When should a startup be regarded as African?

On March 1, 2017, I launched a blog called Startup Digest Africa (which later became Digest Africa). The goal was to tell stories of high-growth early-stage African businesses that had the potential to become pan-African.

Through that, my thinking was that we would help close the huge gap that exists between African businesses as well as those in other parts of the world. As we told their stories, we would help them attract funding, partnerships as well as customers and users.

Yet, over time, as I have continued to cover this space, one thing has stayed consistently confusing to some people: What is an African startup? What is an African business?

Despite the African startup ecosystem coming of age, many have still struggled to come up with the correct definition and it is understandable. The reason is simple; unlike most parts of the world, Africa is very much fragmented with many loopholes - like lack of strict competition authorities - that are easy to exploit, especially with globalization falling upon us, making it easy and luring for one to start a global company right away.

In this Harvard Business Review article released in the 1999 issue, Bruce Kogut ponders what makes a company global as he gave a brief summary of the book The Myth of the Global Corporation by Paul N. Doremus, William W. Keller, Louis W. Pauly, and Simon Reich.

He paused some questions: "It is one thing to say that the markets of the world are coming together," he started. "But are global markets creating globally minded companies? Are we seeing the emergence of rootless corporations guided only by market opportunities, not by allegiance to their home countries?"

Before - partly because of the hardships that entailed starting and growing business across the continent - many started businesses across Africa but the most scale they could achieve was making it a regional multinational. However, over time, we have seen companies with a global mindset emerge from the onset - Flutterwave, Paga, Jumo et al. Even if some of these don't end up achieving that feat, most start out structured in a way that can allow them to easily scale and achieve that ambition.

One of the ways to become a global company is how and where you raise your capital, the way you incorporate and structure yourself. That is why we have seen companies incorporate in Delaware, the United Kingdom, Mauritius et al.

It just happens that we are now in a globalized economy where one can operate a rootless company (with no national allegiance) - instead, with interests spread across the globe. This is because different countries or states offer different incentives for the company's different needs. That is why we have devices designed in California but manufactured in Shenzhen. That is why we have companies operated in Johannesburg but domiciled in the Cayman Islands or Mauritius.

Now, going back to the question we started with: What makes a startup African? Is it the incorporation, the skin colour of the founder, the nationality of the founder(s) or the language that the founders speak?

Yesterday, we released our research brief of the African startups that have raised at least $20 million in VC funding in a single round. Many people commented on the list suggesting that we should have not included some if not most of them.

But, what does one use to classify a startup as either African or not? Or if it is just a startup in Africa?

For example, if Jason Njoku and Bastian Gotter start iROKO TV that is carrying Nollywood (and other African) content but incorporated in the UK, do you regard it African or not? What if a white Canadian immigrant starts a company called Numida and incorporates/headquarters it in Uganda, does it qualify to be an African startup or not? What if an American decides to headquarter Fenix International and keep all her CXOs in Uganda, is it regarded African or not?

What is even more confusing is, what if a US-born Ghanaian starts a company, raises funding from (mostly) US investors, maintains the headquarters in Ghana but incorporates both in the US and Mauritius? Where does that company belong? Ghana, Mauritius or the US? Is it an African or Global company?

Those are questions we ask ourselves on a daily basis as we carry out research on African startups or startups in Africa - depending on which term you are comfortable with. Yet, our commitment is to standardize things to a level that you should be able to digest and make decisions quickly. Keep in mind that we do all this in an imperfect market that is marred with a lot of information asymmetry.

What we decided as the Digest Africa team was to boil everything down to the unit economics. What do I mean by this? Where do the economic benefits of that startup or company's existence go? I am not talking about shareholder benefits because that is very complicated (for now) to keep track of. Instead, we are talking of taxes, job creation and other benefits that come with a particular company being in existence.

If Andela - though founded by people from different continents - raises $100 million, which economy will it likely go into? If a Kenyan-born entrepreneur starts a startup in the US and has all its workforce there, where will all the economic benefits of that startup's existence go?

That is why we decided to base our current definition of an African startup on where its headquarters are located or what its primary or only market of focus is.

The main reason - as explained in our methodology - for settling with this is because (for now) we haven't achieved the level of market information saturation that can allow us to base our allocation of a company's economic benefits basing on shareholder value or incorporation. However, headquarters and primary market of focus, give us a hint on where their main interest lies.

In conclusion, I would like to hear from any other individuals or companies that have or are currently carrying out research about "African startups" and find out the challenges that you are experiencing as well as how you are navigating the numerous and often challenging classifications. You can reach me on malinz@digestafrica.com.

Digest Africa



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