Ameya Upadhyay, who leads fintech-focused fund Flourish Ventures’ investment activities in Africa, is focused on creating a better financial system on the continent, and though he expects the current downturn in venture capital to continue for a while, he remains bullish on the African tech space’s potential.
Born in India, Upadhyay actually grew up in Gaborone, Botswana, before returning to India for college. He joined Flourish Ventures’ predecessor, Omidyar Network, the philanthropic investment organisation founded by eBay founder Pierre and his wife Pam, in India in 2012.
Now 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 has been based in London since 2016, where he leads Flourish’s investment activities in Africa.
He told episode 11 of Disrupt Africa’s “The month in VC” podcast series, released in partnership with Katapult Africa, Hlayisani Capital, Atlantica Ventures, and Endeavor South Africa that Flourish was a VC fund with a purpose.
“The purpose is creating a better financial system, and what we mean by that is a financial system that helps people solve their real life money problems, manages their cash flow better, protects against downside, and have investment capital to capture upsides,” he said.
“And a financial system that is built on trust and transparency, and that is competitive, open, and promotes multiple players that offer the best services to customers, and is regulated in a balanced way that promotes both customer protection and innovation.”
That then, is what he calls the “audacious goal” of Flourish, and it works to achieve that by investing in innovators and changemakers at mostly seed and Series A stage. It does that globally.
“We have investments in the US, in Latin America, India, Southeast Asia and Africa. We are funded by a single LP, Pierre Omidyar, from whom the organisation we were formerly a part of derives its name – Omidyar network. That is an umbrella organisation of several funds focusing on different sectors, and several of the more mature ones have spun out, and Flourish Ventures is the fintech fund,” Upadhyay said.
That spinout happened in 2019, and Flourish has a portfolio of 71 companies. It doesn’t work with individual funds, but more on a rolling basis, having brought over a portfolio of US$200 million of assets invested when it spun out from Omidyar, plus US$300 million of commitments. It recently received US$350 million more in commitments, meaning it has plenty of firepower.
“It is a single LP balance sheet investment vehicle, and I think that’s important to highlight as one of the comparative advantages, we feel. Because we do not have pressures from LPs to exit positions prematurely. Especially when you’re investing in frontier markets, particularly in Africa, exit timelines are going to be much longer than the cut and dry two-plus-eight timeline of several funds in Silicon Valley,” said Upadhyay.
Flourish, then, is able to stay invested for longer than other funds are structurally able to, which Upadhyay believes makes it a better partner for entrepreneurs in frontier markets.
“We look to exit when our capital and our role on the board becomes less significant in a company. So when our capital is no longer “catalytic”, to use a word. That’s often the line,” he said.
Flourish invests on average between US$2 million and US$7 million on the first check, but it is about more than just the capital injection. The firm prefers to lead or co-lead investments, and plays a very active board role.
“Outside of capital we feel we bring a lot to the table, and one part of that is of course thought partnership and strategic advice from the investment team members,” Upadhyay said. “But we also have a large intellectual capital team, which conducts customer research and shares that with our portfolio and with the wider industry.”
The firm also has a human capital vertical that helps entrepreneurs hire, retain and promote the best talent in the market, and also provides founders with help for their own well-being and for mental health, which Upadhyay said Flourish feels is a topic that has been “ignored for long enough”.
“Founders face a very difficult journey, and we want to be part of supporting their holistic growth as opposed to just one facet of their whole person,” he said.
Like any sector-focused fund, Flourish has had several waves of investment across different niches and sub-sectors.
“if you look at our portfolio, it’s a very broad-ranging portfolio that includes payment infrastructure companies, credit companies, credit infrastructure, wealth management, challenger banks, embedded finance companies, and enterprise infrastructure companies,” Upadhyay said.
“I would say that more recently we’ve been focused on the theme of embedded finance and infrastructure. This is fintech incorporated on platforms that are non-fintech. If you’re using a chat app, then there is a possibility to make a payment through that chat application – that would be embedded finance. And we have made investments where fintech companies embed themselves into the fabric of your daily life.”
Sector-aside, there are various factors that affect the development of tech ventures across the continent, Upadhyay said. The first is market size.
“I spent several years investing in India, and the market slide was one of the slides in the deck that you didn’t really need to pay much attention to – you knew that if you built something that was meaningful, there was enough of a customer base in the country to buy that. And I don’t think that’s true for Africa,” he said.
“I don’t believe that a single country in Africa has the depth of market that can generate the kind of VC returns that LPs are used to in the Valley. This could be a controversial statement, but I’m happy to be corrected – I say it with all humility. But this is my humble opinion, and that is a fact that I think we need to recognise and work with.”
In addition, there is a shortage of talent, due in part to issues with educational systems but also migration out of African countries.
“I think there is a structural shortage of talent, which has to do with the education systems in several countries. It also has to do with migration out of the countries, and I would say that one of the biggest challenges startups face on the continent is high-range talent, especially technology talent,” he said.
Number three is foreign exchange.
“Investments are made in dollars, but revenue is usually generated in a local currency. And if you see the trend line for, let’s say three of the four major African VC markets – Nigeria, Egypt and Kenya – they’ve depreciated by 200 per cent, 50 per cent and 50 per cent over the last two years,” said Upadhyay.
“If you’re a startup in Nigeria, you’re earning in naira, and the currency is depreciating at a rate of 100 per cent per annum. You are required to grow your company at eight-to-10 per cent month-on-month just to keep the dollar revenues constant, and that is not a battle anyone can win. So I think there are these structural factors that are holding back investments and startup activity in Africa.”
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 numbers. But what has happened? Upadhyay said 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,” he said.
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.
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.
It is not all doom and gloom, though.
“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.
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.”
