Why most startups in Tanzania fail - and the way forward
In 2019, for example, while a platform like VC4A listed a total of 13,500 startups in Africa, only about 427 of the startups raised over $2 billion in funding. So, if you are a startup in Africa, you are only about three percent likely to raise funds from venture capital firms.
While funding accruing to the African startup ecosystem from venture capital firms is increasing year-on-year, the number of startups which benefit the funding are relatively small compared to the number of startups in Africa.
One of the disconnects between capital (mostly foreign investors) and startups (mostly local companies) in Africa is that foreign investors reflexively value global knowledge over local business knowledge.
Speaking from experience - I have attended over 30 business contests here in East Africa, mostly Tanzania, as well collected data from other African countries which can be accessed on digital archives - there is a clear pattern in African startups funded by foreign investors. These can be traced back to the type of pitch they make, its content, the people who present it: they all have one thing in common. It’s much easier to raise capital if you can make a good Mckinsey-style presentation - and flash some Western-branded educational credentials than if you can figure out how to meet consumer demand in a particular African city such as Dar es Salaam, Mwanza, Nairobi, Lagos... (I am speaking here as the former, not the latter)
They are two very distinct skill sets - and, in some cases, they can even be mutually exclusive.
Both are important. Yet, over time, the McKinsey guy becomes less relevant - and, consequently, exits the market as it becomes hard and hard to scale and with multiple trials they find themselves out sighed with competitors of funds to keep iterating to meet local customers demands thus making this imperative to create local venture capital (VC ) investor communities.
In Africa, consumer preference is way more complex and dynamic than many realize. You must have local knowledge because you cannot assume consumer behaviour based on western assumptions.
Yet, many foreign investors don’t know they have assumptions.
One reason for this is that investors don’t spend much time on the ground in Africa - and, instead, end up hiring people who know exactly what to say, and when to say it to keep the funding coming, regardless of the reality on the ground. It is a classic case of not knowing what you don’t know!
However, while we may not change our individual identities to attract investors, it pays to be strategic. For instance, even though a startup’s founding team may entirely be constituted by persons who are ‘newbies’ to the startup environment or who have not had any previous experience founding successful startup companies, it pays to have a strong team of advisors/board members, or persons of influence projected prominently behind the team. Investors are more tended to finance who they can trust; who has strong credibility and integrity and who knows their mettle about the sectors they are playing in.
The more dense the team - in terms of character, value or influence - the more the chances of the startups securing funding any time soon. Below is a table of some African startup founders and their pedigrees. Therefore, startup founders should not underestimate ‘investor bias’ about who the team members are. In most instances, the choice by VCs, of which team to work with has always (from practical experience and from facts) been influenced by such things as age, gender, race, class, educational background, previous experience in founding a startup, nationality, social networks...
Thus, it is recommended that African startup founders, desirous of securing funds from venture capital firms, first study the investment patterns, over the years, of Africa-focused VCs in order to get insights into how their startups could be affected.
In a nutshell: this provides a better way forward to spearheading the progress of innovation in our country Tanzania - and, consequently, in Africa as a whole.
Mr Mkwawa is the founder of SkillsHub, a digital skills training startup. He is also digital marketing consultant. He can be reached through