How to think of startup regulation in Africa
Or Africa's regulators are fighting a losing war...
There are countless think-pieces on Al Gore’s internet about how regulators are killing Africa’s most innovative businesses. I wrote one myself six months ago, and maybe, a dozen more have been published everywhere since and before.
The Regulator is the one bogeyman every entrepreneur must meet on their journey. They are inevitable. However, my thesis is that Africa’s regulators are slowly losing their steam and consequently their bogeyman status. This is my attempt to think through why that shift will and is already happening.
A Cambrian moment.
If, for example, you were born in the ocean 543 million years ago as modern fish, you would die almost instantly. Except you somehow transformed to cyanobacteria, one of the simple life forms that evolutionary biology tells us covered the seafloor. The reason you would die is simple. 543 million years ago, oxygen levels in the ocean were negligible - very low. You simply could not breathe.
A few million years down the line, however, this simple ecosystem disappeared!
The Cambrian explosion, as it is called, was basically an explosive evolution of complex life forms, insects, worms, and fish with tooth-rimmed jaws became a part of the oceanic ecosystem as oxygen levels rose. There are competing theories explaining why, but one theory stands out. Recent evidence from Namibian grasslands that were formerly under the sea, suggests, “that the Cambrian explosion emerged out of a complex interplay between small environmental changes that triggered major evolutionary developments.”1
Earth’s bio/geological processes are interesting as is, but I am primarily concerned with how this theory parallels my observations on startup regulatory overreach and entrepreneurship on the continent.
Like the planet’s oceans many million years ago, Africa’s ecosystem is toxic to the optimists who build for (and especially in) Africa. That is not unique to Africa, I mean the extroverted Jack Ma has hardly been seen in public for almost a year now. But it is, perhaps, more acutely felt in an Africa that desperately needs bold entrepreneurs.
And like the dying days of the Ediacaran era, a complex and dynamic interplay between Africa’s business ecosystem, social narratives, and the political environment is unlocking a groundswell of entrepreneurial life around the continent. Africa’s innovation is not being stopped. Instead, Africa’s technology entrepreneurs are at the edge of a Cambrian explosion.
Between 2016 and 2020, depending on how you define a startup and how many deals you could track, private equity investments in African companies grew at an average of between 41.17% and 51.2%.
Sources: WeeTracker, Briter Bridges, and Partech Partners. All amounts in $ (USD)
Africa is also on track to set a new record. The first half of 2021 has seen more than $1.2B raised across hundreds of deals that also created three new unicorns on the continent. People are clearly betting more on the promise of African markets and founding teams.
Minor note: Tracking all of this funding is fun and all, but who is tracking friction? Please leave an email if you know any, want to, or you are already building datasets related to the frictions of building and funding startups in Africa. That is something I would love to work on.
A groundswell of innovation.
Why, in general, are African startups and VC money defiantly and steadily hitting new highs?
This new burst of entrepreneurial and financing fervor is not completely unexpected. There is enormous economic and social friction and hence opportunity. There are enterprising young Africans with the skill and desire to solve the frictions. More people are willing to try (and pay for) new solutions. And there are more and cheaper ways to bring these products to market.
Of course, there is also the Regulator on one side, the government, and the usual innovation-averse class of traditional business interests.
In many ways, it has never been easier to start and grow a phenomenal business in Africa. On the other hand, it has gotten tougher to build on the steadily shifting ground that is regulation. Yet, against that backdrop, every year for the past eight years, continues to set new records in the startup and private equity space. Where is this optimism coming from?
Here’s a five-minute exercise for you. Why, in general, are African startups and VC money defiantly and steadily hitting new highs?
Part of it, I admit, is the reckless optimism of young founders who want to take on the system - to varying degrees of success, but the other part, the part that holds no illusions, is still brave, and willing to risk energy, talent, and capital on projects - and mostly win is still unexplained.
Why? A little oxygen, and then some more…
Oceans are incredibly complex ecosystems where simple changes sustained over time, drastically alter entire geological systems regularly. A good example is a wave.
Waves usually form when the wind is blowing over a smooth ocean. When this happens, it creates little ripples on the surface of the ocean. If the wind continues to blow over the surface, the wave will become stronger… and so on.
The Cambrian explosion was most likely caused by small imperceptible increases in the level of oxygen in the ocean over time until it suddenly crossed a threshold that could sustain a more diverse range of species. Similarly, the small imperceptible progress of eight to fifteen years ago in Africa is behind the rise and rise of formal entrepreneurs in Africa’s digital ecosystem.
