Startups are the pistons that drive the African engine. They contribute immensely to economic growth via promotion of trade, the creation of goods and services, value addition of raw materials in the mining and agricultural industries, job creation, and tax provision. However, these entities face a myriad of challenges that curtail their potential.
Many small and medium-sized enterprises (SMEs) on the continent face a classic conundrum when it comes to securing finance and gaining traction with the government. Notably, in most African countries, foreign entities take precedence over the local ones. The governments give lip service to local SMEs, neglecting a significant segment of the economy that employs the lion’s share of the working population.
In addition to, most of these local entities encounter challenges such as lack of cutting-edge technology and skills which increases operations costs and limits the quality of the products, hostile working environment, limited access to venture capital and unfair competition from already established firms.
Infrastructure investment has played a pivotal role in boosting economic growth, mitigating trade bottlenecks and creating jobs on the continent. However, the continent still has a severe infrastructure gap. The World Bank estimates the continent must spend $93 billion a year through 2020 to close it. Most of the infrastructure investments provide jobs and uplift the locals albeit for a short period. It is informed by the fact that once these projects are completed, the locals are left jobless unless another project suffice.
Startups enable the creation of stable long-term jobs. These entities have the tremendous potential for growth and expansion as opposed to already establishes entities. Furthermore, they tend to adopt cutting-edge technology earlier than the established entities in order to boost their competitiveness, streamlined operations, and cost reduction.
Individually, startups are but drops in the world’s economic bucket. However, on aggregate, they add up to more than 95 percent of registered firms in Africa and globally, accounting for more than 50 % of jobs creation, and contributing more than 35 % of Gross Domestic Product (GDP) in the globe in emerging markets.
In Africa, about 75 million of the 200 million young people, aged between 15-24, are looking for work. World Bank estimates that in the next 15 years, about 600 million jobs will be needed only to sustain the current workforce. By 2035 Africans joining the working-age population (15-64) will exceed that of the rest of the world combined, according to the International Monetary Fund (IMF).
Job creation is the biggest challenge for many governments in Africa. Majority of the labor force is employed in the private sector with most in the informal sector. The situation underpins the importance of SMEs in job creation and solving local challenges. Assisting SMEs to flourish creates a vibrant middles class with a high disposable income which in turn increases aggregate demand for a country creating more jobs and wealth as a result, and the domino effects continues.
In the absence of sufficient opportunities in the formal sector, informal activity is an essential safety net that provides employment and income to a large number of people who might otherwise be bound to poverty. SMEs in the formal sector contributes about 33% to gross GDP hence this government cannot give the segment a wide berth in matters development. It has to be natured, improved upon and brought into the fold through formalization.
SMEs create 80% of the jobs on the continent, mostly in the jua kali sector and if natured well they have the potential to make the continent an industrial powerhouse and eradicate extreme poverty. In addition to these startups will attract venture capital and other complementary firms creating jobs for the locals and increasing the revenue pool for the government.
As a follow up to their bold commitment to infrastructure investment, African governments and venture capitalist should focus on assisting local startups to bloom in order to support future economic growth. The bedrock of any long-lasting venture in Africa depends on the continuous empowerment and support of regional SMEs and young entrepreneurs.