could indicate more than one sector) 40 per cent of the ventures are in ict; 21 per cent in agriculture; 15 per cent in e-commerce; 13 per cent in mobile services; 11 per cent in education; 10 per cent in diversified services; 9 per cent in clean technology; 9 per cent in financial services; 7 per cent in media; 7 per cent in manufacturing; 7 per cent in renewable energy. 69 per cent of the ventures indicate they are in a start-up phase, while 30.7 per cent say they are in a growth stage. VC4A defines the start-up stage as “focused on solution validation, product market fit, survival,” and the growth stage as “focused on expanding product line, growing revenue, growing team.” The average team size for a venture is 8.9 fte (Full Time Equivalent).
45 per cent of the ventures indicated generating revenue in 2015. 26 per cent generated less than usd 50,000; 10 per cent generated usd 50,000–100,000; 3 per cent generated usd 100,000–500,000; and 5 per cent generated more than usd 500,000. 48 per cent of ventures have secured outside investment. 92.7 per cent of all investments are less than usd 500,000. 65.8 per cent of investments is between usd 10,000 and usd 50,000. 26.9 per cent of investments fall in the range of usd 50,000 and usd 500,000; and only 3.6 per cent of the investments are over $us 1 million. The difference in investment sizes varies between the different types of investors. Angel investors are typically investing between $us 25,000 and $us 100,000, whereas venture capitalists and social impact funds are typically investing over $us 100,000.
7
The ict sector is the most attractive for investors, securing 61 per cent of all investments. 57 per cent of invested capital comes from founders themselves. Grants and competitions account for 13 per cent, family and friends for 11 per cent, and
Case Selection
We chose to select and present nine cases from the VC4A database in more detail as illustrative cases for the discussion presented in this chapter. The companies include: a cooking fuel company; a mobile sports betting website; an education products company; two mobile payments companies; two solar power product companies; a media company; and an exotic fruits and vegetables company. In addition, we selected five cases that are not part of the VC4A database. These companies include: a mobile payment company; an online hotel booking company; an ict services company; an online shopping company; and an online entertainment company. These companies are generally in a later growth stage, and are exemplary of where “missing middle” startup companies could end up. In line with the objectives of this volume, we have selected successful cases. For this, we used growth in revenues, external investments, ftes and exposure in the last few years as key indicators. After selecting around 40 cases that fitted the criteria, it became clear that the successful cases predominantly could be found in South Africa, Nigeria and Kenya. We selected 12 of the 14 firms in Nigeria and Kenya, which we sent a brief questionnaire with open questions to retrieve additional information to what we already knew through the VC4Africa database and public sources, going into more depth on the educational background of the founders, innovation, finance, performance, and growth trajectories of the companies. Three firms responded and filled in the questionnaire. In addition, we also spoke to three experts who know the practice of the “missing middle” very well on determinants of success for African innovative start-up entrepreneurs, the role of innovation, differences between Kenya and Nigeria, and needed policies. 8
In the remainder of this chapter, we will first present general data of the 14 selected companies; subsequently, we will present the three cases in more detail, followed by a discussion on what the empirical cases can tell us about determinants of success for innovative start-ups.
Cases of Innovative Start-ups in Kenya and Nigeria
Fourteen Cases
Table 5.1 presents descriptive figures of the 14 cases that have been selected for this chapter. In this section, we point out some of the major findings from Table 5.1 and present more background where relevant. If we look at the year of registration, some of the companies (3, 8, 9 and 11) are over ten years old, which questions whether these companies can still be called start-ups. However, two of them reached break-even point only in 2016, which suggests that these companies have been struggling to enter the market and reach a growth stage. When the start-up stage is defined as “focused on solution validation, product market fit, survival,” and the growth stage as “focused on expanding product line, growing revenue, growing team,” most entrepreneurs in this sample did not call their companies start-ups, but referred to their companies as being in a growth stage.
All companies have been started by a limited number of people: they all have between one and three founders. Four of the teams include one or more female co-founders. Most of the founders are between 25 and 35 years of age. All of the founders have university degrees, and five of the teams include one or more co-founders with an additional mba. Only two of the companies were established with support from an incubator, innovation hub, or other enterprise promoting entity. The nine companies from the VC4A data indicated some form of independent collaboration with an mne, either by selling to, sourcing from, or connecting with an mne. Only company 2, engaged in mobile sports betting, is partly financed by an international company.
