Africa has over 90 startup incubators, but can they really change the business landscape?

After four years as a financial analyst for McKinsey&Co, Tendai Mashingaidze decided it was time to follow his calling – to take steps against poverty alleviation in his native Zimbabwe. With unemployment in Zimbabwe nearing 90 percent, Mashingaidze was convinced entrepreneurs and small businesses were the answer to the country’s troubles. He left McKinsey to set up a small business advisory and financing firm, Ubuntu Equity. Before long, he was asked to head up Zimbabwe’s Muzinda hub, and so he stepped into the world of start-up incubators.

Business incubators are popping up across Africa, particularly in the technology space as word spreads of the “Silicon Savannah”. Set to mirror — if not rival — Silicon Valley, Africa’s technology start-up ecosystem has become the new frontier for entrepreneurs and investors worldwide, with many flocking to the continent and setting up incubator hubs offering funding, business development assistance, or both.

Recent World Bank research places the number of these business and technology hubs across Africa at just over 90, but considering that many of these are privately owned and run, and not necessarily widely marketed, there are likely many more. Some counts have listed over 200.

With the incubator space relatively new in Africa and very little direction or consensus in the space, the hubs active on the continent vary in their approaches and in their aims. There are those pursuing a classical Silicon Valley-esque incubator model offering seed funding in return for an equity stake alongside a multiple month full-time accelerator programme. The investors behind these hubs are looking for “big ideas” and hoping to stage a land grab of the African market.

However, not everyone, including Mashingaidze, agrees with this approach, with some hubs focusing on skills training or job creation, such as Muzinda, while still others prefer simply to act as an open co-working space providing facilities, promoting collaboration, and creating an entrepreneurial “headquarters”.

The Classical Incubator

Danish entrepreneur, Kresten Buch, had built a multi-million dollar sports media and data company by 2001, and was taking his first steps into the world of investing. A decade later, Buch had become a serial investor and an entrepreneurial mastermind, and looked to Africa for his next big challenge. In 2011, he launched seed fund and accelerator 88mph. Since then, 88mph has gained a reputation as one of the first, and most revered, incubators active in Africa.

Buch first started running incubator programmes in Kenya, investing $500,000 in seven start-ups in 2011, under 88mph’s pilot scheme. By 2012, the model was in place, and 88mph went big, investing $1.2 million in 13 Kenyan start-ups. It was time to branch out to new territories, and so Buch called in Sylvia Brune, a fellow entrepreneur he met at Europe’s largest start-up accelerator, Startupbootcamp. Brune was tasked with heading up a Cape Town incubation programme. Before long, South Africa had a brand new incubator, which pumped $1.3 million into 16 start-ups.

The 88mph model sees successful applicants granted seed funding in return for an equity stake negotiated on an individual basis, with the funded start-ups taking part in three months of intensive training and mentoring from local and international entrepreneurs, investors and industry experts aimed at building profitable, scalable businesses – and achieving dividend paying investments or profitable exits for the fund. To date, 88mph has had no exits or start-ups paying dividends as a result of a focus on early stage start-ups over quick exits. With this in mind, Brune says an evaluation of the fund’s start-ups’ value at present would not be “sufficiently objective” to determine whether the model adopted by the fund has been effective in the African context.

While it is too early to categorically assess success of the investments made and start-ups incubated by 88mph, some indicative figures are beginning to emerge. Approximately one third of start-ups which participated in 88mph programmes and received investment have closed down. The rest are still going, and out of those, there is one that is experiencing “super-growth”, Brune says. A further 10 are growing and generating revenue, while there are 10 that are growing but could still go either way.

While from the outside the 88mph programmes seem to mirror the common Silicon Valley style of incubation – including seed funding for an equity stake, followed by in-house training – Brune says she does not believe any particular “model” really exists, but rather that all programmes are dependent on the skills and approaches of the individual people involved in the running of them. “We’ve developed the accelerator format since 2011, taking the best of each through to the next one, and leaving behind anything that didn’t add significant value,” she said. “As accelerator styles will be dependent on the people running them, I don’t think there is any one model that works best, you have to play to your strengths. The team behind 88mph, being entrepreneurs, are very focused on helping the start-ups with product focus, go-to-market, and finding business models, with much of the programme also professionalising the start-ups’ setup, establishing a good foundation and understanding around growth and next stage investors. We’ve had varying success with mentors, bigger investors and entrepreneurs in residence, I think mainly because it’s still early days in Africa, and that culture of supporting and investing in early stage internet businesses hasn’t really taken hold yet. But it’s getting there, albeit slowly.”

Skills Not Companies

In Zimbabwe, Mashingaidze has built up Muzinda, underpinned by the belief that the classical Silicon Valley incubator model is inherently unsuited to African markets. Based on his experience as a business consultant and extensive research, Mashingaidze found that only 10 percent of start-ups are destined to become successful, and as such decided an incubator for Africa should focus on tackling youth unemployment through job creation and skills training. “Look at a country like Zimbabwe, where nine out of every 10 people are unemployed. The statistics should tell me that if I take 10 of them from the streets under the current ‘Silicon Valley’ incubator model, nine of them are going to land up back on the street after 12 to 18 months. In my view this model does not work for Africa because it does not reduce unemployment, which should be the priority for any hub operating in Africa,” he said.

