African Startups That Use Disruptive Tech Do Better

Africa is emerging as an attractive market for digital startups (defined as those under 10 years old). But while African startups have experienced a surge in funding in recent years, there are still many untapped opportunities. Addressing this gap could enable these businesses to develop platforms and business models integrating disruptive technologies, with the potential to target new markets with affordable and appropriate solutions.

Focused on three sectors—fintech, e-commerce, and information technology—the study tackles three key questions:

• How do African startups compare to Latin American and Caribbean firms and to ‘tech frontier’ cities of London, Palo Alto, Seattle, and Tokyo?

• Are younger or more mature African startups embracing disruptive tech more?

• Is there a link between companies receiving outside funding and their incorporating disruptive tech?

Disruptive technologies have the potential to create new markets and eventually overtake leading companies in their field. Although much of disruptive tech is considered ‘cutting-edge’ these two concepts are not synonymous. For example, a cutting-edge technology can be non-disruptive if it does not transform the market in some way—something that can occur because its innovative content is too specialized to reshape an entire market. In addition, not all disruptive technologies are, in fact, new: some were developed long before businesses began using them in a market-disruptive way. Examples include Ford’s mass marketing of its Model T automobile in the 1920s, decades after the car was invented, and the rapid diffusion of the mobile phone worldwide from the 2000s, again decades after the first mobile phones were created.

Startups in Africa are found to be 36 percent less likely (excluding mobile payments) to incorporate disruptive technologies than firms in frontier cities, whereas the equivalent gap for Latin American companies is 32 percent. But while Latin American are more disruptive than African startups over companies’ whole life cycle, the gap shrinks as companies age.

On the link between receiving outside venture capital and private equity funding and adopting tech, African companies that incorporate disruptive tech are observed to be 3 percentage points more likely to receive funding than those that did not. This difference, referred to as a “disruptiveness premium,” is higher—by 7 and 16 percentage points, respectively, in Latin America and in the frontier cities. The dollar amount of the disruptiveness premium also differs between regions. African firms that embed disruptive tech receive 40 percent more funding than firms that do not, compared to such Latin American firms receiving 99 percent more funding, and frontier cities’ 259 percent more.

Another finding: embracing tech seems to help a company’s bottom line. Startups incorporating disruptive technologies in Africa have a probability of success that is 4.5 percentage points higher than non-disruptive firms and their average growth level, in terms of market valuation, is 46 percent greater over the firm’s life cycle.

Twenty-nine disruptive technologies were selected for the study, obtained from data on newly issued U.S. patents combined with data on company earnings conference calls. The patent data is a good indicator of a technology’s cutting-edge quality, while mentions in earnings calls suggest market growth potential. Data on 32,530 digital businesses—7,785 in Africa, 12,816 in Latin America, and 11,929 in frontier cities—were pulled from the Crunchbase and Pitchbook data sets.

The research forms part of a broader IFC project to be published in Spring on where African businesses stand on various aspects of digitalization, including: digital infrastructure, connectivity rates, user affordability, firm-level adoption rates, frequency and purpose of use, supply of digital technologies, funding, and policy recommendations.