In terms of finance, most companies in the sample got their money from their own savings in combination with securing external capital. The latter ranges from $us 10–20,000 to $us 125,000. For most companies the founder has been the main source of funding. The other main capital sources include friends and family, angel investors, grants, and competitions. While the funding types include both equity and debt, microfinance institutions did not play a role in securing capital and a bank loan only played a role for company 8. All companies except one are looking for external funding, but some of the owners indicate that this is difficult. Having moved from being a start-up to a growing company, they need more finance to sustain their development.
The companies have been quite successful in their respective operations. As the figures in Table 5.1 show, most companies reached their break-even point within five years, and became profitable soon thereafter, or are expected by the owner to become profitable in the near future. The company growth allowed for most companies to employ more people, as the figures on ftes show. In
It is interesting to observe, when we look at the businesses and the sectors they are involved in, that some of the trends sketched above can be seen among these start-ups. One has to do with the opportunities created by the ict revolution. Company 13 very quickly became one of the biggest online shopping companies in Nigeria, and company 14 has become a successful online hotel booking company. Company 11 became one of Kenya’s biggest it companies, and also Company 2, involved in mobile sports betting, is successful because of the ict revolution in Nigeria. And companies 4 and 10 are involved in forms of e-commerce (having developed an application for mobile credit payments and to enable mobile orders for delivery and pickups of products respectively), which very much relies on the latest ict innovations.
That said, a company needs customers. The ict revolution can only lead to successful outcomes if there are customers who want to make use of products or services that result from new ict applications. Most of the companies in this study target urban consumers, only one focuses on rural consumers, and some do both (see Table 5.1). The nature of goods and services sold by the companies are such that a rising middle-class consumer might be interested in and can afford the products and services. This also partly explains the urban orientation of most companies. The customers may well be outside Africa as well, as is the case with company 9, which sells exotic fruits and vegetables to the European market. Also, company 3, which develops and sells e-books to, among others, Nigerians in the diaspora who want to learn local languages, and company 12, which has become the largest distributor of African movies around the globe, target customers outside Africa. Other companies thrive on the wave of interest regarding the social and environmental impact of corporate business. For example, company 1 is involved in converting waste-based biomass into cellulosic ethanol (cooking fuel). The company serves urban and rural based clients. In terms of social impact, the company has sold over 200,000 clean-cook stoves in West Africa to date and its product has now logged over two million stove-use days. It has been introduced by the national Nigerian programme for clean-cook stoves and adopted by many state and local governments as the preferred stove in over ten states in Nigeria. This also shows that (local) governments in African countries can be customers as well, despite the perception sometimes that these governments are poor and dysfunctional.
Another successful example in the social and environmental impact range is company 6, which produces and sells 2-in-1 roofing tile technologies that
A diverse picture also emerges geographically. While some of the companies stay in their home markets, others have chosen to extend their business beyond the national borders. This may be within Africa itself (1 and 7), and/or beyond Africa (10, 11, 12 and 14). There is not necessarily a link between being more internationally oriented and ict. Although e-commerce facilitates reaching out to international markets (for instance companies 11, 12 and 14), company 1 successfully sells a non-ict related technology (converting waste-based biomass into cellulosic ethanol) to an ever-growing market in West Africa. ict may have helped to identify foreign markets, but this has not been explored in the case studies.
The presented cases may already provide hints about what determinants of successful innovative start-ups might be, but before we discuss this, we have elaborated on three company cases studies in more detail below, based on additional interviews with the owners of these companies.
Three In-depth Cases
Company 9, Kenya
Company 9 is an exotic fruits and vegetables producer, packer, supplier, and exporter based in Nairobi, Kenya, registered in 2007. The company produces for international export markets outside Africa (Europe, usa, Asia, Middle East). The single founder of the company (current age 33) can be classified as a local entrepreneur. His origins are in the rural Kiegoi area in the Meru region of Central Kenya, near to Mount Kenya, 320 km from Nairobi. The respondent finished his education to college level. After secondary school in Kiegoi, he started a college education track in 2001, which he completed in 2012 while simultaneously holding down employment. From 2003 to 2006 he worked at multiple local companies, for example as a field manager for a company involved in farming and export and as a sales and marketing officer at a transport company, where he was able to achieve good results.
Company 9 was started from “doing some informal business” and remained informal for the first five years following its registration in 2007. The initial idea for the company was to market the products coming from the respondent’s rural area, thus empowering local low-income families economically. With this in mind, the respondent went to Nairobi in search of a market for the products. However, in Nairobi it soon became clear the market was already flooded. Consequently, and having gained a few years of experience in the horticulture sector, the respondent also looked at market opportunities in Europe.
