As investors are starting to have a closer look into Ethiopia’s start-up scene, the opportunities are growing rapidly. Yet, Ethiopia has seen very few investments in start-ups and none has exited thus far.
Ethiopia’s ecosystem for incubation is in an early stage of development, even though the emergence of Micro, Small and Medium Enterprises (MSMEs) has been high on the agenda of the Ethiopian government as a means to generate employment and reduce poverty. The Ministry of Innovation and Technology has recently developed a start-up incubation programme, which is called 2-2-2. Furthermore, financial institutions in Ethiopia do not have a commonly agreed definition of MSMEs, and as a result, the financing strategies specific to MSMEs are very limited.
The classification of MSMEs used by some financial service providers in Ethiopia is based on the national Micro, Small and Medium Enterprises strategy originally developed in 1997, revised in 2011 and edited in 2016. The classification below is provided by the 2016 version, which is mainly based on the number of workers employed, total assets and two broad sectoral classifications (industry and service).
However, in terms of asset value, this classification is far below the standards commonly used internationally. This limits the financing available to businesses in this range as financiers (such as PE firms) may not target them considering the commonly used classification of MSMEs (→ a company classification that is defined differently by different countries. Ethiopia’s definition for MSMEs specified in the 2011 Ethiopia National SME Strategy is based on headcount only: microenterprises have up to five employees, small enterprises have from 6 to 30 employees; medium enterprises 31 to 100 employees). Most start-ups in Ethiopia are likely to fall in this category which further enhances the issue of ʻthe missing middleʼ. On the part of start-up incubators, Ethiopia’s ecosystem provides several opportunities for support and limited options for financing of start-up ventures. Furthermore, the available start-up hubs, incubators and growth accelerators in the country are all located in close proximity to one another in the capital, Addis Ababa. This implies only those with resources and ability to reside in the city are likely to gain access to the network, support and financing opportunities.
For software engineers and web developers are available through private educational institutes. The trainings aim on closing the skills gap, which allows the students to work on international projects for short-term or long-term contracts, or to start their own ventures. The demand for this type of training is permanently increasing, as university graduates are often not ready for employment, due to a lack of practical skills and exposure to professional work environments.
Idea stage start-ups
That are often founded by university students or graduates from private training institutes have few options to access support services in Ethiopia. Universities offer incubation services and trainings, which are conducted in an academic mode and are therefore far off the dynamics of the private sector.
Privately operated incubators
Are rare in number, but offer a variety of services including business skills trainings, access to funding opportunities, and international exposure in start-up competitions. Typically, in combination with a coworking space, incubators provide start-ups with free (or low cost) office space, internet access, administrative services, and opportunities for networking with the community. Incubators with rolling application processes offer an individualised programme that relies on the commitment of the individual entrepreneurs to their own development. The focus of the incubation services lies on the development of an MVP (Minimum Viable Product) and team development to bring the start-up’s product out in the market and test it with the first batch of customers. As this is the first step into start-up growth, funding for start-ups in the range of USD 30,000 to 100,000 is often not available and start-ups following a lean approach by reinvesting their profits for growth. As the first private incubator, blueMoon has launched an agritech incubation programme, which provides early stage funding in order to bridge and accelerate the gap in business growth for innovators. The programme is based on a clearly defined training course, which takes the start-ups by the hand and thus ensures measurable outcomes for the justification of the programme funders’ financial contributions.
Growth stage start-ups
Have limited options to attract funding and support as there is currently just one programme existing in Ethiopia. The programme focuses on a cohort of up to 10 start-ups and aims on the investment readiness, even though it remains difficult to find local or international investors at this stage. Individual support for these start-ups comes from VC firms or consultants who focus on the due diligence process and business growth strategies in order to identify promising business models.
With scalable business models can find support in capacity and skills development and funding from different organisations. These types of start-ups have higher chances to attract funding for product development and growth as their impacts are related to the goals of international development organisations. Programmes are typically organised in boot camps or consultancies as there is no existing physical hub for social enterprises and the main drivers of social entrepreneurship incubation are programme based interventions.
Apart from social enterprise interventions, aid and development organisations are using the start-up approach in the value chains of their programme activities to achieve sustainable solutions for their intended impacts. Together with the start-up incubators, the organisations identify the needs in their respective programme activities and select social or for-profit enterprises to supply services on a private sector approach. These companies must have the capacity for business survival at the end of the programmes by scaling and offering added value to the communities, even though this often remains a challenge when business development is mainly donor driven.