Why has African tech startup funding declined so badly, and what happens now?

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After bucking global trends in a record-breaking 2022, African tech saw a reset of sorts in 2023, as the global capital shortage began to bite. The number of funded ventures, and the total funding raised, declined for the first time since 2016, though not as dramatically as many had feared.

According to the ninth edition of the African Tech Startups Funding Report, released last month by Disrupt Africa in partnership with Flourish Ventures, AAIC Investment, and Atlantica Ventures, a total of 406 startups raised a combined total of US$2.4 billion over the course of 2023.

This represented a significant decline on 2022. Indeed, it is the first time since 2017 that total funding has not grown by 40 per cent or more. The number of funded ventures was down 35.9 per cent on the 633 that raised in 2022, while the combined total of US$2.4 billion was down 27.8 per cent on the US$3.33 billion raised in 2022. 

The number of active investors also dropped dramatically in 2023 as compared to 2022. There were at least 527 different disclosed investors in African tech startups in 2023, down by almost a half – 46.6 per cent to be exact – on the 987 disclosed in the previous 12 months. 

Investment, especially of the venture capital variety, declined in African tech in 2023, then, but so too did the possibility of exits. IPOs, not just in Africa but globally, have dried up, so outright acquisitions are the only game in town. 

The number of such deals did, however, fall significantly in 2023 as compared to 2022. There were 15 such deals, down 61.5 per cent on 39 in 2022. There were 32 exits in 2021, which signified a record-breaking year, after 14 each in 2020 and 2019. This year’s decline sees such activity in African tech fall back to 2020 levels, a phenomenon replicated in many countries and sectors also.

So, first and foremost, what is causing the problem?

Ameya Upadhyay is venture partner at Flourish Ventures, an evergreen, fintech-focused fund present on five continents, including Africa, where it counts the likes of Flutterwave and Fair Money among its portfolio. He told Disrupt Podcast it is a question of supply rather than demand, affected by global conditions.

“There were sufficient opportunities to fund, but not enough capital available. For several of the past years the situation was different. But this time I think this was a question of global macroeconomics. The strength of the dollar, the high interest rates in the US, meant that capital flew out of Africa, as it always does in these situations. And that was accompanied by global VC pullback which affected Africa,” said Upadhyay.

That was to be expected, however, and perhaps has not been as bad in Africa as it could have been.

“Like you say in your report, I feel that Africa has weathered this storm better than many of us expected. There has been a global decline of 50 per cent in VC funding globally, and I think that Africa has proven itself to be more resilient than many of us thought,” Upadhyay said.

Antonia Bothner is capital markets lead at Endeavor South Africa, which is part of the global Endeavor network. Endeavor South Africa facilitates access to capital through introductions to investors in its global network, its own Harvest Fund, and the Endeavor Global Catalyst Fund. Bothner told Disrupt Podcast the downturn had been a while coming.

“The global markets have been cooling off for quite some time. Africa has been coming off such a low base. We will always lag global markets,” she said.

The downturn, even if a while coming and not as bad as expected, has been extremely damaging to African tech startups. Disrupt Africa has reported extensively on the closures and scale-backs affecting many leading startups in the space.

“Especially for startups that unfortunately were in the fundraising cycle over the last 18 months, they’ve just had to tighten their belts and look at the cash flows very closely, and bring down their burn ratios,” said Upadhyay.

There may be a bigger overall problem, however, which is the macroeconomic vulnerability of the largest African markets.

“If you look at Nigeria and Egypt specifically, both countries are in what I would say a macroeconomic crisis. By that I mean there is an acute shortage of dollars in both countries, leading to massive decline in currency values, which is causing runaway inflation in both these countries because several of the goods are imported,” said Upadhyay. 

“So the strength of the dollar is causing currency depreciation, that is then leading to higher import bills, and that is feeding through the economies, which is then harming household discretionary income, which many of these startups depend on. So it’s a double whammy – there is shortage of capital to strengthen the balance sheets of these companies, but at the same time the P&L (profit and loss) is getting affected, because it’s harder to charge customers – both businesses and individuals – because they are stressed themselves.”

This “double whammy”, then, is a fundamental threat to many businesses, and it doesn’t seem the going is set to get any easier anytime soon. Upadhyay says 2024 will likely prove just as tough as 2023.

“If I stick my neck out and make a projection, I think it’s going to continue this year. The reason I see that is because several of these challenges are structural, related to dollar versus local currencies, or higher import bills, and so on, which are unlikely to be reversed in the short term,” he said.

Bothner agrees.

“I think these markets are incredibly lagged. So I think it’s going to be tougher again. That said, we’ve seen some incredible inbound for South African entrepreneurs. I think, regionally, people have been kind of refocused, whereby they are now suddenly lifting their heads up and saying, “actually, you know, there are some really exciting opportunities”. So I think you’ll still get deals being done,” she said.

Not all doom and gloom, then.

“I think there are several fundamentally strong businesses that can relook at their expansion plans, product portfolios, and spend, and really rationalise in the face of more difficult funding conditions,” said Upadhyay.

Zooming out over the last four years, Africa is still doing pretty well, Bothner says.

“The dynamics are pretty good for existing companies. It’s a less competitive space. If your competitor hasn’t managed to raise, it’s really allowed for entrepreneurs to refocus, and really understand where their value is, and position for that,” she said. 

“The best companies will always continue to grow. It should really be an alpha-led investment. Nobody likes to see things go down, but I think it’s healthy in some ways. There are some silver linings in terms of an investor and also for a company.”

But all entrepreneurs need to realise that every dollar in the bank right now is costlier than it was before.

“That is because it’s harder to find a dollar to replace the dollar that you spend, and it’s going to cost you more because valuations are down,” said Upadhyay. “So suddenly the price of every dollar in the bank has gone up, I would say several-fold, and entrepreneurs need to realise that this is happening, and tighten their belts.”

The way startups operate from a structural and ethical point of view may also be boosted by the current climate.

“Focusing on what you can control, and then actually actioning it, is gaining some more agency, and making sure that you know you can have a path towards profitability,” said Bothner.

There are some positives to the whole situation, then, which can generally be boiled down to better governance, better diligence, and better spend management. But, Upadhyay says, we have to admit those are only “silver linings”.

“The situation for many startups at this time is dire, and that’s just the reality,” he said. “This is where longer-term investors in Africa need to be present, and need to support startups, and not fly from the continent when things get difficult. We are committed to doing that, and I know that several of our peers that are long-term investors on the continent are also committed to doing that.”

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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