Investing in African Health Tech - In Search of the Perfect Unicorn?
It’s an undeniable fact that the African tech startup space has been growing at an exponential rate. African tech startups raised a record-breaking $4.9 billion in funding last year - a 600% increase since the $700 million raised in 2017. Within the same time period, the number of startups that achieved unicorn status (> $1 billion in valuation) increased from 1 to 7.
Unsurprisingly, the fintech space is leading the charge on the continent, accounting for a whopping 62% of the total funds raised in 2021. Recently, the African fintech startup, Flutterwave, raised $250 million in their Series D round in February 2022, tripling the company’s valuation to over $3 billion.
The health tech space has been making headway as more and more investors pour money into the sector as a result of the pandemic - the health and biotech sector came in a not-so-close second, accounting for 8% of the total funds raised in 2021. The level of innovation in the African health tech space has skyrocketed in the past few years (~60% of health tech startups were founded in the past 5 years) and this has attracted significant investment in the space, with an 81% increase in African health tech investments in 2021.
African Health Tech Startup Overview
So we’ve established that the health tech space is growing and it’s growing fast. But where is this growth concentrated, both in terms of geography and startup types?
According to a Salient Advisory report, Nigeria and South Africa, two of Africa’s largest economies and tech ecosystems, account for 46% of identified health tech startups, with Kenya and Egypt trailing behind.
Across these 4 markets, the health tech spaces that have received the most funding are telemedicine, health management, diagnostics and monitoring, medical supply chain and e-pharmacies.
The COVID-19 pandemic propelled the telemedicine industry to a global scale of importance, and Africa was no exception. Telemedicine startups heavily saturate the African health tech space as healthcare professionals and patients sought remote consultation opportunities during the pandemic. With a very low doctor-to-patient ratio on the continent (roughly 1 doctor to 5000 people), virtual healthcare services provide alleviation to the enormous burden on Africa’s depleting doctor and nurse population and make healthcare services more accessible to patients. However, the technological barrier required for telemedicine platforms (i.e., internet access, smartphones, laptops/computers) mean that these services struggle to reach the most vulnerable and underserved patients on the continent.
Health management involves the provision of tools/platforms to help healthcare providers manage their patients, schedules, billing, appointments and records, as well as to help patients manage their own health. The primary focus of most health management startups is the conversion of paper medical records to electronic medical records (EMR). This is unsurprising given that paper records severely undermine the operating efficiency across primary, secondary and tertiary health centers on the continent, particularly as medical practice becomes increasingly reliant on technology. Helium Health, a leading health management and EMR provider, is one of the most funded companies in the healthtech sector and has raised a total of $12.2 million in funding, expanded into three African countries and acquired a UAE-based subsidiary since its launch 5 years ago.
Despite rapid growth and foreign investment in the diagnostic space in Africa, currently, most of the molecular diagnostic tests collected are shipped and processed outside the continent. Diagnostics and monitoring startups are becoming increasingly important as the tech-enabled solutions they provide bridge the significant gaps in the diagnostics industry in Africa.
RELATED: Nigeria's Diagnostic Industry: Battling the Double Burden of Disease
Medical supply chain and e-pharmacy startups work to facilitate the logistics of the pharmaceutical supply chain, enabling seamless ordering and delivery of medical products to patients and pharmacies via the internet. Most sub-Saharan African countries import as high as 70-90% of the drugs consumed, leaving patients vulnerable to supply chain issues, astronomical drug costs and uncertain drug quality - huge barriers when out-of-pocket payments represent a significant proportion of current healthcare expenditure on the continent.
RELATED: Cancer Care in Nigeria: A Call to Action
Opportunities & Challenges for African Health Tech Investors
So long as healthcare infrastructure on the continent remains largely underdeveloped, African health tech startups will continue to rapidly innovate and provide solutions to the problems plaguing the continent. As a result, investors are lured by the huge growth opportunities in the space, but are also faced with a myriad of challenges - most of which are unconventional.
The COVID-19 pandemic has revealed several shortcomings and sparked a lot of foreign and domestic investment interest in the African healthcare space. With a population of over 1.4 billion people, the African market offers huge potential for investment in healthcare services for investors. And with increasing globalization comes growing rates of non-communicable / chronic diseases on the continent, leading to an increase in demand for healthcare services across all 3 levels of care. The growing digital health and health tech spaces are rapidly bringing new technologies and innovation to Africa that make healthcare provision more efficient, potentially offering significant growth opportunities for investors.
The years ahead hold a lot of opportunity for the development of the African healthtech space. With the number of health tech companies operating on the continent today, there is a significant amount of health-related data being collected, analyzed and mined - this could unlock game-changing opportunities for utilizing big data and predictive analytics to improve the quality of healthcare provision for African patients in the future. Aggregated patient data will also open up opportunities in drug discovery and pharma and biotech R&D that could lead to the development and commercialization of effective treatments for the illnesses that exclusively impact the African continent. Lastly, data could be used to enhance public health planning and policy development as policy makers leverage data in the decisions they make that affect the health of Africans.
RELATED: Bridging the Funding Gap in Healthcare Infrastructure
Despite the massive growth potential in the African health tech space, there remain a number of challenges that investors need to navigate in order to ensure success of portfolio companies. Most of the roadblocks undermining the scalability of startups in the African health tech space stem from the depleting human capital and chronically low demand-side dynamics.
