Africa has made great strides recently in fulfilling its dream of becoming a launch pad for innovative high-tech companies. From 2015 through 2020, the number of African tech startups receiving financial backing grew at a 46% annually clip—some six times faster than the global average—according to the venture capital firm Partech Partners.

Africa’s record of sustaining and scaling up startups, unfortunately, is another story. The entire continent has only three “unicorns”—privately held tech companies valued at more than $1 billion—the most recent being Nigerian fintech Flutterwave. By contrast, there are more than 50 unicorns in the EU, 100 in China, and 200 in the US. In fact, by our count there are fewer than 20 African “zebras” (valued at least $200 million). African startups rarely survive beyond the Series B funding stage. As a result, returns on venture capital investments are weak—less than 3% on average across the region over five years, compared with around 11% in Asia-Pacific and nearly 16% in Europe.

A number of structural barriers make Africa challenging for tech entrepreneurs and investors. They include a fragmented market of 54 countries, low consumer purchasing power, complex and inconsistent regulations, inadequate data communications infrastructure, and scarce capital and digital talent.

But even if startups navigate those obstacles, many run into the hard realities of Africa’s competitive playing field. Key sectors, especially business-to-consumer ones such as financial services, retail, and energy, are controlled by large business groups or state monopolies that are regarded as national champions. Although such enterprises are supposed to use their privileged position to advance the national interest, they often use their market power and connections to stack the odds against new entrants with disruptive business models.

Africa’s inhospitable startup environment not only stunts job creation and economic development. It also threatens the competitiveness of Africa’s national champions themselves by depriving them of crucial sources of innovative technologies, products, and business models. Over time, Africa’s biggest companies will grow increasingly dependent on the world’s leading technology players in their segments, and profit margins will shrink.

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