How to overcome startups obstacles

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In recent years, Africa is making great strides to become the launch pad for high-growth innovative companies. This is evidenced by the increasing number of tech startups to have received financial backing, which grew by 46% annually. This is six times faster than the global average, according to Partech Partners (a venture capital firm in the US).

Unfortunately, Africa has not done well in sustaining and scaling up startups. Even though startup development has been progressive, there is only three “unicorns” on the continent, including Nigeria’s fintech Flutterwave. Unicorns are privately owned tech companies valued at more than $1 billion. Whereas such unicorns are common in advance economies; 200 in United States, 100 in China and 50 in Europe. Also, there are less than 20 African ‘zebras” including Ghana’s only JUMO. Zebras are privately companies with valuation of more than $200 million.

According to the Boston Consulting Group (BCG), African startups rarely survive beyond the Series B funding stage and return on venture capital investment remains weak at a continental average of 3% compared to 16% and 11% in Europe and Asia-Pacific respectively.

In situation is worse in Ghana, which is one of the growing economies in Africa. According to Briter Bridges (briterbridges.com), there were less than 20 disclosed deals in Ghana valued at $19 million at close of Q3 2020 whereas the likes of South Africa and Nigeria closed over 70 deals valuing more than $200 million.

The Ghanaian startup faces various structural challenges including low consumer purchasing power, inconsistent and complex regulations, inadequate infrastructure, and scarce capital. However startups manages to surmount these challenges, there is fierce competition from incumbent companies, especially from large companies in -to-consumer sectors, such as retail, financial services and energy. Instead of established companies using their privileged position to advance the national interest, they often use their market power to push new entrants with disruptive business models out of business. Such hostility against startups do not only threatens competitiveness and kills innovative technologies, products and business models, it also deprives job creation and economic development.

Notwithstanding, Ghana remains a very fertile ground for entrepreneurs. It is politically stable, fast increasing internet penetration, fast growing economy in the Africa, and also part of Africa’s young population. This presents tremendous opportunities for innovators to develop product and services to improve social and economic development. However, startups will need to develop new strategies, and Ghana’s national champions, investors and governments will need to work together to tackle the challenges of startups.

Scaling up through Corporate Partnerships

Large companies have demonstrated the ability to overcome structural challenges affecting business. They have access to capital, the human expertise to steer complex regulatory environment, and the ability to expand into other markets. Therefore, rather than Ghanaian startups competing with incumbents for consumers, it is advisable to collaborate with such large entities by providing innovative business-to-business solutions to survive and be successful.

On the other hand, large enterprises must be willing to open up and engage startups as partners. Such partnership model is already well-established in financial and geographical technology. For instance tech companies such as JUMO and Vokacom have partnered with large corporations and government respectively to provide data and addressing services.

With such collaborations, incumbents can nurture startups by providing direct investment or partnerships with external incubators and accelerators. An example of such collaboration is that of Indonesia companies Lippo Group, a conglomerate, and OVO, a leading digital payment service. Lippo Group provided financial support to OVO in its early stage. OVO benefited from Lippo’s ecosystem, which include hypermarkets, telcos, e-commerce marketplaces, content streaming, and banks serving small and medium enterprises. Lippo also got valuable help from OVO to bring merchants onto its platforms and provided incentives for consumers.

Incumbents can also form strategic alliances with startups to develop new technologies or innovative business models. Such partnership can be revenue-sharing, joint-venture, or technological alliances between two or more companies. JUMO, the Ghanaian mobile financial services is a perfect example of how such partnership can be a win-win and could enable a startup grow into a zebra. JUMO, which holds credit-scoring algorithm, collects behavioral data from willing customers and share with telecom operators. It then collect mobile-wallet data from telcos to provide credit scores to partner financial institutions such as Ecobank and Letshego to enable them review loan applications. This alliance is helping telcos to earn revenue from data sharing, banks to reached out to untapped markets and JUMO is gaining access to wider customers within the informal sector.

In addition to the above strategies, established companies can also setup startups on their own. This enables companies to overcome internal processes and cultures that inhibit innovation. Established companies can set up in-house incubators or accelerators to attract and develop new businesses or products. For instance, In Ghana, companies like Kosmos, Stanbic Bank and Ecobank has in-house hubs setup to invest in local talent and capacity. Such initiatives have benefited the like of Ecobank to come up with various Fintech Products to enhance services delivery and revenue generation.

Support from Governments and Investors

Governments and investors are important players to improve startup development and growth in Ghana. For instance, large companies can help new businesses to scale up through strategic alliances. Financial incentive from government, such as tax reliefs, cash grants, is a good initiative to entice investors and large companies to support the growth of new ventures.

Ghana, through government initiatives, have established innovation hubs such as the Accra Digital Centre to drive digital innovation in Ghana. However, to further improve the development of the startup ecosystem, there is the need for government to collaborate with development institutions such as the African Development Bank to develop bigger innovation hubs to enable partnership between larger companies and new venture and attracts and investments. For instance, the African Development Bank and Rwanda have invested $400 million to develop the Kigali Innovation City on a 70-hectare land size.

Government also need to support or direct state agencies such as the National Entrepreneurship and Innovation Programme and the Ghana Enterprise Agency to educate and build the capacity of entrepreneurs on initiative and programmes happening within the West African Region and Africa. Such as the AfCFTA and the implementation of a comprehensive legal and regulatory framework for private equity and venture capital fund being developed by the West African Economic and Monetary Union and the World Bank.

The government have undertaken initiatives to advance the development of startups in Ghana. However, more need to be done by the public and private sector to release the wave of innovation to create jobs and improve economic opportunities in Ghana.

**Credit to Boston Consulting Group

The writer is a Chartered Accountant (ICAG).  email at [email protected]

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