African doctors and nurses are emigrating out of the continent at alarming rates. A 2018 report published by the Mo Ibrahim Foundation estimated that African countries have spent $4.6 billion training doctors who then emigrated to the US, UK, Canada and Australia. This growing medical brain drain means that health tech startups have a depleting pool of healthcare workers with which to engage with to commercialize their service offerings. The remaining healthcare workers face extremely high patient loads and long working hours, meaning that health tech startups need to ensure their products/services are able to be easily integrated into HCP workflows without significantly increasing their workload.
RELATED: The Signs & Symptoms of Nigeria's Medical Brain Drain
On the demand side, low health insurance enrollment rates across African markets hinder the ability and willingness to pay for healthcare services for most of the patients and customers on the continent. A 2021 BMJ report found that health insurance coverage in Sub-Saharan Africa is characteristically low - only 8 out of the 36 countries examined had an average level of health insurance coverage above 10%, while only 4 had a coverage level above 20% (i.e., Rwanda, Ghana, Gabon and Burundi). A major implication of such low insurance coverage is that health tech startups need to price their offerings to be competitive in a market characterized by high out-of-pocket healthcare expenditure, low willingness to pay and low prioritization of spend on healthcare.
The healthcare infrastructure on the continent is chronically underfunded. A 2020 Knight Frank report indicated that, except for South Africa, all African countries fall short of the global average ratio of 2.7 hospital beds per 1,000 people and require significant investments in healthcare infrastructure to catch up with the rest of the world. As a result, countries do not have the comprehensive infrastructure required to effectively support the deployment of health tech startup products/services; oftentimes, startups need to pursue an ‘infrastructure play’ in which they have to pause their original idea and change course to develop the infrastructure surrounding their original concept instead. This requires huge upfront costs and, with the foreign exchange rate fluctuations and disparities across countries, it is significantly challenging to make a return on these investments.
Lastly, as the space continues to grow, it is likely to attract the attention of the government and trigger the creation of new policies to regulate the space more directly. A notable example is the recent CBN actions in the fintech space in Nigeria - in 2021, CBN ordered all banks to close operating accounts with cryptocurrency traders and froze the accounts of some fintech companies due to alleged forex infractions. Even more recently, the Kenyan government announced a plan to double the digital service tax from 1% to 3% starting in July of this year in an effort to leverage the growing digital economy to increase domestic revenues.
While African governments have been slow to catch up with innovation in the healthcare space, there may be new developments in the near-term. Recently, the Nigerian government issued new operational guidelines for insurance web operators, including health insurance. These new guidelines prevent adverts on the platforms, add fees for any generated leads, and introduce rebate limits on all revenue-generating efforts on such platforms. While this legislation includes protection for existing industry players, it raises the entry barriers for new startups given the higher fees required to launch such products. This highlights the importance for investors to monitor government regulation in the health tech space in order to ensure their portfolio companies are suitably positioned to operate in light of potential regulation.
So what do these opportunities and challenges mean for investors looking to enter the health tech space in Africa? Most traditional investment models (i.e., venture capital and growth equity) often require large exit or liquidation opportunities for investors. However, the reality is that most health tech companies may never offer huge payouts in the typical investment period (i.e., 5-10 years) due to several of the aforementioned challenges hindering their scalability; but, these startups may become successful operating businesses that offer dividends and cash flow payouts over the long-term.
Investors, particularly foreign investors, may need to adapt their models and expectations in the African health tech space in order to inform their investment decisions and work with local founders to grow their startups more sustainably. And deciding on an investment strategy is key to this - the play isn’t always going to be about investing in a health startup and hoping it grows organically. With health tech, the traditional “buy-in and medium-term exit” doesn’t always work because these companies take a while to grow; as such, investors need to be more intentional about exploring alternative investment strategies to facilitate the growth and sustainability of their portfolio companies in the health tech space.
Investors could explore diverse acquisition approaches (e.g., bolt-on, add-in, and tuck-in) to allow for revenue growth, geographic expansion or other strategic goals that produce more liquidation options. For example, over the last 3 years mPharma, a Ghanain based e-pharmacy and telehealth startup, acquired pharmacy chains in Uganda and Kenya to enter the Eastern African market and has expanded its operations across Ghana, Nigeria, Kenya, Ethiopia, Zambia, Malawi, Rwanda and Gabon through various approaches including local partnerships and franchise models.
Another investment strategy we’ve seen in the health tech space is the concept of a partial exit, which involves the sale of only part of the investor’s holdings within that investment period. For example, in March 2022 Leapfrog Investments, a private equity firm investing in businesses in Asia and Africa, sold nearly 30% of its holdings in Goodlife Pharmacies, one of the leading East African pharmacy chains and digital health platforms. The sale was to Eurapharma, the healthcare division of the CFAO Group, one of the largest wholesale pharmaceutical distributors in Africa. The transaction was the first partial exit for the Leapfrog healthcare team, and while it will remain the majority shareholder, the sale brings in pharmaceutical supply chain expertise from the CFAO group and frees up capital for Leapfrog to potentially move onto other ventures.
Key Takeaways from TC Health: Investing in African health tech is a high risk, high reward endeavor. Potential investors need to evaluate the trade off between the oftentimes chronic, systemic and infrastructural barriers and the huge long-term growth opportunities. The African health space could be a great investment, but traditional models may be futile in the space and investors and founders need to adapt to the local ecosystem in order to be successful.
