Cracking the code: Unravelling Tanzania startup funding puzzle

Dar es Salaam. Stakeholders in Tanzania’s innovation scene are calling for policy and market reforms to attract more funding for startups.

 A recent breakfast debate, held during Tanzania Innovation Week 2024, highlighted the funding gap compared to regional peers.

While Kenya secured $800 million in 2023, Tanzania only attracted $25 million.

Read: What Tanzania ought to do to attract startup funding 

Other issues requiring special attention are requirements for regulatory compliance, improving exit options, encouraging human development and branding, and supporting local talents.

They listed the above issues during a breakfast debate organised by the Policy Forum held last Friday here.

The event coincided with the climax of the Tanzania Innovation Week 2024, themed Innovation for a Competitive Economy, aimed at highlighting commitment to driving economic growth through innovation.

Report findings reveal that between January and February 2024, startups on the continent collectively raised nearly $300 million in funding.

Nigeria led the list after securing 42 percent of the total funding, equivalent to $123 million, with Kenya coming in second after garnering 27 percent, which is equal to $81 million.

Egypt and South Africa collected 10 percent and seven percent, respectively, which is equal to $28 million and $22 million. The findings show that the 'big four' countries collectively accumulated 86 percent of the total funding raised by the continent in just two months.

Read: What Tanzania ought to do to attract startup funding 

Tanzania's absence of significant funding is a matter of concern, especially after another member of the East African Community (EAC)—Uganda—managed to record over $10 million in funding during the said months.

However, a policy specialist in inclusive digital economies at the United Nations Capital Development Fund Tanzania (UNCDF), Ms Aneth Kasebele, said policy and market issues should be addressed for the country to attract significant funding in the startup ecosystem, saying money always goes where it is attracted.

“From the ecosystem, we are moving in the right direction in terms of supporting young innovators because investors go and invest somewhere with a promising future,” she said.

She said funders' requirement to register with the Fair Competition Commission (FCC) for them to extend Venture Capitals (VCs) involves a lot of hurdles, even if it involves a small amount.

“These regulatory hurdles deter the inflow of capital, particularly from VCs. The other component we are putting on the market is companies’ requirement to register at the Central Bank (BOT) to access external capital, which is another hurdle for people to access funds,” she said.

“We should also work out exit options, as some investors are hesitant to come to Tanzania because of the limited options that exist in the country as compared to other African countries,” she added.

Ms Kasebele said the good news was that the government is taking initiatives to improve capital mobilisation, including the capital market’s formulation of the co-funding regulations to facilitate domestic resource mobilisation.

“We also see the emergence of NGOs (non-government organisations) investor’ networks in the country, some of them as catalysts tailored by the supporters in the ecosystem to ensure different Tanzanians, including the diaspora, can contribute to the capital inflows in the ecosystem,” she said.

Sahara Ventures founder and Tanzania Startups Association (TSA) board member Jumanne Mtambalike supported the exit option concern, saying things are not well organised in the area, therefore scaring investors.

“We also need to have appropriate talents that will absorb the capital and offer strong competition across Africa. We need to strengthen our branding and build a culture of celebrating our heroes instead of pulling them down,” he said.

“This culture is really bad because some local companies refrain from disclosing their capital, a move that affects the trend of the country’s funding figures.

He said Kenya, Nigeria, Ghana, South Africa, and Egypt were the five giants for attracting funds in the ecosystem, unveiling their core strengths as venture capital that has existed for the last 20 to 30 years in South Africa.

Furthermore, Mr Mtambalike said Kenya’s strength rests on its expertise, while Nigeria depends on the partnership between its UK and US members of the diaspora and the local people.

“People invest in those who look like them, speak like them, and think like them. So, we must find our core strength as a country if we want to unlock capital and identify our areas of focus,” he said.

According to him, domestic funding should be prioritised to benefit over 842 startups registered in the country that have employed more than 1,000 people, according to the recent TSA report.

He commended the government for signing the National Innovation Framework, referring to it as an important tool for measuring innovation performance.

“We need to have more tools that go beyond policies and laws. The national innovation scope should help us to reinforce our performance at the Global Innovation Index (GII) and Global Competition Index (GCI),” he said.

CRDB's startup development and innovation manager, Ms Sharon Nsule, said partnerships were the key to efficiently supporting the ecosystem. “We support startups from our banking perspective, but we would like to know what they want, the level they have reached, and where they are coming from,” she said. “During financing, we experience several challenges, therefore finding our funding irrelevant. Therefore, startups should come after reaching a level where we can further support them,” she added.

The Small and Medium Enterprises (SMEs) head at Stanbic Bank Tanzania, Mr Charles Misheto, supported the partnership idea, suggesting the need for simplicity and a competitive mindset.

“We should move away from the short and myopic strategies because the business models we have in the banking sector will be irrelevant in the next 10 years; therefore, we need to change our mindset,” he said.

The Warioba Ventures founder and managing partner, Mr Martin Warioba, said there was a need for players to speak the same language, especially on policy issues. TAOTIC founder and executive director Kiko Kiwanga said there is a need to promote inclusivity and diversity when attracting funding in the country’s ecosystem.

Sharing the Kenyan experience, the deputy country director of the UK-Kenya Tech Hub at the British High Commission, Mr Enos Weswa, said the massive ongoing product development requires a lot of testing, which is expensive; therefore, efforts to attract investment are important.

“Some countries are doing a good job in terms of investment attraction, specifically the VCs. However, regulations supporting product development are important because the funds are required for the actual development and marketing,” he said. Mr Baraka Aligesha from the President’s Office of Planning and Investment said in his presentation that the government has taken several measures to support innovators.

They include the SMEs' exemption from the three-year product registration set by the Tanzania Bureau of Standards (TBS) and the rise of the presumptive income tax threshold (annual turnover) from Sh20 million to Sh100 million.

“In 2021, the government removed the mandatory requirement for preparation of audited financial statements, while in 2022, the Tanzania Investment Centre (TIC) introduced the stop centre facilitation as well as the qualification criteria,” he said.

Speaking during the event, the Planning Commission executive secretary, Mr Lawrence Mafuru, urged innovators to stop putting policies ahead of innovations, saying policy issues could stop innovators from thinking big.

“It is due to that blow that we design policies. So, I’m encouraging people in the room to understand that policies need to follow innovations,” he said.

He challenged the rapidly growing Tanzanian population to be productive, through which we can solve problems facing the country.