African startups slowly realise value of informal economies

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Almost half of Sub-Saharan Africa’s GDP comes from the informal sector, which also accounts for more than 70 per cent of employment on the continent.

Yet Africa’s growing tech startup scene has yet to fully take advantage of the opportunities in this space, though there are signs of growing awareness of what can be achieved.

Last week, Johannesburg-based business support organisation The Awethu Project rolled out an app aimed at informal markets, aimed at assisting informal entrepreneurs in starting and growing businesses.

South African companies, indeed, have done more than most to tap into the space. Amongst them is Nomanini, which provides PoS and enterprise management software to informal merchants. The company’s chief executive officer (CEO) Vahid Monadjem says as one of the largest and least well-served parts of African economies there are numerous opportunities for companies offering solutions to informal markets.

“The two areas that I see the most immediate opportunities are in financial services and logistics. Within financial services, payments is still a massive opportunity, and increasingly there are new opportunities becoming possible as payments rails go deeper such as micro-insurance, savings, on-demand products…” he said.

“On the logistics side, the increase in smartphone penetration leave lots of opportunities for new ways deliver and collect physical goods in informal markets.”

In Mozambique, local company UX last year launched Biscate, an on-demand mobile app connecting informal handymen with customers. Co-founder Frederico Silva says not enough companies are making similar efforts to tap into this space.

“Although most African economies are highly informal, many businesses fail to address this market and never truly embrace the market dynamics in the continent,” he said.

Much of the reason for this is that making headway in informal markets is tough. Lelemba Phiri is chief marketing officer of South African company Zoona, another company working on providing more efficient financial services in informal markets. She says the main challenges revolve around achieving scale.

“Businesses seeking to effectively thrive in the informal marketplace need to be aware that the bulk of business consists of microtransactions. To survive, you need to benefit from volume at scale – in our case this means knowing that over 60 per cent of mobile money transactions will be for less than US$5,” she said.

Regulation, or the lack of it, can also be a hindrance.

“Businesses need to constantly engage and work with key stakeholders to ensure that regulatory and policy frameworks keep up with innovation and that learnings from the field are being shared for the benefit of the wider industry,” Phiri said.

Help is at hand, however, with Phiri saying there is a growing wealth of resources aimed at supporting expansion into informal sectors previously underserved by business. Organisations like the MasterCard Foundation, UNCDF, FSD and CGAP are offering support to organisations seeking to foster digital financial services and financial inclusion.

“We have also seen the rise and growth social enterprises and impact investors who are willingness to back them once they have proven models,” she said.

Monadjem is more than aware of the challenges, but he too feels the ecosystem is starting to develop.

“The innovation game is always hard. It can be tough to find product-market fit in the varying markets across Africa. Fortunately there is a growing ecosystem. Over the past decade there has been a push from governments to develop parts of informal markets,” he said.

“Development agencies also provide funding, but more based on the view that the informal market is beneficial and should be supported as it enables excess labor to be absorbed, and mitigates unemployment issues. There are more research and advisory firms such as Helix and BFA and CGAP building up a body of knowledge. But most importantly there is a growing cohort of entrepreneurs building solutions for these markets.”

Support is also available from African Innovation Foundation (AIF) founder Jean-Claude Bastos de Morais, who has taken an active interest in informal markets. He has even launched an incubator – Fábrica de Sabão – in Angola’s biggest slum, Cazenga, and says entrepreneurs need assistance when it comes to accessing informal markets.

“Access to modern techniques and technologies, access to capital and financial services and a lack of training and experience in business management – these are all issues that investors will face when they start working with promising businesses in the informal sector,” he said.

“Investors will also have to go through the process of ‘formalisation’ – meaning that time and money will be spent on working on issues such as tax, payroll, proper accounting processes, adherence to health and safety frameworks, fair pay and much more.”

Fábrica de Sabao is an incubator, accelerator, makerspace, co-working space and cultural connector. The idea is to incubate businesses in this setting and then launch them into the formal market. De Morais said companies and social entrepreneurs who are supporting startups also need support in their efforts.

“Some philanthropic foundations do offer financial support to those giving services to new entrepreneurs. Sone donor agencies also provide guarantee schemes for supporting young employment and entrepreneurship programmes,” he said.

“But how much impact these types of initiatives have made on the informal sector is not clear. My gut feel is that much more needs to be done, and that too in disruptive ways.”

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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