He registered the company and applied for export licences plus other certifications to comply with international food standards. Then he started looking for markets in Europe, a process that he says was not easy. In the end, he says, his work paid off: he secured a number of contracts from client companies and started producing and exporting the products. “At first it was hard,” he said, but as he progressed, “things became easier.”
The respondent said that, to begin with, he funded the venture from his own savings and that he has been able to grow by reinvesting profits to expand the company. To date, the company has not received any substantial outside investments, although he does want to raise external funds.
The company has developed a structure with appropriate quality checks at both the farm and packing house level. The produce for export includes beans, peas, chilies, aubergines and other vegetables, baby vegetables such as baby carrots, baby leeks, baby courgettes, bimi (tender stem broccoli), passionfruit, avocados and a large selection of fair trade certified flowers.
The company started by shipping small volumes of one to three tons a week and now is shipping three to twenty tons a week. The company has been looking for a stronger partner in the market to work with, to ship volumes for distribution to foreign countries, but so far without success.
Working with smallholder farmers and fair trade and sustainability certifications, the company achieved a large social/environmental impact. At the time of the interview, the company employed 90 people. Before 2014, the company had no paid employees. In 2014, it employed 50 ftes and in 2015 70 ftes. The founder expects this will rise to 200 ftes in 2016 and 300 ftes in 2017. The company secured $us 10,000 in external investments in 2015. In 2014, the company generated between $us 50,000–100,000 in annual revenue, in 2015 between $us 100,000–500,000, and in 2016 and 2017 revenues are expected to be above $us 500,000. They expect to reach break-even point and become profitable in 2016.
The company did not use an accelerator or incubator. Innovative elements the company introduced are adding value to existing horticulture products (innovating new value adding techniques to the products), developing new
Of the packers, farmers, and other workers involved, 80 per cent are women and 20 per cent are men. According to company documents, the aim is to revolutionise the industry in terms of farmers’ and employees’ welfare, with fair trade compliance benefiting the community. Small-scale farmers owning one to three acres mainly grow the produce. They are provided with seeds, fertilisers, chemicals, and technical assistance to meet the required quality standards that the market demands. Once the produce is at the packing house, it is processed and packed according to the client’s order, specifications, procedures, and standards and then exported to Europe, usa, the Middle East and Asia. The produce is exported to the wholesalers/distributors importers who then supply the produce to big supermarkets like Tesco, Morrison’s, J&S and other retailers.
The respondent said he is the only small business in Kenya offering sea shipping for vegetables to Europe. He said he has developed brands that are now widely accepted in the market. The company developed new and better products on their own, in consultation with customers and clients, in order to get an idea about how the market would receive the products and to get with taking the brands to market. On competition in the sector he said: “The competition is high amongst the players both big and small locally plus competition from other countries. The competition is healthy. What keeps us as unique is that Kenya has good weather that supports full year production compared to competing countries who grow in seasons because of not conducive weather.”
The respondent mentioned “economic and social impact to the community, the workers and the consumers” as the most important indicator to determine achieved success of African start-ups/companies. In response to the question of whether he considers his own company successful, he replied: “Not yet successful, because I have not achieved the full potential to where I would want to be.” He said “we haven’t reached where we want to be, neither have we achieved our goals.” According to the respondent, the most important reasons the company became successful include securing and sustaining markets and its workforce. He sees “securing markets and the ability to produce what the market requires” as the most important indicators showing the company is successful.
The respondent suggested that government/policymakers should support small companies financially, as this is the greatest obstacle for many. He suggested that other entrepreneurs should “first of all identify the need they want
Company 12, Nigeria
Company 12 is a creative industry company based in Lagos, Nigeria, founded and registered in 2010, targeting low-to-middle-income consumers in Africa and in the diaspora with creative content. Two co-founders started the company. The founder interviewed here (current age 35), who is the initiator of the company and its current ceo, can be classified as a diaspora entrepreneur, born in the uk and of Nigerian descent. After school and studies in Nigeria and the uk, (he holds a Master’s degree), he says he had jobs but never stayed in them for very long as he was “always looking to set up my own venture.”
The idea for the venture emerged when the respondent noticed how much his mother was watching Nigerian movies at home, but when realised that there was a lack of online services to buy or stream new movies. His first step was to do some research, in order to get a better understanding of the content, the industry and the wider market – first online from the uk, later also on the ground in Lagos, Nigeria. It became clear the distribution infrastructure was very limited. “When I saw that there was an opportunity to develop it,” the respondent said, “I started purchasing the online licenses for some movies, direct from the producers, so that I could legally stream them on our YouTube channel.”
