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The Analysis of East African Startups Ecosystem and Korean Corporation’s Participation Plan Economic cooperation, Overseas Direct Investment

Author Yongkyu Chang, Kyungha Kim, Yuh Jin Bae, Joon Hwa Cho, and Dooyoung Choi Series 20-12 Language Korean Date 2021.06.21

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   Startups are an adventurous business platform with a high likelihood of failure. Statistics show that in 2019 only one out of every 12 startups survived worldwide. Despite such risks, investment in startups is increasing tremendously globally. For instance, Cruch base, one of top global startup investment research institutes, has shown that the total amount of venture capital invested in startups over the past decade (2010-2019) amounted up to KRW 1,700 trillion (15$ trillion)internationally. Furthermore, KRW 400 trillion ($249.8billion) that was invested in a single year in 2019.
   Behind the rapid growth in startups is the global economic crisis. Since the 2008 global financial crisis, the global youth unemployment rate has rocketed. Many countries have taken serious measures to tackle this impending and escalating youth unemployment rate. Promoting startups was one of decisive measures that aim to tackle the global youth unemployment issues.
   Currently, Europe and North America are at the forefront of global startup ecosystems. These two regions account for about 80% of startups in the world. On the contrary, Africa shares only a tiny portion of the global startup market. However, a good sign is that the African startup ecosystem is growing fast and that has caught the attention of international venture investors. For example, Africa's Tech Hub grew to nearly 50% alone in 2019 and major global startup investors, mostly based in Europe and the United States, are actively investing in the continent. The potential of the African startup ecosystem has been demonstrated and should not be taken for granted. With this in mind, we would suggest that the Korean startup ecosystem should also take steps towards entering the African startups ecosystem. The purpose of this study is to provide relevant information and analyse the African startups ecosystem. Based on this information and analysis, we advise the Korean startup ecosystem to take measures to pursue the possibility of cooperation with the African startup ecosystem.
   East Africa, known as the entry point of the African continent, has developed a cordial relationship with Korea. For Korea, East Africa is geopolitically a vantage point for various reasons. Korea and East Africa have maintained an active exchange of human and material resources, and East Africa is also a region where the large part of Korea’s ODA is implemented. East Africa is also a politically and socially stable region compared to other parts of African continent. Therefore, this study takes East Africa as its research area. For this purpose, the study takes and analyses East Africa’s five major industrial sectors (logistics, transportation, energy, health care, agriculture and education) in four East African Community (EAC) members (Kenya, Tanzania, Uganda and Rwanda). These five major industries are business areas that meet the needs of East Africa's high demand for and Korea's expertise in excellent ICT technology. We understand that this cooperation would be a starting point for cooperation between Korean and East African startups. In addition, East Africa is one of the major target areas for Sustainable Development Goals (SDGs) and we expect that a cooperation with the East African startup ecosystem would contribute to successful implementation of SDGs.
   This study employs a qualitative and quantitative methodology to analyse the East African startup ecosystem in order to provide ways for Korean startups to efficiently approach the market. The qualitative methodology consists of literature analysis and in-depth interviews. Unfortunately, academic literature on startups is rare. Therefore, it was not easy to attempt academic analysis. Also, another qualitative methodology, field work, is almost impossible as Covid-19 has spread world wide and prevented us from travelling to East Africa. So, we have had to rely heavily on Web-meetings with our interviewees. Interviews were conducted with Korean and Kenyan startup-related informants. Throughout this qualitative study, we could identify some trends and characteristics of global, Korean and East African startup ecosystems. The major results of the qualitative investigation are as follows:
   A significant feature of the most successful countries that have well-maintained startup ecosystems is that there are a number of excellent startup hubs. In these countries, governments provide proper policies to support startups and various initiatives. In addition, those startups operating in high-level startup ecosystems receive a good amount of venture capital investment. For example, in2019, international venture capital investment received by German and French startups, in their respective countries, amounted to $6.65 billion and $4.39billion, respectively. The volume of the venture capital invested in Africa (asa total in 55 countries) in the same year was merely $3.9 billion. The total volume of venture investment in the African continent was smaller than that of within France. However, a positive signal is that a growing number of venture capital transactions in Africa between 2014 and 2019 suggest that the African startup ecosystem is likely to grow in the future.
   The leading startup sectors in East Africa specialise in software, data, and fintech, which follow global startup trends. East Africa is Africa's second largest venture capital destination after Southern Africa. In particular, East African countries are trying their best to develop startup ecosystems by introducing startup bills and other actions. For example, the Kenyan Parliament announced the Startup Bill (2020) in 2020, which aims not only to protect startups in Kenya, but also to motivate the local youth to innovate and create startups.
