Reasons for the continued dearth of investment in African AI startups despite a global expansion
Reasons for the continued dearth of investment in African AI startups despite a global expansion
Over the last few decades, artificial intelligence (AI) has advanced significantly, permeating every level of the digital experience. Investments in AI companies increased in lockstep with the industry's growth.
CB Insights reports that AI startups raised a record $20 billion in funding during the second quarter of 2021. This is more than double the global total of $8 billion raised in Q2 last year.
Despite global growth, artificial intelligence is still in its infancy in Africa, owing to a variety of issues, including funding.
In 2020, the AI sector raised just 2.5 percent of the over $700 million raised by African startups. This demonstrates that investor preference for the sector is extremely low. By comparison, the fintech sector, which is the current favorite of venture capitalists, received over 24% (a quarter) of total investment.
Growth of AI in Africa
Even with limited funding, activity in the sector, as in the rest of the world, is gradually picking up. The development of learning algorithms such as deep learning, chatbots, and neural networks, which enable software to learn from experience and self-improve, has increased the importance of AI.
These developments, combined with new funding, are gradually removing the veil from the artificial intelligence sector.
Previously, there was some funding (for example, South Africa's IoT.nxt raised $7.7 million in 2017), as well as the presence of several pioneering startups such as BrandsEye in South Africa and Affectiva in Egypt (2009). Apart from these, there was no significant growth to indicate the sector's emergence.
On the continent, 2019 was a watershed year for artificial intelligence, with funding significantly increasing from previous years. The sector raised $11.27 million, an increase of 223% over the $3.6 million raised in 2018.
2020 was even better, with funding increasing to $11.63 million, according to reports. Notably, four startups raised over a million dollars, with an average of US$1,162,700 raised.
This year (2021) is no exception, as AI startups contributed to the year's first-half revenue record of $1.19 billion.
However, in comparison to the massive funding attracted by other sectors and the enormous potential of artificial intelligence, these fundings remain egregiously small and unevenly distributed. The following are some reasons why.
Reasons why funding in Africa is still in its infancy
Funding in the African AI space is still largely driven by large rounds closed by individual startups. In 2019, Tunisia's Instadeep (US$7 million) closed 62 percent of total investment, while South Africa's DataProphet's $6 million funding accounted for more than half of all funding attracted to the continent in 2020.
Investment in AI is not evenly distributed across the continent, with some countries, such as South Africa, receiving more funding than others.
Apart from DataProphet, SA has two additional notable rounds scheduled for 2020, with inQuba raising an undisclosed sum and LightWare raising US$1.5 million and another smaller round.
This puts South Africa significantly ahead of the rest of the continent in terms of artificial intelligence funding.
Nigeria is not forgotten. While the country lacks SA's massive AI investments, it does have several AI-focused labs. The most recent is the Data Science Nigeria, an artificial intelligence incubation lab funded by Main One, the Bill and Melinda Gates Foundation, the UK-Nigeria Tech Hub, and Microsoft Nigeria.
The struggles of early-stage artificial intelligence start-ups
Even as more AI or AI-enabled startups are founded, the funds and resources necessary for survival are in short supply.
For instance, Nigeria's infrastructural challenges continue to pose a threat to the spread of AI. The cost of electricity, the cost of internet, and rogue government policies are just a few of the numerous infrastructural barriers to AI adoption.
These factors affect the confidence of venture capitalists, who may not fully understand the technology in some cases. Early-stage deal share, which includes seed, angel, and Series A rounds, declined to a low of 55% in Q2 2021, according to the report.
Recruiting AI talent
To succeed in the field of artificial intelligence, businesses require highly trained data scientists. However, these are in short supply on the African continent.
Almost every university in Europe and the United States has established new departments, institutes, and degree programs in Data Science. Africa, on the other hand, has made only recent strides toward closing the continent's educational gaps.
Although AI and machine learning have become hot tech jobs as a result of the new norms of remote work and digitization, the majority of schools offering AI courses and certifications are foreign-based, for example, CISCO and Elev8.
In conclusion
Throughout Africa, the AI sector is still in its infancy, with the most significant advancements occurring in more developed ecosystems such as South Africa.
However, the potential for artificial intelligence services in industries such as manufacturing, security, and financial services is enormous. Several examples include the AI-powered software used by numerous businesses, such as real-time transcription services and post-call analysis tools.
Among the others are Carbon's machine learning tool for credit application evaluation and Kuda bank's AI-powered digital assistant, "Ore."
As with the solutions outlined above, there are a plethora of issues in Africa that AI could assist in resolving.
After all, the future appears to be brighter now than it did a few years ago. The space is a hive of activity at the moment, which should translate into significant growth in 2021.