The company was started in 2010 with investments from a uk-based friend who became co-founder of the company. The respondent says they started a Limited Company in order to be taken seriously by other local and international organisations, for example YouTube. “We needed a professional structure in order to function.” The respondent indicated the initial partnership with YouTube was brokered via personal networks.
After a us-based technology news website published an article on the company in 2011 they were approached by a big international investment fund and, following conversations, due diligence and negotiations, they successfully closed a deal worth $us 3 million. Subsequently, they have secured one other investment with this investment fund, two with other international investment companies and one with another company. Amounts were not disclosed in the interview.
Without making use of an accelerator or incubator, the company developed a product/service that was new and was the first in the market. The product evolved from a YouTube channel to an online platform, to an Android App produced by the company. The new product/service was developed together with
Before they introduced the product, there were other ways of streaming Nigerian movies on YouTube or online, but illegally. In contrast, the new company paid for online rights to the content – making a fair deal for content producers, who previously were losing out to online revenue models. The respondent added: “We totally reshaped and redefined the entire distribution model for Nollywood, Africa’s most popular form of entertainment. We brought Nollywood online, opening up a huge content catalogue to millions more people, both in Africa and in the Diaspora. I consider that to be innovative.” He described the most innovative aspect of his company as “creating a beautiful platform for African content – making it more accessible than ever before.”
In five years, the company became one of the world’s largest distributors of African-made creative content, employing over a hundred people. The respondent did not disclose details, but other sources indicate that the company is valued at tens of millions of us dollars, with multi-million-dollar revenues. Outside sources also indicate that the company has attracted tens of millions in investments.
Regarding competition in the sector he said: “A lot of competitors who initially came into the video on demand space have fallen by the wayside, as they’ve realized how complicated and capital-heavy the market is. In terms of other content distributors, more well established entities, we are seeing more competition as more and more come into the digital sphere.”
The respondent mentioned “continuing to build year-on-year” and “adding value to the market” as the most important indicators for achieving success for African start-ups/companies. In response to the question of whether he considers his own company successful, he replied: “We are still working hard to be ‘successful’ – a lot of people know about us, a lot of consumers use our products and consume the content we distribute and we’ve successfully raised venture capital – however, there’s a long way for us to go, in terms of growth and profitability, before we would declare ourselves as successful.” He considers Innovation, determination, and hard work the most important reasons for his company’s success, and indicated growth and profitability the most important indicators of a company’s achievements.
The respondent suggests government/policymakers could make it easier to do business and cut down administration time for entrepreneurs. To other entrepreneurs he suggests: “Lower your expectations of what being an
Company 7, Kenya
Company 7 is a media company based in Nairobi, Kenya, registered in 2011. Its main customers are broadcasters and it serves regional markets. The company was started by two founders. The founder interviewed here (current age 50), who initiated the company and is its current ceo, can be classified as an entrepreneur from outside of Kenya. The respondent was born in South Africa where he also completed his education, (he has an Arts degree). This provided him the basis for his media skills, but did not prepare him for starting a company. The respondent says management experience was as useful in this regard as his media experience. After graduation, the respondent worked for a large multinational media company for almost twenty years. This involved working in many parts of the world and he was relocated within Africa around ten years ago.
After being posted to Africa, after more than a decade away from the continent, the respondent said he realised “change was coming fast to the continent” and he wanted to “bring change to media on the continent.” His work for the multinational media company showed him the potential and the opportunities of the rapidly changing media environment. He mentions the “push” of potential relocation and the prospect of his contract coming to an end as the motivation to put some of his innovative ideas into practice.
After he left his regular job, it took about eight months to start the new company. Registration in 2012 coincided with initial discussions with a potential client to produce African news content. This first deal was agreed verbally and it took almost a year before a contract emerged. In early 2013, the company launched a daily video news service providing African news content on a subscription basis; this required hiring four people as news staff. A few months later, the company started producing another show and hired a creative director and a graphics designer. This grew potential to create graphics and, later, animated graphics and full animation. Currently, the company produces three tv shows, partners to create a Sports News show and produces a daily news “feed”, in addition to some animation. The idea of engaging African media producers across the continent, using cutting edge technology and an African “media hub” to create ready-to-air content and selling that content to broadcasters, has been proven. The company now needs considerable financing to scale up and is looking for outside investments.
