With a number of notable funding rounds in the last few months, and a general uptick in investment across the continent, it looks like we might be close to the end of the much-discussed “funding winter”.
Yet the African tech and VC space has been irrevocably changed by the global capital shortage, in some ways for the better. Now that the funding winter seems to be nearing its end, what does the continent’s VC space look like?
Zachariah George, managing partner of pan-African early-stage VC firm Launch Africa Ventures, told the latest episode of “the month in VC”, Disrupt Africa’s regular podcast on the African venture capital space, that though at times the going has been extremely tough, one positive is that the funding winter in Africa has not been as bad as it has in other markets.
“African startups, during the bull market from 2021 through to the beginning of 2023, did not have as high of a bump in valuations compared to in the US and and Europe, and to a certain degree Asia,” he said.
“So the fall from grace was not anywhere close to as severe as it was in the US and Europe. There were a few fintechs in Nigeria, for example, or a few sort of telco-friendly startups in Kenya or retail-tech startups in Kenya that were overvalued as a function of either their revenue, their transaction volume, or their users. But it was nowhere as severe as the outrageous valuations we saw across fintechs and e-commerce companies, for example, in Europe and North America.”
As international capital dried up, Africa-based investors are playing a greater role than ever before within the ecosystem, a sign of growing maturity.
“One of the important benchmarks is the fact that there’s been a much higher percentage of African family offices and African investors investing in tech startups in Africa, versus investors from the US, Europe, and Asia. I think for the very first time last year, if I’m not mistaken, the percentage of Africa-based funds investing in Series A and pre-Series A startups was higher than investors from outside of the continent, which is usually the hallmark of the start of a maturity cycle in the VC industry,” George said.
“You had more Africa-based VCs, on the ground, like ourselves, Enza Capital, LoftyInc, 4Di Capital, Knife Capital, et cetera, investing in African startups versus having to depend on US, European, and Asian VCs investing. So that was quite a big moment.”
We are also starting to see successful African founders give back by making investments in the space.
“You are now looking at the end of year seven, year eight, year nine of the first real tech success stories in Africa. So the founders of tech startups like Flutterwave, Paystack, Andela, Chipper Cash, Kuda, and OPay are now at a point where they’ve had either full or partial exits of their own equity in these companies, and they’re putting that money back to use either as angels, or LPs in funds, or setting up their own family offices,” said George.
“Which is fantastic for the ecosystem because this is smart capital from operators that can add a lot of value outside of just their money. And that is something that is very positive for the African ecosystem, the fact that we have former founders that are investing in the next generation of African tech innovation, it augurs really well for the future of tech in Africa.”
One gap that remains, however, is non-DFI institutional capital.
“What I would love to see more of is more institutional money in Africa going into both VC funds and startups, that are not DFIs. DFIs are institutions, but they’re not the only institutions out there. The vast majority of VC funds in Africa are heavily focused on DFI funding. But where are the asset managers? Where are the pension funds? Where are the mutual funds? Where are the insurance companies? You have close to zero allocation from these big institutions. And that’s something I’d like to see change.”
More success stories, to change the mind of the allocators within these institutions, would help, while fund of funds initiatives, such as the one recently rolled out by the SA SME Fund and the Technology Innovation Agency in South Africa are a step in the right direction.
“I’m very happy with what the SA SME Fund has done. And we’ve got similar funds in Rwanda, in Egypt, the Moroccan government fund of funds, Smart Capital in Tunisia. But it’s still, as a percentage of GDP, a drop in the drop in the ocean.”
