Insights
Blended Finance as Catalytic Funding for the Ethiopian Entrepreneurship Ecosystem
After a decade of steady growth, the entrepreneurial ecosystem in Ethiopia is open to catalytic funding.
Ethiopia’s Economic Context
As the fastest growing economy in East Africa, Ethiopia is poised to continue its growth trajectory supported by several factors. There is a young population (median age of 18) entering the workforce with close to 200,000 STEM students graduating each year, there are positive trends in poverty reduction since 2011, and there is a nascent but fast developing private sector and financial sector. In addition, there are regulatory tailwinds and strategic plans including the Home-Grown Economic Reform Agenda, Job Creation Strategy, Digital Transformation Strategy, the Start-Up and Innovative Businesses Proclamation soon to be approved, and the privatization of key State-Owned Enterprises (especially in the Telecommunication Sector).
Ethiopian Entrepreneurship Ecosystem
Over the last decade, the Entrepreneurship Ecosystem in Ethiopia has seen an organic growth of startups evolving in all sectors. Indeed, startups are seen flourishing in fintech, healthtech, job placement/gigs, cleantech, logistics, e-commerce, agritech, edtech, media & leisure, govtech, etc. In addition, the presence of support hubs such as incubators, accelerators, and co-working spaces is increasing. Government entities are also investing resources in the ecosystem with assistance from development partners.
However, Ethiopia with currently 9 active technology hubs still lags behind compared to other African countries: 80 technology hubs were counted in South Africa, 85 in Nigeria, 56 in Egypt and 48 in Kenya in 2019[1]. One of the main challenges the ecosystem is facing is the gap in financing.
Financing Gap
Currently, Ethiopia’s value chain for start-ups and SMEs growth is fragmented.
In the early stages of a startup lifecycle, many development partners are increasingly providing support through technical assistance and direct grants.
In the growth stages, financing is fundamentally needed for successful development of startups. Ethiopian banks such as the Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) can provide finance to start-ups but require 30% matching and collateral. When it comes to Venture Capital (VC) and Private Equity (PE) financing, very limited capital is available. Ethiopia ranks 109 out of 125 countries in the VC and PE Attractiveness Index[2]. Across Sub-Saharan Africa, PE accounted for less than 10% of the 51 disclosed deals[3]. Kenya had the largest share of the reported deals followed by Uganda, Tanzania, and Ethiopia for the period between 2014 – 2019[4]. For established scaleups and innovative businesses, some can have access to bank loans and VC/PE capital, but transactions have been very limited as well.
Therefore, despite the current abundance of liquidity supporting early-stage entrepreneurs both through financial and technical resources in Ethiopia, research conducted by the Ethiopian Jobs Creation Commission in partnership with private firms clearly underscores a lack of support structure, financial and technical, post the incubation phase of start-ups in the nation. Indeed, entrepreneurs are left to fall off a cliff post incubation programs.
The Need for a Continuum of Capital
A continuum of capital is needed to support entrepreneurs and fund an ample talent pool of youth and women entrepreneurs. The type of capital deployed is a critical ingredient for the growth of the ecosystem and needs to be carefully calibrated. A blended finance approach seems to be the most appropriate for the Ethiopian ecosystem:
Equity risk capital would be predominant to ensure accountability and profitability, aiming to be a strategic co-investor accompanying its investees along their growth trajectories.
Grant capital as a de-risking mechanism to crowd-in capital, through entrepreneur capacity building and direct ecosystem support. Indeed, technical assistance is required to increase the maturity of the ecosystem, including ecosystem builders and even bank executives.
Debt to selected, more mature enterprises with demonstrated debt bearing capacity, looking for non-diluting capital to accelerate their growth.
The amount of the blended finance is to be carefully estimated so as to not flood the ecosystem with too much capital, hence encouraging entrepreneurs to adopt unhealthy behaviors at loggerheads with growth and accountability. In addition, it is critical that the fund be managed by a professional fund management team from the private sector that has the experience to identify investments and work closely with Ethiopian entrepreneurs, youth and women, with full knowledge of idiosyncrasies of the ecosystem.
Outlook
Once such type of fund is deployed into the ecosystem, it is expected that more funds (Venture Capital, Private Equity, and Corporate Venture Capital) will be enticed to set up shop in Ethiopia, raising funds in hard or local currency, or a hybrid of both. This will ensure sustainability in the flow of capital in the ecosystem while lifting it up in the process, and also reducing future dependency from grant funding.
[1] GSMA, Briter Bridges 2019
[2] Groh, Liechtenstein, Lieser , & Biesinger, 2018
[3] Asoko Insight, 2019
[4] AVCA; Ernst & Young, 2018
