Japanese study shows Ethiopian startups are struggling to raise finance

A study conducted by the Japan International Cooperation Agency (JICA) shows that Ethiopian startups are struggling to secure funding. The survey, involving 300 startup founders in Addis Ababa, showcased that more than three-quarters of technology-based startups in Ethiopia’s capital face significant hurdles in raising capital. It also showed a preference among Ethiopian startup founders for equity funding over debt. Approximately 86% of these enterprises expressed their openness to foreign investments or merger and acquisition opportunities, signifying a potential avenue for Asian investors seeking to engage in Ethiopia's burgeoning startup landscape.

Despite Ethiopia’s position as Africa's second most populous nation (125 million), its startup ecosystem pales in comparison to the likes of Kenya, South Africa, Egypt, and Nigeria in terms of funding, venture numbers, and both local and international investor involvement.

However, the study says that the country’s rapid population growth - expanding at a rate of 2.55% annually – holds promise for the future. Additionally, the surge in Ethiopia's data and internet user base has been remarkable, reaching 31.3 million users by December 2022, marking a 19.4% increase within six months. This growth trajectory implies increased market access for digital products and services.

The ICT sector is also witnessed significant reforms, notably with the government awarding a US$850 million mobile network operating license to a foreign consortium led by Kenya's Safaricom, thereby breaking the long-standing dominance of state-owned Ethio Telecom.

When evaluating preferred financing methods, the study highlighted that 47% of startups favoured equity funding, allowing companies to raise capital without incurring debt while enabling investors to share both risks and rewards. Meanwhile, 35% of ventures expressed interest in a blend of equity and debt financing, while 18% leaned towards debt financing alone.

The survey delved into the challenges faced in securing capital from various sources, revealing that nearly half of the startups found it 'very difficult', with an additional 28% citing it as 'difficult'. Key obstacles included a lack of connections to equity investors and inadequate collateral for securing debt financing from commercial banks.

Most startups participating in the survey were in their early stages, with around 70% reporting annual revenues of US$20,000 or less. Only 16% of startups earned over US$50,000 annually.

The study also shed light on the sectors witnessing a surge in startup activity in Ethiopia, including agri-tech, fintech, e-commerce, and logistics, with a notable focus on last-mile delivery services.

Agri-tech startups aim to bridge the gap between smallholder farmers and modern technology and finance, enabling them to access markets and essential services. Fintech companies like Arifpay and Kacha offer diverse financial services, aiding financial inclusion in the country. E-commerce platforms like Berbera Market and GebeyaX are gaining momentum despite existing challenges, while logistics and last-mile delivery startups like Eshi Express and Tikus are providing innovative solutions in Addis Ababa's nascent delivery market.

The study by JICA provides valuable insights into the challenges and opportunities prevalent within Ethiopia's startup ecosystem, offering potential areas for improvement and growth in the future.

 

References

‘Ethiopia awards telecom licence to Safaricom-led consortium’, Al Jazeera, 22 May 2021

‘Ethio Telecom reports exceptional surge in internet users’, Shega, 12 January 2023

‘Ethiopia population’, Worldometer, Accessed 21 December 2023

‘Startup Ecosystem Report: Ethiopia – Addis Ababa’, Japan International Cooperation Agency, 2023