Africa’s Tech Gold Rush

Africa is on the verge of something big. This seems to be a quiet, cautious consensus in some investment communities. The past year has been peppered with stories of tech startup hubs emerging across the continent, from Lagos to Kigali to Agadir. The model of American tech entrepreneurship looks to be slowly sparking a renaissance in the Silicon Sahara.

As the gaze of America’s VCs begins to settle on African entrepreneurs, many open questions are left unanswered. Will Africa play host to the tech world’s next gold rush? Can these markets stay stable enough to grow the next billion-dollar Internet companies? Does Africa have what it takes to emulate Silicon Valley? The answer is a resounding “Yes.” Big things are ahead for African tech.

But to understand the rising star for Africa, you first must understand why the road to Africa goes through China.

The running of the bulls: China’s economic rollercoaster

The Chinese credit crunch and the crash of the Shanghai Composite should have come as a surprise to no one… with the benefit of 20/20 hindsight. Beginning in the early 1990s, the Chinese economy grew at a consistently monstrous rate of between 8 percent and 16 percent, year over year (only dipping to 7 percent following the global financial crisis). This happened mainly because the west began to outsource and offshore its traditional manufacturing in favor of less expensive Chinese producers.

The Chinese middle class made exceptional gains as a result, and grew tremendously during this period as manufacturing generated new wealth for the emerging agrarian economy. It seemed inevitable that the party would end at some point — where the roulette wheel would stop though, was anyone’s guess.

The first warning signs came in 2013 and 2014 as reports began to trickle out about Chinese “ghost cities.”

Developers were running deep in debt from loans originated mostly by government municipalities, which the developers had taken out to build the audacious mega cities that would house the next wave of the urbanized Chinese middle class. There was only problem: The next wave didn’t come.

As the defaults from construction started to trickle upward, it likely became clear to the People’s Bank of China that growth may be slowing for the first time in a few decades. Meanwhile, the U.S. and, to a lesser extent, Europe, were slowly but steadily recovering from their recessions.

Harmony and stability are values central to the policies of Chinese President Xi Jinping — and to the communal ethos of China as a whole — and are lauded much the same way Americans praise liberty and equality. A credit crunch, a cooling growth rate and underwater construction loans all flew in the face of a stable, harmonious China, and threatened the newly minted middle class, looking for returns on its capital. So the CCP guided retail investors to a new asset class: public equities on the Shanghai Composite.

From mid-2014 to mid-2015, the Chinese stock market was an investing barn burner, more than doubling in value in less than a year. It looked like the CCP had solved the problem of what to do with the glut of wealth held by its middle class — until the market crashed spectacularly in June 2015.

Again, the warning signs were there. Companies like Shanghai Duolun Industry rebranded themselves as “technology” companies and made outlandish claims that just their domain names alone were worth hundreds of millions. I made a brash — and admittedly uninformed — bet against the Shanghai Composite. A few bearish investors and I got lucky; many millions of Chinese did not.

Now, as the Chinese stock market enters its third bear market — marked by sustained losses of more than 20 percent — in less than half a year, Chinese retail investors are again looking for a promising asset class to park their investments.

So why does this matter for Africa? While China was reaping the windfall of massive growth and dealing with the investment challenges of a “free” market within its borders for the first time, it was quietly scaling up its investment outside the country, as well.

The tale of the Chinese patron and the African builder

War, hunger, malaria, tribalism, Ebola and crushing poverty… these are the common western images conjured up at the mention of Sub-Saharan Africa. Since the end of the last world war, those headlines have been sadly reflective of the condition of some unstable African republics. Driven by motives ranging from charity to profit to a renewed “white man’s burden,” the western world has during the past half century poured money into the African continent to combat these ills.

But over the past decade, driven by its meteoric economic growth, China has quietly but steadily increased its foreign direct investment (FDI) in Africa. In the five years from 2003 to 2008 alone, Chinese investment in Africa shot up by a CAGR of 105 percent, from $75 million in 2003 to $5.5 billion in 2008. The same went for imports and exports between the two, which grew from $10 billion in 2003 to more than $50 billion in 2008.

Unlike the west’s investment, China’s ravenous appetite for African labor and resources is not tied to countries with good governance. The only two criteria for Chinese investment in the continent appear to be stability and profitability. This has allowed China, which still only accounts for 3 percent of the FDI in Africa, to grab the lion’s share in some of its larger FDI recipient markets, such as Sudan, Congo DR and Nigeria, all of which score low in world democracy rankings. Zimbabwe, long a thorn in the side of the western world, recently made the yuan its official currency, effectively making it an economic vassal state of China.

