African investors love fintech. But it is an opportunity cost

Fintech is the darling of the technology sector in Africa. From its early and humble beginnings at the turn of the century, enabling payments has become the centerpiece of innovation in Africa. Last year, approximately 62% of venture capital investments were made in fintech companies. In the first half of this year, fintech already accounts for 60% of raised risk capital, according to MAGNiTT.

This is both an example of Africa’s technical prowess and the inspiration for investment in Africa. But this claustral thinking can have a hefty after-party bill.

Why fintech dominates

Investors clearly love fintech funding, and once in a while on Twitter people argue about whether more fintechs are needed. Even development finance institutions, which historically limited themselves to backing other investors, have caught the fintech bug, investing directly in some of Africa’s biggest fintech companies.

Why?

In response to my tweet Dan Gray, head of marketing at Equidam, complained that investors only understood fintech to the detriment of investments in other sectors, tweeted: “I’ve seen it claimed that fintech helps unlock innovation in other sectors by enabling easier online transactions, access to capital, new business models, etc.”

But more than “unlocking other sectors,” investors love fintech because it’s more aligned with how venture capital works. As one investor told me, “You have to look at incentive structures.”

In other words, in Africa it is fintech that can support the kind of growth that the venture capital system needs to justify raising capital from limited partners.

I agree. And I will go one step further.

Fintech dominates because finance is the one layer of Africa’s infrastructure gap that technology can abstract away into code, data centers and mobile phones. The fact is that extracting value from infrastructure plagued by systemic failures remains painfully difficult. That’s why areas like healthcare, agriculture and even transportation will remain a tough call for unicorn-seeking investors — at least for a while.

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The opportunity cost

But however compelling the above reasons are, it does not eliminate the costs of making fintech the bellwether of African innovation.

At first it works out. While not a crime and perfectly fine, there is something disturbing about the fact that African innovation is prioritized according to the whims of (mostly) foreign growth equity investors looking for companies they can flip on Wall Street for a billion dollars in value.

Sebastian Mallaby’s The law of power: Venture capital and the art of disruptionand Tom Nicholas’s VC: An American Story (I recommend you read both) does more than illustrate how venture capital drives innovation. Both books also show how venture capital has developed.

Beyond the riveting stories of venture capitalists and the companies they backed, what stood out to me after reading these books was the fact that the fundamentals of venture capital do not derive from today’s Silicon Valley (SV) handbook.

The earliest venture capitalists don’t seem to me to have chased unicorns. They allowed the foundation of innovation to flourish on pure commercial strength rather than potential billion-dollar listings.

There was no stage pipeline in 1980s venture capital, so early-stage investors weren’t just looking to sell a hot potato to the next financier.

Silicon Valley’s venture capital playbook is relatively young and, despite its billionaire successes, suffers from deeply flawed incentives.

America tends to mask these flaws well. But these fundamental failures tend to become acute structural failures outside of Silicon Valley.

If all you have is a unicorn-seeking approach to innovation, you’ll naturally default to easily abstracted sectors like financial services. And while financial services are an important part of the economic mix, they are only one part. There’s only so much people can pay for online – and just facilitating consumption doesn’t really affect production. It just means that people will buy a little more because it’s easier to do it online.

Innovation in agriculture, health care and delivery, infrastructure and data may not be attractive in the short term, but they are critical pieces to building great innovation that serves as a foundation for the kind of innovation that appeals to financial markets.

The opportunity cost of innovation driven in part by misaligned Silicon Valley incentives is that we risk perpetuating a cycle that serves Wall Street, leaving impact as a mere byproduct.

The opportunity cost of failed agricultural systems is that fertile irrigated areas in Mali will continue to be bought by developers from China, France and the US to produce and process food that can be returned to hungry Africans as food aid.

The opportunity cost of a mobile-first-and-only Africa is that we will lack the incentives to build and maintain adequate data infrastructure that can transform Africans from consumers of digital services to leaders of what a digital future will look like tomorrow. And the opportunity cost of broken health systems will be queuing for nearly expired vaccines.

African innovation needs more strategy

VCs are probably right not to invest much outside of payments because the groundwork that will allow for stronger efforts at innovation elsewhere is not fully developed. But the investors who want to change this are not Silicon Valley-style unicorn seekers.

Startup laws, while well-intentioned, are not effective tools for building this strategic digital vision for Africa. Mostly because so far they’ve been designed to just plug into or replicate Silicon Valley-esque structures.

“A lot of attention has been focused on things like payment-based systems like M-Pesa and shopping in e-commerce stores. I think what’s being missed is [the opportunity] to industrialize,” argued Nimrod Zalk, a non-executive director on the board of the South African Industrial Development Corporation.

The bottom line is that anyone who is serious about African innovation needs to start thinking beyond what Silicon Valley wants. Venture capitalists have an important accelerating role to play, but how, why and what is accelerated is something we need to think deeply about.

From the cabal

Fintech startup, Afriex facilitates money transfers in any currency, from anywhere in the world. Read more about it wanting to facilitate money transfers for Africans here.

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