The respondent said local (Kenyan) financing, even from so-called business-friendly institutions, is prohibitively expensive, with interest rates between 17–19 per cent per annum and with prohibitive guarantees. To date, the entire business has been bootstrapped, with the respondent having provided all financing in personal loans to the company from the beginning.
The company currently has revenues of over $us 500,000, employs 18 people and is active in multiple countries across Africa. The company has not yet secured any outside investment, but is still looking. In 2012, the company employed six ftes, which rose to 12 in 2013, 15 in 2014, and 18 in 2015. The company’s workforce is expected to rise to 20 ftes in 2016 and 24 ftes in 2017. The company reached break-even point in 2013 and became profitable in 2014. In 2012 and 2013, it made between $us 100,000–500,000 in annual revenue. In 2015, this rose above $us 500,000 and revenues have remained above this level ever since.
The respondent mentioned a media space in Nairobi, where offices can be rented, as crucial to the company’s development. As a media company creating African content for broadcast, online and corporate clients, the company’s promise is to deliver cutting edge African news, creative, and animated content. The respondent considers the company innovative in the sense that their content is “truly Africa-wide and groundbreaking, the use of technology constantly evolving and we do so from a highly creative media hub.” He indicates that the most innovative element is the “merger of digital technologies and African media creation to develop great African broadcast content, quickly and competitively.” He indicates developing an innovative and creative media space from a “frontier market hub” as groundbreaking: creating African content that speaks to pan-African audiences and taps into local capacity and increasingly available digital technology.
The company developed the new products on their own, using feedback from early clients. Turnover increased 10 per cent in the last year due to new or strongly improved products. This was slower than previously, due to the loss of a major client. He also mentioned competition in the sector is growing fast.
The respondent sees access to capital as the most important indicator for determining the success of African start-ups/companies. In response to the question of whether he considers his own company successful, he replied: “We are told we have been extremely successful. We are a long way from where we want to be.” He considers the focus on producing great African content the most important reason his company is successful, and new contracts for multi-episode tv shows (three new contracts in the past year) to be the most important indicator of the company’s achievements.
He suggests that government/policymakers should provide funding to institutions and/or financiers so that they can provide competitive financing (at less than 10 per cent interest per annum), and provide more sectoral support (as, for example, South Africa’s Industrial Development Corporation and regional business development councils do). To other entrepreneurs he suggests: “Try to line up financing before starting out.”
Discussion
In this section, we use insights from the case studies and the interviews with experts 9 to discuss the determinants behind the success of the firms that have been examined. We make a distinction between the internal and external factors, as explained in previously.
A first important internal success factor that emerges from the case studies, but also from the wider VC4A database, is the level of education of the founder entrepreneurs. Most of them have a university degree, in some cases combined with an mba degree. While the contents of the studies may not have contributed a great deal in terms of how to set up and run a company, for many of them education has probably helped in building “entrepreneurial competences” such as itc literacy, presentation and communication skills, networking skills, and negotiation skills. In addition, the high education level is also a reflection of social class, though it does not necessarily imply that the entrepreneurs originate from higher social strata in society. That said, the fact that they have completed university enables them to participate in social and economic networks, both nationally and internationally, that go beyond the level of kin and friendship relations. In terms of sustainable livelihoods studies, one could argue that the high level of education has helped these entrepreneurs to build and extend their social capital.