Yet this new spate of FDI leaves one big question unanswered in the west: Why is China investing so much in Africa? Conventional wisdom holds that Chinese investors want to make a play for African resources — such as mining — as fuel to power China’s mighty manufacturing sector. However, the data tell a different story: China is slowly moving its industrial and services sectors to Africa. Indeed, 38 percent of African FDI has gone to manufacturing and construction, and another 20 percent to finance and business services.

So why does this matter for Africa? In all likelihood, it means that over the last two decades, as the Chinese middle class grew and became richer, and as western standards for factory labor became more strict, Chinese goods slowly became more expensive. As evidence, China has consistently devalued the yuan in recent years in order to keep its exports cheap. But at some point, prices will catch up with producers, and China will need to find cheaper factories for its companies to be competitive. Enter Africa.

Chinese FDI in Africa shows no sign of slowing, even as it goes through a credit crunch and a run on its stock market. If it continues at this rate, Africa could become the new world’s factory in the next 10-20 years, and the African middle class could find itself yanked out of agrarian poverty just as quickly as China’s over the last 20 years. And why wouldn’t Chinese investment continue? Relative to the boom and bust of the Chinese debt and equity markets, African FDI has looked remarkably stable.

As long as China, like the Medicis of Renaissance Italy, continues to be a patron of Africa’s enterprising manufacturers and builders, both will profit, and the African middle class will grow.

From blue collar to white collar to v-neck: Africa’s road ahead

Silicon Valley is boring and oversaturated with capital. At least, that seems to be the conclusion some of its largest investors came to as they looked longingly west. Over the past few years, Sequoia, Matrix, Tiger Global Management and other VC and PE firms have been embroiled in a land grab for Chinese Internet startups. They’ve been met with equally fierce competition from Chinese investors, such as Tencent and Alibaba. China is seen as the “market to conquer” for mega-startups such as Uber or WhatsApp.

All this offshore investment activity has been driven by two factors: an increasingly crowded VC and PE market for American tech and the new stability and wealth of emerging economies like China and Brazil (another big focus of American VCs). The rise of China’s middle class led to a mature, stable business environment that encouraged entrepreneurs like Alibaba’s Jack Ma to found startups and reap their fortunes.

Over the next 20 years, Africa will walk down the same path. As more and more manufacturing and services companies look to increasingly stable African economies in which to offshore their operations, the African middle class will grow. And as the middle class grows and business environments become increasingly wealthy and stable, entrepreneurs will emerge in Africa’s nascent tech startup scene.

It’s important to note here the alluring temptation to over-homogenize Africa. The western world tends to think of Africa as a cohesive unit, while countries as close to each other as Egypt and Rwanda are in reality as diverse as Luxembourg is from Turkey. Some will welcome the tech scene; many will not.

But early signs are encouraging. Literacy and education rates are skyrocketing. Studies are coming out on entrepreneurship as the best driver of growth on the continent. The Rwandan government just announced a $100 million venture fund for local tech entrepreneurs. Djibouti is modernizing rapidly with an eye toward becoming East Africa’s Singapore. Mobile phones still have yet to reach their potential. And The World Bank says that Africa is “poised to become the next great investment destination.”

It’s tempting to patronize a bit and characterize these entrepreneurs as “African solutions for African problems,” seeing them only as incubators for social enterprise. Western ears tend to hear about these startups and call up pictures of mosquito nets, clean water, cheap lighting and malaria vaccines. Yet these companies will compete for the same markets to distribute the same products as western ones, with new tactics.

Which is not to say that there isn’t a looming, powerful opportunity to amass what C.K. Prahalad calls “the fortune at the bottom of the pyramid.” Local contexts will allow entrepreneurs to create new services that wouldn’t even make sense in western contexts, such as the much derided “Yo!” app which Marc Andreessen noted smugly — and correctly — is hugely relevant in Bangladesh.

Look no further than China for evidence of fierce local competition. Didi Kuaidi boasts 7 million rides daily in China to Uber’s 1 million, in the one market that Uber has repeatedly stressed is most important. Look to Alibaba, challenging Amazon’s monolithic supremacy in online purchases while also spinning out payment subsidiaries (Alipay and ANT Financial), streaming music (Xia Mi) and news (South China Morning Post). Or to Tencent’s WeChat, whose 650 million users challenge WhatsApp’s 900 million.

As support structures grow around entrepreneurs in emerging markets, they will gain access to the resources that have buoyed Silicon Valley for 30 years now, and will compete head-on with Silicon Valley startups. In the words of Andela, a Nigerian education startup backed by the American VC firm Spark Capital, “genius is evenly distributed; opportunity is not.”

This is just the beginning.

Inspiration for this article came from conversations with Daniel Zuckerman, Mo Elbibany and Robert Toews. This editorial and the opinions expressed within it are entirely my own, and are not affiliated with, nor belong to, my employer or other associated parties.