According to Mashingaidze, there are three considerations which any incubator in Africa should bear in mind in order to achieve the goal of job creation: the organisation must be capable of operating at a significant scale, at a very low cost per incubatee, and the turnaround time from incubation to commercialisation (of skills learned) must be quick. These characteristics cannot be achieved if the incubator focuses on the “big ideas” typical of Silicon Valley incubators, Mashingaidze says, because there is too high a “degree of customisation” needed for each; that is, each “big idea” requires individualised assistance and expertise – for the incubator to efficiently manage all three criteria proactively.

“To operate at scale, the ideas, skills need to be standardised with an ability to be mass produced. Once we have an idea [or] skill that can be mass produced it automatically speaks to the other two, being low cost per incubatee and quick turnaround time to market readiness,” Mashingaidze said. “Now if you look at Muzinda Hub’s model, that is what we have just done. We are operating at scale with 1,000 incubatees at any given point in time over a six-month cycle. They all get a standardised skill – idea developed, which is to plug the global digital skills gap. Because of the scale at which we are operating, we are able to enter into exclusive training partnerships that allow us to train at a significantly low cost. Once we have completed the training, sourcing jobs is relatively easy, given the 1 percent unemployment rate for programmers globally.”

The first cohort of Muzinda incubatees will graduate in April 2015, with the incubator expecting 10 percent of graduates to form successful “big idea” start-ups despite the focus of the programme not being geared towards this, while the other 90 percent are expected to achieve success by leveraging their newly acquired digital and business skills in the wider marketplace.

According to Muzinda’s manager, the question for incubators is simple: “Why must incubators in Africa stick to an unsustainable model that does not speak to the continent’s need to address unemployment and poverty?”

A Co-working Community

Some organisations have focused less on incubation per se, and more on providing a community oriented workspace; allowing entrepreneurs to network, collaborate, and access facilities such as high-speed internet while also hosting educational and industry-specific workshops and events

.One such space is Nigeria’s Lagos-based Co-Creation Hub (CcHub). Launched by Olatunbosun Tijani, CcHub aims to create a space which nurtures collaboration; believing the value of business hubs lies in providing a reliable, affordable and vibrant community-based space which facilitates the creation of valuable (and scalable) businesses.“The emerging widespread adoption of technology (web and mobile) in Nigeria provides us with a chance to leapfrog development through these unique platforms,” said Tijani. “Our main driver for founding CcHUB is thus to build a network that helps harness the creativity of talents and resources of diverse stakeholders to birth and incubate unlikely technological solutions to local issues. We see a strong role for innovation in shaping the future of our society either through for-profit or social enterprises. This is why we place a strong emphasis on building an organisation that inspires collaboration and encourages shared accountability amongst individuals and organisations. Our ultimate goal is to provide the space and support for local talents to lead the change they desire in their society through creative home-grown solutions.”

A significant element of the role business hubs play under this model is to preclude the crippling costs of basic facilities faced by start-ups – such as office space and facilities, highspeed internet, and power, for example. Tijani estimates the cost of office space for a four-person team in Lagos at over $3,000; as compared to the CcHub, which charges $200 per person annually, for full access to the space and all the facilities, which include a dedicated 45 Mbps fibre internet line.

With the national grid serving a fraction of the day’s power demand – Tijani reckons approximately three hours of power a day are served by the grid – the CcHub has two backup generators, with fuel and maintenance costs of these totalling $6,000 per month, he says.

Clearly these are prohibitive costs for any start-up or small-scale business. Tijani points out that the benefits of open co-working spaces are not only infrastructural. He believes the key benefit of this model is that members of the CcHub community often trade skills and form collaborations which nurture business growth from within, without the need for formalised incubation. “Innovation hubs eliminate the initial pain and cost associated with starting and running a technology start-up,” he said. “Beyond the obvious cost, access to several other tools and resources such as testing labs, accounting and legal services and other shared talents and resources which are available within the space, are typical barriers to getting started in a market like Nigeria. The intangibles outweigh the tangibles. The networks and relationships available within the community created by innovation hubs are the kind money can’t buy easily.”

What is Next?

With over 90 business hubs up and running across Africa, and more emerging, it is clear that the era of business incubators is beginning on the continent. However, with so many models, and each hub aiming to achieve something different, it would be wrong to define the business incubator trend as a unified initiative. It remains, for now, a melting pot of individual actors sometimes working at cross purposes.

Is this a bad thing? On the one hand, individual approaches to encouraging entrepreneurship probably go some way to fostering innovation – it would be counter-intuitive to over-regulate innovation. But if the entrepreneurial sector is to have a pivotal role in spurring economic growth in Africa, and incubators are expected to act as the leapfrogging mechanism enabling this growth, more collaboration will be necessary.

Given how new an occurrence incubators are in Africa, very little data is available as to their success rates. 88mph concedes they do not yet know if their model works in the African context, as it is still too early to tell. Muzinda has yet to have any graduates, and CcHub aims to empower start-ups through resources and networks, and as such does not necessarily measure incubator success. Experts agree there is a clear need for further research into the impact and achievements of the pioneer incubators to distill a better vision of the strengths and weaknesses of the various models, which will in turn allow actors in the sector to begin thinking about a common purpose for incubators and what they are supposed to achieve in Africa.

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