A second internal determinant for success is the registration and formalisation of the company. Being a formal enterprise – i.e. being registered at the Chamber of Commerce, paying taxes, abiding with all other requirements set by statutory law – not only opens up access to sources of finance that go beyond microfinance, but also enables the entrepreneurs to engage in or catch the attention of larger (international) investment funds and ventures. This can help growth-oriented firms to overcome one of the big constraints they generally face: access to finance and working capital. There is a downside to
A third internal factor that is relevant to the cases presented in this chapter is the access to capital. Many of the respondents used their own savings to invest in the start-up of their business, and rarely used external finance. In the growth stage, the entrepreneurs have, however, been able to attract capital in various ways, as the case studies show. Consequently, an important constraint to further firm growth is overcome. The formalisation of the company in combination with other entrepreneurial competences, skills, and networks have helped to attract this finance. That said, the entrepreneurs in our case studies also mention that attracting finance is hard and some of them are still seeking larger investment funds to finance their growth ambitions. Moreover, a “missing middle” exists in financial services. While in many African countries it is much easier to either access micro-finance loans for informal entrepreneurs or formal bank loans for large corporations with political contacts, access to finance is extremely difficult to the intermediate-sized loans needed by the segment of enterprises that have been presented here. The emergence of platforms such as Venture Capital for Africa, and the rise of Angel investments, etc., has broadened the scope for finance for these types of enterprises. Nevertheless, venture capitalists still look at Africa with some caution. Although business climate and investment risk indicators in many African countries show a steady trend upwards, investing in African companies is still considered a risky and uncertain business, different from Asia or Latin America. A perceived lack of adequate (financial) market regulations and governance in Africa, and a high-risk assessment of insecurities related to the political and economic conditions in African countries means investors remain reluctant
The cases also reveal a fourth and undeniable success factor: an entrepreneurial spirit and attitude among the founders of the firms. Many of the companies appear to be pioneers in their respective markets and sectors, having identified and grasped market opportunities, and having developed innovative products and services. The innovations they develop are not always disruptive, in a sense that they are breakthroughs for society as a whole, but, in most cases, they are new to the market and, in all cases, new to the company. This reflects the reality of innovation. Breakthrough and disruptive innovations are scarce. Frequently, innovation comes from the cumulative effect of implementing small-scale ideas over prolonged periods of time. It is a process that encompasses the acts of numerous individuals, not only the original inventors, but also the producers, consumers, and middlemen that transmit and operationalise the innovations, making them acceptable to society. What the presented cases show is that this cumulative innovation is widely manifest in African societies as well through the recombination or innovative use of ideas, knowledge, and technology (see also Gewald et al. 2012). The entrepreneurial spirit, which is manifest in, among other things, the innovative products and services, gives companies a “first mover” advantage in their respective markets, through which they can accrue innovation rents. Some of the entrepreneurs indicate that competition is increasing, others copy what they are doing, but certainly entrepreneurs set in motion a process of creative destruction, as indicated by Schumpeter.
As already touched upon in the case descriptions, the adequate and innovative use of available new technology is a clear factor behind the success of many of the firms presented in this chapter. While the availability of new technologies is largely an external factor, it ultimately depends on an internal factor, namely being capable of making use these new technologies, which is a key to success. In this sense, the availability of new technologies in Africa is only a mediating factor, offering new chances and opportunities, which still have to be captured by innovative entrepreneurs. From the case studies, it becomes clear that new ict has enabled many entrepreneurs to explore more easily and get better insights into (new) market developments and identify new business opportunities. It has also helped them to increase the scale of their business, be that national, regional, or international. Finally, it has led to innovative products and services, which have made many of the entrepreneurs presented in this chapter forerunners in the respective markets and (sub-)sectors.
That said, the presentation of success stories in this chapter may overlook the fact that, to date, only a small section of entrepreneurs have been able to profit from the ict revolution in Africa in such a way that it has helped them to realise an innovative, growth-oriented enterprise. This is despite media rhetoric that claims otherwise. The World Development Report 2016 refers to the digital divide, which occurs across countries and continents (World Bank 2016). In addition, arguments from the technological capability school, a prominent line of thinking in the 1980s on technology and innovation in developing economies, might be relevant today as well. Their argument is that (firms in) developing economies need to undertake well-articulated searches in terms of the adaptation and assimilation of the transferred technologies, outside of formal R&D labs (Badhuri 2016: 3). The main point is that, without proactive indigenous innovation efforts, imported technology remains static technology, which will never turn into real indigenous technological capability (Fu et al. 2011: 1210). Fu et al. (2011) conclude that the technology gap in many developing economies remains large. The consequence for local innovative firms might be a “locked in” or path dependent trajectory that prevents them from embarking on trajectories for further innovation and growth.
More research is needed to further explore determinants behind the success of the innovative start-up and growth companies we have focused on in this paper. Moreover, we are aware that in this exploratory paper we were only able to present a select number of cases and could not cover the full variety of companies. For example, while the VC4A data and other sources indicate female founders start many successful innovative companies in the sphere, all three cases explored in-depth were owned by male entrepreneurs. Another example of an issue debated in the context of African start-ups is the presumed advantage American and European entrepreneurs, or entrepreneurs with American or European education and networks, have over local African entrepreneurs in terms of access to funding, relevant networks, language, and skills for pitching to investors and other factors. While we were able to show cases of successful innovative companies by local African entrepreneurs, this could be explored in greater depth too.
