According to the ninth edition of the African Tech Startups Funding Report, released in January 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.
These figures meant African tech saw a reset of sorts, as the global capital shortage began to bite. 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.
Any hopes that 2024 would see an uptick in investment were quickly dashed, with Q1 2023 and H1 2023 seeing falls of just over 50 per cent, meaning an annual halving in total investment has now been a trend for two years now. This “funding winter” has already claimed some high profile victims, including Copia, Sendy, 54gene, Dash, WhereIsMyTransport, and MarketForce, with many others still battling hard against the darkness.
But what is causing it? Just how bad is it? And how long will it last? To find out, Disrupt Podcast chatted to prominent investors as part of episode 16 of its “The month in VC” series, released in partnership with Atlantica Ventures and Goodwell Investments.
Let’s start at the beginning. What are the factors behind the global credit crisis that is affecting the African tech space? Wim van der Beek, founder and managing partner at Goodwell Investments, says there has been a fundamental change in the availability of liquidity taking place over the last few years.
“The era of zero interest rates in global financial markets is gone, and we won’t see that coming back anytime soon, which means that the allocation of capital towards the more risky segments of the investment spectrum, such as early-stage investing in Africa, which is considered doubly risky from the global capital allocators’ perspective,” he said.
“And that is now much lower on their priority list than it was previously. And that’s also what we’ve seen in the African market. If you look at the percentage of capital that came from outside Africa into Africa as a contribution to total funding, and that went into startups in Africa, over the last few years, it was extremely high. And we’ve seen most of that disappear. So that accounts for a lot.”
However, there are also local factors in play.
“Africa itself has been going through tough times and the African markets have not been able to show sufficient returns for those global capital allocators. It’s not just that there’s a higher risk barrier, but there’s also a higher return expectation, and both of those together mean that global capital allocators are allocating less to Africa,” van der Beek said.
Unfortunately for African startups, local investors are not picking up enough slack.
“We don’t see any increase in capital allocation locally. Sadly, Africa as a continent is still a net exporter of capital, which if you think about it from a macro perspective is incredible, absolutely counterproductive, because this is where capital is needed most.”
That’s what is causing the problem, then, but exactly how damaging is the downturn to the African tech space?
“There are a lot of businesses that had gotten going with the funding boom that we’ve seen, and the really spectacular growth years in 2021 and 2022. A lot of those companies that were on a trajectory to grow their business, depending on further funding, suddenly had to come to a standstill, or even shrink, or even actually didn’t survive. And that in itself is very wasteful. It is very, very sad to see some really, really good businesses have not been able to make it because of that funding drought,” said van der Beek.
However, if you look at it from a more macro perspective, a reset isn’t necessarily a terrible thing, he says, as some “crazy” things were going on before.
“There were some really overvalued funding rounds happening, very hyped businesses raising crazy amounts of capital that was unsustainable, and also setting a trend that would have created difficulty down the road anyway,” said van der Beek. “If businesses are overvalued in the early stage, it is going to be difficult for investors to make returns, and then it becomes a self-fulfilling prophecy that this space can’t deliver returns and therefore can’t grow.”
Some more sanity in the market, then, doesn’t hurt in the long run. And there are further positives.
“What we’ve also seen on a longer-term basis is that in these times of stress in the system, very resilient businesses emerge that are able to make much more effective use of capital. So capital efficiency definitely is going up. And that is something that will help this ecosystem once things go up again,” van der Beek said.
Lavanya Anand, senior investment manager at AfricInvest, agrees that the startups that emerge from this period will be stronger for it.
“The founders and companies that are able to make it out of this tough period are going to be the winners in the ecosystem in the longer term because they’ve been able to navigate cashflow challenges, they’ve been able to navigate regulatory uncertainty, macro and currency uncertainty. And if they can prove that they can continue to grow despite all those challenges, I think that’s a really promising sign,” she said.
Anand believes there are some signs of the pressure easing.
“It does seem like there is some stability coming, especially when it comes to currency, with the Naira and the Shilling. In the case of the Shilling, it’s actually come down over the last couple of months, which is also a promising sign. If we can get some stability, and now make this the new normal, then we kind of level the playing field,” she said.
van der Beek agrees things seem to be improving.
“I’m quite confident that over the next few quarters, we will start seeing some stabilising graphs and that things will bottom out. We’re already seeing that globally. We are picking up the signals that in the European, US and Asian markets things have bottomed out,” he said.
“And since that ripple effect takes a few quarters to reach the African shores, I’m modestly optimistic that over the next few quarters, say somewhere in 2025, we’ll start seeing things starting to pick up again. We’ll also start seeing that in Africa.”
Africa is still a land of opportunity from a venture capital perspective, Anand said.
“The markets are still large. There’s still a lot of problems to be solved. It’s a long game. So I think we just need to continue to collaborate, across investors and entrepreneurs, and try to find solutions that can address these issues,” she said.
What does the African tech space need to do to prepare for the end of the bear run?
“We can make sure that we are ready for the influx of new amounts of capital by making sure that we are very investment-ready, and also those that are managing funds need to ensure that we’re actually doing a good job of investing in the in the right kind of companies that are able to to operate on an efficient basis, and therefore justify also attracting capital from local sources,” said van der Beek.
“The good news is that the currency effects that we’ve also seen in our markets, which also haven’t helped us in raising capital abroad, would be less of an issue – one would assume – for local capital allocators.”
