"Tomato, to-mah-to"​ - on SMEs and startups in Africa

(5-minute read)

While many have been making sourdough and started other lockdown projects, I've been working on my literature review. In the reading on entrepreneurship in Africa, four dimensions stood out to me. From the Rural & Urban, the Formal & the Informal to the Necessity- & Opportunity-driven, entrepreneurship in emerging markets has distinct features that make it different from the developed markets. But there’s one dimension of entrepreneurship that seems applicable regardless of where you find yourself in the world. That’s the Traditional & Contemporary dimension. 

Think of traditional companies in the service industry that operate with proven business models. The restaurants, the hair salons, the car shops. Then contrast this with contemporary entrepreneurship that is built around services that are delivered digitally, or products enabled by technology. This Silicon Valley born startup entrepreneurship is nothing new in Africa. Still, to my knowledge, we haven’t empirically and academically proven the best ways to support it locally.

According to Steve Blank, a startup is “a temporary organization used to search for a repeatable and scalable business model”. Scalability in today's globalized world implies being technology-based, and being innovative is closely linked with startups. The Lean Startup methodology developed by Blank’s mentee, serial entrepreneur and investor Eric Ries, has been inspiring startup and agile product development all over the world.

Interestingly, a review of the websites, social media and industry reports from some of the leading tech entrepreneurship actors in Africa shows that “startup” is used when describing a technology-enabled, growth-oriented, early-stage venture. Just look at for example VentureBurn, Disrupt Africa, Venture Capital for Africa (VC4A), or iHub, MEST Africa and SA Innovation Summit. For anyone exposed to the technology or startup ecosystem in Africa this is no news - the Blankian startups have been on the continent for a while and we could do a better job in supporting them.

The Blankian startups have been on the continent for a while and we could do a better job in supporting them.

Sure, the terminology still gets a bit fuzzy here and there. Sometimes “startups” are used by policymakers or entrepreneurship supporters to mean new but traditional Small or Medium-sized Enterprises (SMEs). That is, SMEs that are starting up – your restaurants, hair salons, car shops. These businesses are important for creating services and jobs, but they are different from the Jumias, the Mkopas, the Lupiyas. Many countries have simply borrowed the English term into their own languages but for instance, in Finnish, the term "kasvuyritys" is very close in meaning to the Blankian startup and it means literally growth enterprises.

Unlike in the old song on the pronunciation of tomatoes and potatoes (do you say "to-may-to" or "to-mah-to"?), the terms SMEs and startups are not interchangeable. Being clear about the definitions is not just academic nitpicking, it matters in practice. The more technology is invading all aspects of society and the education-levels are on the rise, we will continue to see startups come up everywhere in Africa. However, startups need different support structures and different type of entrepreneurship ecosystems than traditional SMEs. And here’s why.

1. Startups aren’t… well, traditional

The startups are on a non-linear development trajectory, and they are often aiming to create disruptive services or business models. If the whole philosophy on how you build a company is based on constant testing, measuring and learning (all guided by the Lean Startup principles), typical funding mechanisms requiring three-year business plans and milestones just won’t do. And doing something for the first time is scary. Mentorship from experienced startup founders is helpful in navigating the treacherous path which only the brave embark on - despite a lack of awareness in their communities of what they are trying to accomplish. They certainly are today's superheroes, and having role models is significant - especially for women, an underrepresented group in technology.

2. Early-stage startups are intentionally informal

For startups, the formal registration of a company might make sense only when the business model has been validated through product and market testing with users. The teams can thus be intentionally informal in the early stages in their development (see eg. Startup Commons). The well-intended goal of governments, funders, donors and trainers to formalize the startups might not be well aligned. This becomes problematic when company registrations are used by training organizers or funders as important Key Performance Indicators (KPI) for entrepreneurship support. Formalizing the informal SMEs is an important economic discussion, but it needs to be separated from the discussion on startup support.

3. Startups are on a mission

The startup founders are driven by opportunity and not by necessity, which makes them passionate to solve a problem by any means necessary. Studies like those from Adom (2014) show that opportunity-driven entrepreneurship is on the rise in Africa. The entrepreneurs' motivation behind the venture is important to take into account when designing entrepreneurship training content. Instead of sitting in on lectures about SME business planning, these teams and their missions would benefit from training in Lean Business Model Canvas or creative problem-solving (one study in Togo showed how this makes for stronger companies). Like Ries said it: "Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught."

It's been nearly a decade since Lean Startup came out. In my experience, the book is hard to find in bookstores in southern Africa, but the dissemination of its learning is already happening, and academia has some catching up to do. There are luckily signs of discussion around the phenomenon (see eg. here or here). It’s essential to build on this work to understand better the startups with the ability to scale rapidly, as they can play a crucial role in 21st-century job creation. It’s high time to empirically prove what works in startup development support in Africa.

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Read more here about the research I am conducting as a PhD researcher at the Loughborough University London.