As we mainly concentrated in this chapter on the start-up and growth trajectory of the companies itself, we have paid less attention to the external environment that may have influenced a firm’s performance. A few things stand out though. Firstly, at least three of the developments identified in the landscape of innovation created opportunities for the companies discussed in this paper. Many made use of the new technologies that have become available, one succeeded in becoming part of a gvc (fruits and vegetables), and
Secondly, clearly Kenya and Nigeria are different in many respects, be it tax regimes, industrial policy, or government attitude and policy towards smes. But also macro-economic conditions, societal conditions, public sector capacity, and willingness to cooperate with business, the legal framework and implementation, the level and appropriateness of services offered by the financial sector differ. This almost certainly has an effect on the performance of the firms discussed in this chapter, but we however have not explored this in detail. On the other hand, both countries are known for being innovation hubs in Africa, and historically they have been among the few African countries that, following independence, have succeeded in building and sustaining a segment of strong small- and medium-sized local firms in the formal sector. In addition, Nigeria and Kenya have become major entry points for investors and companies aiming to serve regional markets in West and East Africa, respectively. This also suggests that the economic and political environment is currently conducive to business, probably also for local start-ups and growth-oriented local firms.
To conclude, this chapter has shown that there is an emerging and growing generation of enterprises in Kenya and Nigeria that come near to what has been formerly defined as “the missing middle”, and that innovation and the recent changes in the innovation landscape play a major role in their success. Both internal factors and external factors have had a role in this. Important to note here is that the interaction between the internal and external factors also matter. Mead (1994) showed the crucial importance of bust-boom cycles in some African economies on informal-sector firm performance. While internal factors offer micro-level insights into which firms are able to perform more successfully in a given setting, the external factors provide macro- or meso-level insights into factors that hinder or enable firm growth more generally. In order to promote the missing middle, one would need to look at both internal and external factors. Certain external conditions would need to be in place for a forerunners to be able to exploit opportunities to fill the middle and benefit from it, and to start providing role models for other less catalytic entrepreneurs to follow in their footsteps.
Badhuri S. (2016). “Frugal Innovation by the ‘Small and the Marginal’: An Alternative Discourse on Innovation and Development”, Inaugural lecture Prince Claus Chair in Development and Equity, 23 May 2016, Erasmus University Rotterdam.
Berner G.E. , Gomez G.M. & P. Knorringa . (2012). “Helping a Large Number of People Become a Little Less Poor? The Logic of Survival Entrepreneurs”, European Journal of Development Research, vol. 24 (3), 382–396.
DEMO Africa (2016), www.demo-africa.com, accessed 21 June 2016.
Fafchamps M. (1994). “Industrial Structure and Microenterprises in Africa”, The Journal of Developing Areas,29/1, 1–30.
Fu X. , Pietrobelli C. & L. Soete (2011). “The Role of Foreign Technology and Indigenous Innovation in the Emerging Economies: Technological Change and Catching-up”, World Development, vol. 39 (7), 1204–1212.
Gewald J.B. , Leliveld A. & I. Peša (eds) (2012). Transforming Innovations in Africa: Explorative Studies on Appropriation in African Societies,Leiden/Boston: Brill.
Grimm M. , Knorringa P. & J. Lay (2012). “Constrained Gazelles: High Potential in West Africa’s Informal Economy”, World Development, vol. 40 (7), 1352–1368.
Howard Philip N. (2015). Pax Technica: How the Internet of Things May Set Us Free or Lock Us Up. New Haven, CT: Yale Press.
Kaplinksy R. (2011). “Schumacher meets Schumpeter: Appropriate Technology Below the Radar”, Research Policy, vol. 40, 193–203.
Knorringa P. , Peša I , Leliveld A. & C. van Beers (2016). “Frugal Innovation and Development: Aides or Adversaries?”European Journal of Development Research, vol. 28 (2), 143–153.
Lavie D. & S.R. Miller (2008). “Alliance Portfolio Internationalization and Firm Performance”, Organizational Science 19(4): 623–646.
Mead D. (1994). “The Contribution of Small Enterprises to Employment Growth in Southern and Eastern Africa”, World Development, vol. 22 (12), 1881–1894.
Nichter S. & L. Goldmark (2009). “Small Firm Growth in Developing Countries”, World Development, vol. 37 (9), 1453–1464.
Phillips C. & S. Bhatia-Panthaki (2007). “Enterprise Development in Zambia: Reflections on the Missing Middle”, Journal of International Development, vol. 19, 793–804.
Prahalad C.K. & S.L. Hart (2002). “The Fortune at the Bottom of the Pyramid”, Strategy and Business, First Quarter 2002, Issue 26.
