“Low Risk Businesses are Not the way Forward” Markos Lemma Co-founder & CEO, Ice Addis

Markos Lemma is co-Founder & CEO of iceaddis, one of the early innovation hubs and tech startup incubators established in 2011 in Addis Ababa. He is also Founder of SelamCompany—an education technology venture working on primary education and literacy.
Through the years, Markos has focused on establishing the technology ecosystem and providing business consulting specific to information communications technology (ICT). His businesses support social innovations and startup initiatives of the young. He is doing these impactful works while also working as a program coordinator for a global study on literacy in Ethiopia.

Markos is also an advocate and advisor on entrepreneurship and innovation policy while being a member of the advisory board for the Global Innovation Gathering (GIG). He runs a variety of classes, vibrant tech scenes, and several tech events in East Africa. In this interview with EBR’s Addisu Deresse, Markos discusses the emerging landscape of startups in Ethiopia, looking at the challenges and opportunities ahead.

What is a startup for you?

A new startup proclamation is under development now and I am sure they are including the definition there. For us, we look for two criteria to call a business a startup. The business must be a high-risk and high-reward undertaking and it must also depend on only a few people. Another feature is that they start small, but are scalable with the potential to become highly rewarding, like Uber for example.

There is a tendency of confusing startups with any small and medium enterprise that is starting out. Startups are knowledge-based businesses and they have to be innovative. Problem-solving software and other tech-based solutions are what we call startups, at least at our company.

Banks, for example, are a traditional business model and any new business here—even if small and scalable—would not be called a startup. But, if someone develops an app that solves a problem in the financial sector, that could be a startup.

iceaaddis has been operational for 11 years now. What tangible achievements are there; how many startups have you supported?

We have supported about 160 startups. Once a startup has passed our primary evaluation and we decide to give support, one of two programs is implemented. The first is our incubation program where we provide all the technical, financial, and managerial oversight support to startups which are at their idea-development stage. Other startups that have already developed their ideas, trialed their products, and may have also tested primary markets are involved in our accelerator programs.

We become the extended family of the businesses until they graduate. We don’t just teach them how to develop a business strategy; we develop and implement the strategy with them, making sure these businesses are successful after graduation. We jointly take the risks and provide our services for free.If they are successful, we assume 10Pct ownership in the business for the services we provided.

Both programs involve the same strategy with the only difference being the stage the startups are in when they join us. Startups that join our incubation program are expected to graduate in six months and launch their products for public use. We also have another program with other partners, not in-house.

We support tech-based startups designed to solve problems in various sectors—from agriculture to finance and water sanitation to education, and other sectors. We have also been collaborating with various NGOs to launch different startups working on women entrepreneurs and other themes. We further engage in policy advocacy, not just here in Ethiopia but also at the regional level.

What are the major challenges of startups in Ethiopia?

Some challenges are resolved already but one that we have right now is the lack of necessary infrastructure—not just a good internet connection. A stock market, for example, is necessary for startups to keep financing themselves and take on their actual potential. The other challenge has to do with talent—the structure of education. Students study technology but have little to no idea about the business aspect of it. Various universities are now launching entrepreneurial programs along with their tech departments, which is a good start. The policy framework has been another challenge for many years—taxation doesn’t encourage startup investment. There is also another law that prohibits you from seeking foreign funding below USD250,000. If you secure USD100,000 of funding for your startup, it is not permitted into the country. The overall macro climate encourages FDIs more than local startups. These are not challenges just for iceaddis, but the entire startup ecosystem.

What is your take on the changing landscape of startups? 

Not only the actual changes but the speed of movement is very encouraging. Globalizing the way business is done in Ethiopia is a good start. The emergence of businesses that want to undertake traditional business differently is really encouraging. We are also witnessing the rise of support teams for startups—not just incubators and accelerators, but also financiers ready to invest in Ethiopian startups as well as more and more experts entering the global tech market from Ethiopia. We now have numerous young men and women developers hired by foreign companies—an opportunity by itself. But we need to work more on the image of the country. This is a sector driven by investors and we need much more of them to feel good about the way things are in the country.

How does one finance a startup?

The issue of financing is a critical issue for startups and there is limited access. This is a country with no investment bank but there are few things one can do. The first, boot strapping, is when you quickly launch your startup and try to raise finance for the sale of the services themselves. But this might not work for high-risk, high-reward, and scalable startups. Another method is to find angel investors. These are not companies, but individuals interested in investing in startups. There are three or four angel investors that I know of operating in Ethiopia. Many startups, like Across Express, took off using funding from angel investors.

If you are hoping to raise more than USD300,000, you can also look at venture capitalists (VCs) of which there are about 14 operating in Ethiopia. However, some VCs might not even look at your proposal if you ask for less than USD1 million.

There are of course the traditional loan mechanisms. For example, there are opportunities at the MasterCard Foundation or the Development Bank of Ethiopia. But these are not just for startups as they finance all other businesses too. So, one might not get the required attention here.

We at iceaddis are seed funders, working together with the businesses and taking on shares. The funding we provide is for the business to take the next step in its evolution towards success. When another investor shows up, we sell our 10Pct of shares and leave the team.

So, one might want to look at a seed fund, and then go on to an angel investor and then a VC. There are only a couple of startups able to access the second and third stages of financing. I think Deliver Addis and Ride had that opening. We hope more and more startups will have that opportunity of funding in the near future.

I want the private sector to look at the tradition of doing business in a different way. These low-risk businesses are not the way forward. They also do not have the potential for export and massive global impact. So, the business community needs to teach itself these new ways of doing business.

How do you evaluate digital literacy and the willingness to learn these new ways of doing business?

I hope the next 15 years will not be as challenging as the last 15. People are slowly becoming interested in these new trends; you can find big names known in the traditional business spheres behind some of the fintech recently introduced in Ethiopia. Mercato business people are also slowly becoming interested in these new tech ventures.

Trading or buying and selling [startup equity] might be a bit far off. We don’t have stock markets, so they are doing it in a very traditional way.

One more thing bothering me is the disconnect between the capital and the rest of the nation. This difference is huge and we need to at least work on what we call second cities like Adama, Bahir Dar, Mekelle, Hawassa, Assosa, Gambella, and Jigjiga. We at least need to bridge the gap between these towns and Addis Ababa. One thing should be clear—business as usual will take us nowhere.

At a global level, the success rate of startups is not as significant. What are you doing differently?

Unfortunately, that is the case and nature of business in the startup ecosystem. Only 10Pct of startups actually succeed in becoming large and impactful on a national and global level. There is some evidence on how that success rate could improve for startups that get support from incubators and accelerators. EBR

10th Year • Sep 2022 • No. 110