The Financing Gap in Ethiopian EdTech Startups

A recent edtech ecosystem assessment by Reach for Change, a social enterprise incubator focused on improving youth and children’s lives, highlights access to finance as a major challenge for edtech enterprises in Ethiopia. Released in April 2024, the assessment surveyed 65 EdTech startups, revealing that access to finance, including debt, equity, and grants, is a significant barrier to their operation and growth. This challenge is compounded by the early stage of development for most of these enterprises, making it difficult to secure funding from traditional sources.

The study found that 52% of startups have investments below 500,000 birr ($8,600). Around 40% of the surveyed startups have investments between 500,000 and 3,000,000 birr ($52,000), and only 7% have investments exceeding 3,000,000 birr.

Additionally, the assessment identified other barriers in Ethiopia’s education system, such as limited access, poor infrastructure, a shortage of qualified educators and educational materials, and the limited capacity of providers. According to the study, these shortcomings lead to low enrollment, high dropout rates, poor student performance, and an with high unemployment.

Another report, “Startup Ecosystem Addis Ababa 2023” by JICA and Shega, notes that EdTech is the second-largest sector in the capital, comprising 21% of startups. The report indicates that roughly 21% of EdTech startups have progressed beyond the early stages, while 79% are still in the early phases of developing and testing their business models, acquiring customers, and building brand recognition. This highlights both the rapid growth of the EdTech sector and the significant challenges startups face in establishing themselves in an evolving market.

These reports underscore a financing gap for early-stage EdTech startups. Debt financing, primarily offered by microfinance institutions and banks, remains limited due to collateral requirements.

Bizunesh Gelaw, Global Head of Impact at Reach for Change, emphasizes the lack of evidence and data on the overall EdTech ecosystem in the country. This lack of data, according to her, is one of the reasons that prompted them to conduct the assessment and map the ecosystem.

Compounding the lack of data, there’s no clear definition of what constitutes an EdTech company. This ambiguity sometimes pushes businesses to self-proclaim as EdTech without proper verification.

The lack of a defined EdTech category at the Ministry of Trade and Regional Integration ( MoTRI) further hinders counting these businesses. This data gap contributes to the overall financing challenges faced by the EdTech sector.

To address this, “we propose a key intervention: building a comprehensive EdTech ecosystem database. This database would be populated with evidence-based information, starting with a clear definition of EdTech companies. The database would then track the number of EdTech companies operating in Ethiopia, their specific needs, and details about their work” States Bizunesh.

The status of edtech financing in Ethiopia was a topic of discussion during the April episode of EdTech Mondays Radio Show.

Produced by the Mastercard Foundation and Shega, the radio show serves as a platform for bringing policymakers, EdTech entrepreneurs, teachers, and parents together to discuss the intersection of education and technology. 

As usual, guests from the EdTech ecosystem spoke about issues that pertain to financing EdTech enterprises, funding assessments, and the overall landscape of the show.

Dawit Tilahun, Acting Country Manager of Reach for Change, Nebiyu Yirga, President of the Ethiopian Association of Startup Ecosystem (EASE), and Abebe Chekol, Lead of the Mastercard Foundation Digital Economy Program, all participated in the discussion.

Abebe, mentions while the Mastercard Foundation is stepping in to support startups, the private sector plays a critical role in fostering a thriving startup ecosystem. This includes resources like tech hubs and accelerators.

“African countries with the most funding raised in 2022, such as South Africa, Egypt, and Kenya, all benefit from such enabling environments. For example, Lagos alone boasts around 50 tech hubs. Therefore, fostering a similar ecosystem in Ethiopia is crucial to support startup growth,” stated Abebe.

Nathan Damtew, founder of BeBlocky, an EdTech startup that gamifies learning through an app by using fun graphics and integrating Augmented reality (AR) to teach kids the basics of coding, also joined the conversation to share his experience on securing funding.

Nathan mentioned that finance wasn’t the only big hurdle. He said there are resources available for those seeking funding, but the main challenge, according to him, is a lack of management expertise. “Many founders come from a strong technical background but lack experience managing finances or their businesses.”

“Managing the funds at this point requires a different approach; therefore, fellowships and accelerators should also take that into account when addressing issues pertaining to financing in EdTech startups,” added Nathan.

Identifying this financing gap, Reach for Change Ethiopia, in partnership with the Mastercard Foundation, has recently launched the Mastercard Foundation EdTech Fellowship.

This three-year program, supporting a total of 36 Edtech companies (12 per year), equips selected Edtech ventures with critical business and financial support, insights into the science of learning, and prepares them for scale, sustainability, and impact.

The program, allocating a total of $2.1 million for equity-free funding, aims to accelerate the growth of promising Ethiopian Edtech ventures and bridge the gaps in the country’s education system.

The selected Edtech enterprises will receive a range of benefits, including one-on-one coaching from specialists, peer learning sessions, investor advisory, access to courses from Carnegie Mellon University, and equity-free funding of $60,000 for each startup.

After an eight-week call for applications, the first cohort of 12 edtech startups to join the program were announced last week.