The rise of Africa’s tech sector: genuine development potential or inflated promise?

For a few years, it seemed impossible to read any African business news without coming across a headline announcing the explosive growth of the continent’s tech scene. Billions of dollars in venture capital poured into tech hubs from Lagos to Nairobi and Cairo to Cape Town, minting a new class of ‘unicorn’ startups valued at over a billion dollars. The story was compelling: a young, dynamic, and digitally-savvy generation was building digital solutions for the continent’s most pressing challenges, turning their startups into some of the fastest-growing companies in Africa. In a 2023 UNIDO IAP blog post, I contributed to that upbeat narrative, arguing that “a new wave of tech start-ups [is] driving development in Africa.”

However, this narrative has recently come under serious scrutiny. A sharp global economic downturn, coupled with rising interest rates and capital costs since 2022, has taken a significant toll on the African tech ecosystem. Startups have raised significantly less funding, and high-profile companies that were once emblematic of the boom have struggled to become profitable and survive.

So, was it all just hype – an inflated promise fuelled by an influx of cheap capital, mainly from the West? Or does Africa’s tech sector genuinely have the potential to transform the continent’s economies in the long term? In this piece, I reflect on the sector’s meteoric rise and recent downturn and examine what this means for its ability to drive development across Africa.

The making of a boom…

The excitement of the last decade was not unfounded. It was driven by tangible changes in the continent’s connectivity, with tens of millions of Africans going online for the first time thanks to a massive rollout of digital infrastructure by telecom giants. By 2020, 30% of sub-Saharan Africans were using the internet, up from just 1% in 2000. Over the same period, the number of mobile phone subscriptions per 100 people increased from two to 83.

This new connectivity has enabled a wave of tech startups to address market gaps in underdeveloped sectors such as finance, retail, and transport. As our research shows, there has been a meteoric rise in the number of venture (capital) funding rounds – a good indicator of the dynamism of a tech ecosystem, as it primarily targets tech startups – over the past two decades, especially since 2015. Fintech has been – and still is – the undisputed king, attracting over $4 billion in funding between 2015 and 2022. But e-commerce and logistics platforms also drew massive investment, connecting buyers and sellers and streamlining supply chains. The investment overwhelmingly flowed to the ‘Big Four’ tech nations: Nigeria, Egypt, Kenya, and South Africa, which together attracted over 75% of all start-up funding in Africa.

Importantly, these startups were not just Silicon Valley copycats. They built unique, locally-adapted business models to succeed. For instance, platform-based businesses often invest significantly along the value chain, rather than simply connecting supply and demand. To reach customers in remote areas or informal settlements, these platforms usually rely on vast networks of local agents. They also offer embedded financial services, such as ‘buy now, pay later’, to extend credit to small businesses and retailers who would otherwise be excluded from the formal banking system.

…followed by a painful correction

Yet the hype has evaporated with startling speed. According to IFC analysis, the number of African VC deals has fallen 52 % since its peak in 2022 – a steeper decline than in any other region. As the liquidity from the next funding round is crucial for venture-backed startups that have not yet become profitable, this sharp decline in funding has already had devastating consequences for some of the continent’s most prominent tech companies.

For example, the Nigerian fintech startup Flutterwave and the Kenyan  B2B e-commerce startup Twiga Foods have had to make significant staff cuts in their quest for profitability. Others, such as the Nigerian ride-hailing startup Gokada and the Kenyan B2C e-commerce startup Copia Global, have recently filed for bankruptcy or shut down altogether.

These cases demonstrate that the era of ‘growth at all costs’ and  ‘blitzscaling’ in Africa’s tech ecosystem has come to an end, making way for a new focus on profitability and sustainability. The current situation also necessitates a reality check on whether African start-ups can deliver broad-based development on the continent.

Can tech transform livelihoods for the many?

The vast majority of people in Africa work in agriculture and services, often in very small or informal businesses with low productivity. Historically, economic development in Europe and Asia was driven by (export-oriented) manufacturing, which created millions of jobs and boosted productivity. However, most African economies have not managed to follow this path, and this may become even more challenging in the future as automation and geo-economic fragmentation are rising.

This is where digital technologies, and especially platforms, could be a game-changer. They have the potential to bring the productivity-enhancing principles of manufacturing to the continent’s fragmented service and agricultural sectors:

1. Economies of scale: Digital platforms can aggregate demand in ways that incentivise suppliers to invest. Consider, for example, tractor-sharing apps that make mechanisation viable for thousands of smallholders.
2. Modularisation and standardisation: Digital platforms, ratings, and cloud-based point-of-sale systems help to turn messy face-to-face transactions into modularised, standardised, and repeatable services. Ride-hailing platforms, for example, make the process of finding, paying for, and rating a ride more efficient and competitive in a traditionally informal sector.
3. Market access and innovation: Digital technologies can lower transaction costs and reduce information asymmetries, thereby expanding market access and promoting innovation. Mobile money is the prime example of this, having enabled millions to save, transfer money securely and participate in the formal financial economy.

Reading the evidence

Despite their potential transformative effects, there is still limited evidence on the development impact of digital platforms. The most well-documented evidence comes from mobile money. In Kenya, for example, it is estimated that the M-Pesa mobile money platform helped lift around 2% of households out of poverty by providing them with a secure and affordable means of transferring money and mitigating financial shocks. Rigorous studies elsewhere in Africa link access to mobile money to a wide range of socioeconomic benefits, including higher household welfare, larger remittance networks, and women shifting into non-farm work.

While similar rigorous quantitative evidence on the impact of other digital platforms – including fintech, e-commerce, or transport-tech – is much scarcer for Africa, some lessons can be learned from different places. Randomised trials in rural China found that connecting villages to an e-commerce marketplace barely affected labour supply, incomes, or prices. Early evidence on the U.S. shows that fulfilment centres may reduce local retail employment and wages. Importantly, many of these findings are in contrast with existing case studies, which tend to show only the positive effects of digital technologies, highlighting the need for rigorous quantitative studies to inform appropriate policy responses. We should expect similar nuance in Africa: platforms may create gig opportunities for some while eroding margins for others.

What’s Next for African Tech?

The future of the sector hinges on whether the startups can build resilient, profitable businesses that offer genuine value. Although the speculative bubble has burst, the underlying drivers – growing connectivity, a young and growing population, and significant market gaps – remain strong. The startups that emerge from the current shake-out will probably be leaner and more locally attuned, focusing on profitability and efficiency rather than scale and speed.

Whether that translates into inclusive growth in Africa depends on the choices made today: by founders focusing on the continent’s pressing socioeconomic challenges; by investors rewarding patient, problem-solving founders with capital; and by policymakers building the infrastructure – including digital IDs, interoperable data and payment systems, and streamlined, pro-innovation and pro-competition regulation – on which innovation can flourish.

Tevin Tafese is a Research Fellow at the German Institute for Global and Area Studies (GIGA) in Hamburg, specialising in the impact of global value chain integration and digitalisation in developing countries, particularly in Africa. A key focus of his research is on labour market implications, providing insights into the changing nature of work.