Japanese investors muscle in on African startup scene

Japanese public and private enterprises, led by the Japan External Trade Organization (JETRO), had a strong presence at a leading Africa-focused tech event in Marrakech, Morocco, in recent weeks as the East Asian powerhouse looks to the continent’s markets for new sources of growth.

Japan’s visible presence at GITEX Africa comes at a time when the country’s investment flows into Africa are steadily increasing. Japanese investment into Africa reached around $3bn in 2020 and more than doubled to over $7.5bn the following year.

Sadaharu Saiki, a speaker and investor attending GITEX Africa, moved from Tokyo to Cairo in 2022 to found Sunny Side Venture Partners, a venture capital firm investing in start-ups in North Africa and across the continent. He tells African Business that “this is the most exciting time to get involved in African markets.”

“While the venture capital asset class has faced challenging times due to the economic crises caused by the Covid-19 pandemic and Russia’s war in Ukraine, since 2020 Africa has seen huge growth in this sector. Africa has had the biggest growth in this sector amongst all the regions in the world, including North America, the Asia-Pacific, Europe, and Latin America,” Saiki adds. “The overall trend is very positive.”

Carrot and stick

Saiki says that Japanese investors are taking an increasing interest in African markets partly because of the demographic and economic issues the East Asian country is facing.

“Japan is likely to see a significant decline in population over the coming decades and that will inevitably mean a decline in economic growth. Nearly half of the population is already aged 50 or more, and this is predicted to increase to 54% by 2035. Japan is the second oldest country in the world after Monaco,” he explains.

“Africa has the complete opposite situation. It has a population of 1.4bn and is one of the fastest-growing markets in terms of population. A bigger population will mean a bigger economy. Japan needs to find another market to keep growing despite a declining population,” Saiki adds.

“Japanese investors tend to be relatively conservative in general and so far, only a small number of Japanese companies have expanded into Africa. But it is clear that Africa is the answer to many of Japan’s economic problems – and that is the reason why we as venture capitalists are investing in African start-ups, hoping to catalyse more collaborations between Africa and Japan in the future.”

According to a recent report from Japan’s Ministry of Foreign Affairs, there were 927 Japanese companies active in Africa in 2022, up from 520 in 2010.

Emma Ruiters, a senior analyst at the Tony Blair Institute in London, previously told African Business that “we can see that Japan’s investment levels into Africa have increased and that Japan is changing the terms of engagement with the continent.”

“Japanese corporations and investors are incredibly cash rich and so they are able to invest – Japan was the world’s largest bilateral lender until 2019, when it was overtaken by China.”

Liquidity issues

Still, Saiki notes that there are several challenges in the African market which need to be resolved in order to facilitate increased Japanese investment.

In the venture capital space, a lack of a market in initial public offerings (IPOs) and a limited number of mergers and acquisitions (M&A) or secondary transactions mean that it is difficult for investors to exit their investments and cash in their profits. He says that “these liquidity issues are a barrier for many.”

“While some African companies are considering floating in the Middle East, as well as in the US or Europe, it is clear that we need more liquidity options to boost the attractiveness of African markets for investors,” Saiki adds.

While there are still issues to be resolved, Saiki says that Africa is becoming of increased interest to the Japanese public and private sector.

“There are big opportunities to solve fundamental problems and help unleash Africa’s full potential. African start-ups are working on essential issues and solving fundamental problems. The Japanese private sector’s involvement in Africa is still minimal and there are a lot more to be done,” he says.

“Japan is uniquely positioned as a country which experienced rapid economic growth just over the last several decades. We may know what it takes to grow.”