African operators launching VC funds a win-win scenario

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Africa has a VC shortage. Though it is improving, the fact is self-evident, and startups go into business knowing they’re going to have to operate under tighter financial constraints than their counterparts in the United States (US) and Europe, where money is sprinkled much more liberally.

With this in mind, the arrival of any new VC in the African startup ecosystem is to be welcomed. But the new players that have arrived on the investment scene in the last few months have raised some eyebrows, especially given the prevailing view in recent years that they do more to hinder African startups than help them. Mobile operators are pumping money into the ecosystem.

Millicom in October launched the US$10 million Millicom Foundation, aimed at supporting digital innovators in Africa and Latin America, while the company’s ‘think’ accelerator programme began in Kigali, Rwanda, last month. Disrupt Africa reported last week leading Kenyan operator Safaricom launched a US$1 million investment fund aimed at supporting mobile ICT startups. And yesterday, Airtel joined the party, launching ‘Catapult-a-Startup’ in Nigeria, aimed at assisting mobile app developers in scaling their businesses.

These developments are a win-win situation for both the operators and startups. In the past, operators – notably Safaricom – have been criticised for damaging startup innovation. Now they are prepared to fund startups, which given the lack of cash coming from elsewhere can only be a good thing for entrepreneurs. Moreover, the chance to integrate apps into the networks of the likes of Airtel and Safaricom gives startups a greater platform from which to market their products.

For the operators, it also makes complete sense. With a few notable exceptions, the large incumbents have traditionally been poor when it comes to innovation. Operators have long fought against the idea that they are “dumb pipes”, and argued they are able to innovate themselves, but the acceptance that they are in fact pipes, even if not “dumb” ones, signals a change in direction. They’re now willing to let others provide the services that run on their networks, and startups can benefit from this.

This situation has developed for two reasons. The telecoms industry in Africa is more competitive than ever, and operators have to innovate to compete. Given they have traditionally not been strong at this, it makes complete sense for them to, if you like, outsource this innovation to bright young bucks with a Mac and a bright idea. And it is much cheaper to fund someone else to come up with innovative services than conceive and build them in-house.

Secondly, the operators are starting to think long-term. It is undeniable that African operators are currently undergoing a “land grab”, with the primary focus on customer acquisition. This phase will go on for a while, but it will end. The next phase of the development of the telecoms industry in Africa will see operators competing with each other based upon the value added services they are able to offer on top of their networks. By funding and assisting the development of innovative apps and services now, the networks are preparing for the day when they will be judged by them.

When this day does come, it is still unclear what kind of revenue sharing models will have developed, and whether a balance can be found that keeps both the “pipe” – the operator – and the over-the-top (OTT) service – the startup or app – happy and in-pocket. But for now, Africa’s startup ecosystem can celebrate the arrival of additional funding and marketing resources, and breathe a sigh of relief that operators are now showing willingness to help rather than hinder entrepreneurship on the continent.

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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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