Blockchain Funding: Can Countries outside Africa’s ‘Big Four’ Break the Mold?

Although still at its infancy, Africa’s blockchain industry is rising.

According to the African Blockchain Report 2021 published last Monday by Crypto Valley Venture Capital (CV VC), a Swiss blockchain investor, blockchain companies in Africa raised $127 million in 2021.

On the other hand, at the end of the first quarter (Q1) of this year, they raised $91 million, the report stated, adding that the figure represents a staggering 1,668% year-on-year (YoY) growth from the same period last year.

In 2021, the global blockchain funding hit $25.2 billion across 1,247 deals. Additionally, Africa's $127 million stands at a paltry 0.5% of total global blockchain venture funds, the report says.

Nonetheless, the report notes that the blockchain industry in the continent greatly outperformed other sectors in terms of total amounts raised in venture funding with Q1 of 2022.

In fact, Africa’s blockchain venture funding growth was 11 times the growth of general venture funding growth as of March 2022 when compared to the same period in 2021.

An industry-by-industry analysis of these blockchain venture capital funds also shows that fintech companies and exchanges alone accounted for $101 million or 79% of the total investments in Africa's blockchain industry in the said quarter.

CV VC wrote in the report, “Financial-related cryptocurrency companies raised the most venture funding by far. Fintech companies came in first place, followed by exchanges.

“It is not in the least bit surprising that this is the case considering the following two factors.

“First, because of a largely informal, frayed and fragmented financial system, the use cases for alternative financial technologies in Africa are plentiful.

“Second, roughly 60% of all venture funding in Africa goes to fintech businesses.”

According to the report, the second quarter of 2022 got off to a quick start “with some noteworthy fundraising.”

MARA, a pan-African cryptocurrency exchange, raised $23 million (Nigeria/Kenya), Jambo $30 million (Congo) and Afriex $10 million (Nigeria).

A Lion’s Share

The report reveals that most of the venture dollars pumped into Africa's blockchain industry in 2021 went to 3 out of Africa’s ‘Big 4’ countries: Nigeria, Kenya, South Africa and Seychelles

The 'Big 4' countries, Nigeria, Kenya, South Africa and Egypt, are the top tech startup investment hubs or destinations in Africa.

However, with Egypt not emerging top this time, Nigeria, Kenya, South Africa, and Seychelles accounted for 96% or $122 million out of $127 million blockchain venture capital funds African blockchain companies received in 2021.

Altogether, all funds in 2021 went to 8 out of 54 nations in Africa, with Nigeria, the continent’s leading economy, alone responsible for 39.05% or $49.6 million.

“There has been a sporadic flow of funding for African blockchain companies. However, a few key countries stand head-and-shoulders above their peers in deal count and funds raised,” the report says.

Dr Christopher Smithmyer, the lead author of Dragons of the Digital Age, told Finance Magnates that the 'Big 4' continue to lead in the continent because of the stability they offer for investment in industries which are still considered relatively risky.

“We need to remember that investors have only been investing in crypto for a couple of years now. They see it as a risky investment. Couple that with the risk of operating in Africa, and you are entering into a 'junk bonds' territory,” the former Chief Financial Officer (CFO) of the Africa Peace and Conflict Network said.

"Nigeria, Kenya, South Africa and Egypt offer that modicum of stability that countries look for in order to have a stable investment,” he added.

Jason Wise, the Chief Editor of EarthWeb, an independent technology outlet specializing in cybersecurity and blockchain coverage ascribed the leading position of the 'Big 4' to “the supportive startup ecosystem fostered by the policies and digital infrastructure of these countries.”

On his part, Abe Cambridge, South Africa-based solar entrepreneur, blockchain expert and Founder of the Sun Exchange, pointed out that depending primary on VC funding “may be slightly missing the mark.”

Cambridge explained, “If startups have a blockchain venture for which they wish to get funding, they can do so online now without necessarily needing to approach large funds.

“It is possible to start projects globally in collaboration with teams elsewhere in the world. So one doesn't necessarily need to bring the big funds to the countries outside of the big four. It is possible to bring the countries outside the big four to the funds, by doing things online and connecting and collaborating with people elsewhere in the world and the continent.”

With such a tiny fraction of Africa accounting for the total capital entering Africa’s emerging blockchain industry, it can only be imagined what momentum the industry can receive if other countries gear up.

Problems Outside the 'Big 4'

Experts who spoke to Finance Magnates highlighted various reasons why countries that are not part of the 'Big 4' are attracting a small amount of funding.

For Smithmyer, the Vice President of International Affairs at Brāv Online Conflict Management, a lack of political will and great marketing skills are the top challenges.

“To attract real direct investment, not just Chinese control investment, a country needs to have a government that is willing to market the nation and also have enough maturity to assure investors that they will get good returns. Africa is stabilizing, which means that the next 'gold rush' will likely be in Africa,” he explained.

For Wise, who described blockchain as a sensitive technology with layers of information that need to be thoroughly protected, the problem is that investors are not being offered strong enough “promising safety nets."

“When investors are looking to invest in blockchain startups, they [are] likely to mitigate their risk by studying the startup ecosystem, the security protocols and the fraudulence levels in the country," Wise said.

“On this front, the Big 4 have actively worked on their security, Ease of Doing Business (EODB) rankings, and overall creating conducive environments to give investors a promising safety net,” he added.

Breaking the Mold

Despite these challenges, these experts believe that the countries left out can rise up to the challenge.

Wise, for one, believes that they “will have to fight harder” to attract investors.

“Countries such as Ghana and Ethiopia are already in the race for the Big 4, with great investment jumps in 2021 as compared to the previous year,” he pointed out.

Smithmyer echoes the same sentiment as Wise, noting that blockchain for them should be a “go out and get them area.”

To achieve this, Smithmyer advised that these countries invest in cryptocurrency, keep their regulations simple but definitive, and act quickly to punish bad actors.

He added that they have to overcome issues, such as regionalism, trust and access to the technology.

“Regionalism is a major problem with any project in Africa. They have been 'screwed' by the west enough times that they are leery about working with legitimate companies. And, who can blame them?” Smithmyer said.

“If Africa enters into this with a provincial viewpoint, then they are going to be competing against the system."

Wise believes that some of the countries outside of the 'Big 4' are already on the right track but still need the backing of effective government policies and initiatives to promote their entrepreneurial culture.

“It takes one or two unicorns to erupt from a country to get it into investors' limelight,” he added.