Radjou N. (2009). “Managing the New Trajectory of Global Innovation”, Centre for India and Global Business, Cambridge Judge Business School, Cambridge, UK. http://www.cfr.org/content/meetings/New_Global_Trajectory.pdf, accessed June 2016.
Ravallion M. (2009). “The Developing World’s Bulging (But Vulnerable) Middle Class”. World Development, 38(4), 445–454.
Rifkin J. (2011). The Third Industrial Revolution: How Lateral Power is Transforming Energy, the Economy, and the World’,New York: Palgrave Macmillan Ltd.
Schumpeter J.A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle, Cambridge: Harvard University Press. Translated from Theorie der wirtschaftlichen Entwicklung (1911).
Schumpeter J.A. (1942). Capitalism, Socialism and Democracy, HarperCollins 3rd edition (1951).
Singh M.G. (2011). “Innovation in India: Affordable Innovations”. In: S. Dutta , The Global Innovation Index 2011, Accelerating Growth and Development, Geneva: INSEAD, 77–86.
Staley E. & R. Morse . (1965). Modern Small Industry for Developing Countries, New York: McGraw Hill.
Tellegen N. (1997). Rural Enterprises in Malawi: Necessity or Opportunity?, Aldershot: Ashgate Publishing Ltd.
The Economist (2010), “First Break all the Rules: The Charms of Frugal Innovation”, 15 April 2010. www.economist.com/node/15879359, accessed 20 April 2016.
UNCTAD (2006), World Investment Report, Geneva: United Nations.
VC4A 2016a, www.vc4a.com, accessed 21 July 2016.
VC4A 2016b, Venture Finance in Africa 2016 Research, https://vc4a.com/venture-finance-in-africa/2016-research/, accessed 21 July 2016.
World Bank (2016) Digital Dividends, World Development Report 2016, Washington, DC: The World Bank.
World Development Indicators, http://data.worldbank.org/data-catalog/world-development-indicators.
Correspondence to: André Leliveld, a.h.m.leliveld@asc.leidenuniv.nl. We thank the following individuals for providing insight through questionnaires or during interviews: two entrepreneurs in Kenya and one entrepreneur in Nigeria, who participated on the basis of anonymity, and Mr. Ben White (ceo & Founder VC4Africa), Mr. Bankole Oluwafemi (ceo & Founder Big Cabal Media / TechCabal), and Ms. Saskia Reus-Makkink (ceo & Founder Africa Funded). We thank VC4Africa (Venture Capital for Africa) for allowing us to use data from their database for this chapter. The authors are responsible for any error of interpretation that may have occurred.
The annual DEMO Africa event provides the most innovative companies from African countries a platform to launch their products and announce to Africa and the world what they have developed. Innovations presented at the DEMO Africa Conferences in recent include innovative touchscreen stickers, game studios, solar power products, smartphones, e-commerce platforms, finance products and services, media companies and products, apps focused on various issues, among other innovations. (DEMO Africa 2016).
A notable exception is an ongoing research project on innovation for productivity growth in low income countries (among which six African countries), commissioned by the uks Department for International Development (DFiD) and conducted by Tilburg University, the Netherlands. Research outcomes and publications can be found at https://www.tilburguniversity.edu/research/economics-and-management/dfid-innovation-and-growths.
Ravallion (2009: 11) estimated the “middle class” in Sub-Sahara Africa as 27.6 per cent, in a range of 2–13USD/capita/day.
The Economist coined the term “frugal innovation” in the article “First break all the rules: The charms of frugal innovation” ( The Economist 2010). The term has since been picked up in academic literature on innovation.
One should be aware that “domestic” is a politically sensitive term in many African countries, because a significant portion of the existing small- and medium scale businesses are owned by people descending from Indian, Arab or Lebanese immigrants, and recently many Chinese small-scale entrepreneurs have also come to Africa.
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A venture capitalist is also an individual or a group of individuals, or a company, that invests in a business venture, providing capital for start-up or expansion. Unlike venture capitalists, angel investors often operate in a group and play a direct role as advisers in the operations of the investee firm. They often demand a substantial part of the ownership to exercise control over the investee firm to offset their high risk.
Mr. Ben White (ceo & Founder VC4Africa), Mr. Bankole Oluwafemi (ceo & Founder Big Cabal Media / TechCabal), and Ms. Saskia Reus-Makkink (ceo & Founder Africa Funded).
Mr. Ben White (ceo & Founder VC4Africa), Mr. Bankole Oluwafemi (ceo & Founder Big Cabal Media / TechCabal), and Ms. Saskia Reus-Makkink (ceo & Founder Africa Funded).