   Whereas, in general, the Korean startup ecosystem is passive in the sense that Koreans are reluctant togo off overseas and invest in foreign startup environments. There are various reasons, but the lack of information on foreign startup ecosystems is considered as the most critical one. Technically, most Korean startups are optimised for the Korean market and that makes it extremely difficult for Korean startups to expand to local markets beyond their boundaries. However, during this study, we were able to contact some Korean startup operators in East Africa (Jerry Baek, Tella, Zakyraders, etc.). The number is insignificant; however, the results were sufficient in obtaining an overview of the nature of Korean startups operating in East Africa. These startups collectively demonstrate a movement to solve the various levels of social problems faced by East African societies. Also, we had interviews with four Kenyan startup initiators (Uhai 365, Mali Agricultural Industry Solutions, Young Stripe, Zeit Africa) that share similar characteristics to Korean startup operators in East Africa. In other words, startups operating in East Africa are partially pursuing social values ​​in their early stages. Based on this qualitative study, we define these type of startups as “social startups”.
   In this study, we adopted data mining methodology to anlayse five major industrial sectors in East Africa. The process of the analysis involves three steps: correlation analysis of topics related to startups in East Africa. By doing this, we hope to suggest the possibility of Korean startups entering into East Africa and cooperating with the East African startup ecosystem. For data mining, we collected news articles related to five industrial sectors in major East African daily newspapers over the past five years (2015-2019). Then we put them into a data mining programme. The programme classfied, patterned and selected some significant key words, called pain points, to illustrate the needs of the local business consumers. The five industrial sectors analysed in this study show some significant features. For example, there are Pain Points that show the overall needs in terms of the development of agricultural sectors in the region, such as improving agricultural production technology, ensuring market access (Kenya) and supporting and investing in improving the agricultural sector (Uganda). In the energy sector, more detailed pain points were revealed: the need for further support for the solar industry, strengthening access to power supplies (Uganda) and supplying power using solar technology (Rwanda).One commonality that can be found in all these five sectors is that there exist some pain points related to startups that are successful in securing investment. However, we found that there are far too many startups not properly receiving adequate government or venture capital investments. Despite their needs (pain points), they still lack investment. The results show that there exists a market where Korean startups could invest in and, in doing so, cooperate with the East African startups. In addition, the cooperation would lead to a meaningful contribution to social development in East Africa as five of the industrial sectors are closely related to the indicators of SDGs.
   In this study, we have reached the conclusion that we propose a converging point between Korean and East African startup ecosystems. We need to approach East African startup ecosystems in achieving two discrete, but connected goals: achieving financial returns and taking social responsibility. Startups in Less Developed Countries, such as many East African countries, cannot be solely assessed from an economic point of view. Measuring startup social responsibility is another cardinal indicator. As we have shown in this study, a number of Korean startups are already operating their businesses and taking social responsibility in East Africa. Fortunately, we have a government-led startup programme that is closely linked to development cooperation programmes in Africa. The effective use of these programmes will be an effective solution for the moment. The problem is that the number of social startups and programmes has not reached a critical momentum as yet. In order to overcome this unfavourable situation, the study reasons as follows:
   This study encourages governments to design a standardised startup programme to promote Korean startups accessing East Africa. As the study has shown, social startups are an alternative option for entering the East African startup ecosystem. The government's startup programme should be diversified, while at the same time one clear direction must be taken to link development cooperation programmes to facilitate their cooperation. Inter-cooperation among different governmental organisations is mandatory in this sense.
   Recently, facing an international aid fatigue, in the cycle of international development cooperation, international organisations have introduced ESG and impact investments that give more responsible positions within business corporations. Within this initiative, every single business corporation or government wishing to invest capital should provide reliable social and environmental indicators for sustainable development and social startups may play a role as major agents for ESG investment. Government organisations may operate a joint ESG investment fund with local and international companies. In addition, the joint ESG investment can lead to support for Korean and East African startups, nurturing a greater worldwide startup network system.

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