What this means is simple. A wave of rapidly changing social narratives, economic factors, technology (think blockchain, crypto, and for fun, Elon’s Starlink), means the Regulator is helplessly behind the curve, has a lot of catching up to do, and is simply lashing out.
My position is that on aggregate the startup ecosystem may not need to “fear” regulators, as much as regulators need to fear making terrible mistakes - not that they always appear to care. Still, when you are behind, and racing to catch up, swinging the regulatory rope out front may end up tripping you first.
Regulators need help.
The point is that regulators are already losing the plot - in compliance (crypto bans fueled peer-to-peer adoption, despite increased risk), overlapping enforcement, and associated turf wars - like this beautiful confusion about how to classify Netflix, for example. The confusion in the regulatory space is also unwittingly (or not) creating monopolies. Regardless of how confusing it all is, interest in, adoption, and funding of entrepreneurs continue to pick up pace around the continent. Why?
Groundswells in oceans are caused by indirect or distant seismic activity. Similarly, the speed of entrepreneurial innovation, current social and cultural narratives, and the increase of relatively braver private capital is fueling a resilient groundswell of entrepreneurial energy. In essence, “entrepreneurial innovation” is doing well in what is essentially a shifting minefield!
Stay with me.
This is not an argument to fix government by passively being resilient or “innovation”. It is an argument that given a long enough timeline, social, political, and economic currents eventually force the hand of regulators.
In my opinion, and this is I admit, very optimistic, we are near the tip of that happening. Besides, we’ve been on a long enough timeline and the future of Africa’s ecosystem will depend on whether or how well we harness positive political trends, create precedents, demonstrate results, and fix real mass-market problems.
Startup Acts: regulation vs the Regulator
“If you always do what you always did, you will always get what you always got.” - Albert Einstein
Africa is hardly alone in navigating regulatory relationships. During a series of panel discussions on financial-services regulations in the European Union in November of 2013, One panelist said regulators see the relationship as "the bar brawl they always wanted to have and finally can have in full, with an already weakened opponent." Another one asked, “Are there any good regulators out there?”2
The EU is a global leader in regulatory policymaking, so it is not out of place for an exasperated panelist, to ask eight years after the global financial crisis, if there was a good regulator. The answer is of course, yes. There are good regulators. But the question is still very valid.
At this same meeting, everyone agreed that strict regulation was “both required and desirable, but only when appropriate, adaptive, sufficient, and transparent.” When “the Regulator” fails here, he also fails first, in regulation, and then everything else. In the EU, as in Africa and indeed everywhere, regulation is a fairly stable technical construct, regulators are not. Emeka Azuka Okoye once noted that “we should worry more about the regulators than the regulation.”
This may be the thinking behind the growing push for national Startup Acts by industry stakeholders - a mostly proactive reaction to regulatory overreach. Tunisia, Kenya, Senegal, Rwanda, and Nigeria are some of the countries. In some of the cases, the government is playing a very visible role, while in cases like South Africa, for example, industry players are in the early stages of articulating why they believe South Africa needs a Startup Act.
As I see it, these calls are essentially asking for regulatory frameworks to provide a shield of sorts from the Regulator and their very unpredictable whips. Given how fast, well, and how much innovation is being adopted around the continent, (crypto is a good example), Startup Acts are an opportunity and a risk.
On the one hand, African regulatory bodies can lead the way or risk being completely caught off guard. On the other hand, the ecosystem might empower bad-faith regulators to codify structures that entrench their power to act as hedges to traditional players. Here’s a quick question, does your average Regulator see a startup as a “startup” or as an “upstart”? As children playing with laptops about to upend the world…
Build.
Whatever happens, it is important to note that the real innovation in Africa is not what you see. Not the popular “tech is the new oil” tropes. African innovation is happening in people. It is in the shifting attitudes, allegiances, and behaviors of Africa’s single biggest demographic - and market.
As Victor Asemota said in this brilliant tweet thread, “There are other undercurrents not immediately obvious that will turn out to create more newsworthy developments… it is utility that ultimately drives markets.”
And even whiplash regulation cannot contain this outburst of energy. Build!
This is all my thoughts, and of course, it is incomplete and probably misses some nuance. I would love to hear yours too. Tweet at me @signorabraham
SELECTED REFERENCES
Fox, D. What sparked the Cambrian explosion?. Nature 530, 268–270 (2016). https://doi.org/10.1038/530268a
Kearney, Regulatory fatigue in financial services, accessed September 24, 2021, https://www.kearney.com/financial-services/article/?/a/regulatory-fatigue-in-financial-services
The world has to read this. Smart and totally brilliant thoughts.
Brilliant!