Africa seemed to defy the global venture funding decline in the first half of 2022 after its startups raised $3 billion, double the amount secured over a similar period the previous year. However, the VC market correction caught up with the continent in the back half of last year, when ticket sizes fell and fewer deals closed as investors tightened the purse strings.
VCs now predict that the funding slowdown in Africa will be sustained in 2023 as investors continue to pull back, making it harder for new and existing startups to raise capital.
“My 2023 prediction is that things will get worse before they get better — down rounds, layoffs, closures and bridge rounds will continue to increase in the African startup ecosystem.” Abel Boreto, Novastar Ventures
“With the global economic slowdown trickling into 2023 due to inflationary pressures and tightening monetary policy, investors on the continent will maintain a judicious approach to investment and African startups will continue to find fundraising challenging,” said Bruce Nsereko-Lule, a general partner at Seedstars Africa Ventures.
As a ripple effect, the operating environment for startups is expected to worsen this year, leading to a surge in layoffs, scaling down of activities, down and bridge rounds, and business shutdowns, continuing the trend that picked up at the end of 2022.
Mega-rounds are expected to be scarce, too, as was the case in the last half of 2022, when no deals over $100 million were signed, according to The Big Deal, a database of publicly disclosed deals. Overall, six mega-rounds were closed last year (all in the first six months), half of the number of such deals closed in 2021, when VCs invested record amounts.
A dip in the number of mega-rounds will lead to a slump in the overall funding raised, according to Abel Boreto, the associate investment director of the Africa-focused VC firm Novastar Ventures.
“My 2023 prediction is that things will get worse before they get better — down rounds, layoffs, closures and bridge rounds will continue to increase in the African startup ecosystem for much of 2023,” he said. “As such, we will see a material drop in the amount raised by African startups compared with 2021 and 2022, primarily due to a significant reduction in mega deals as global investors slow down investments in growth-stage startups.”
Taking into account disclosed deals, Africa raised over $4.8 billion last year, according to data from The Big Deal and market intelligence firm Briter Bridges. The latter, adding undisclosed deals they are privy to, puts the total funding raised to $5.4 billion. The reports show, when compared to 2021, Africa had a 4% growth in VC funding. This means that globally, only Africa attained an increase in VC deal activity in 2022, though the funding is still measly compared to the rest of the world. Nigeria, Kenya, Egypt and South Africa took up more than 75% of the total funding and deals.
Fintechs pulled in a third of the total funding raised, but while accounting for most funding gained, the vertical experienced a decline in investor interest — it had, in 2021, attracted two-thirds of the funding. The clean tech and logistics sectors made the top three in accumulated VC funding, according to Briter Bridges data.
An eventful year
Last year proved that Africa’s tech funding ecosystem is not insulated from the challenges facing private capital markets globally. From global LP asset reallocations to contagion effects from the FTX situation, almost every issue affecting global VC played out at some level in Africa.
With the industry unable to cope following macroeconomic headwinds, thousands of jobs were lost as startups shut down, while others opted for leaner staffing to counter the cash crunch.
Among the startups that shuttered was Kune Food, a food delivery business that went defunct less than a year after launch; WeFarm, an agtech linking farmers to agricultural products and advice; and EV taxi service Nopea. Sky.Garden, an e-commerce startup, almost suffered a similar fate before it was acquired by BNPL provider Lipa Later.
Valuation cuts, a global theme during last year’s funding crisis, made their way into Africa’s tech scene as several startups saw their worth trimmed. Brimore’s valuation halved, 54gene’s $170 million valuation dipped to $50 million and FTX-backed Chipper Cash, one of Africa’s unicorns, had its internal valuation slashed by 37.5% from $2 billion to $1.25 billion. As valuations dipped, zero unicorns emerged during the year, down from five in 2021.
There were reports of mismanagement and bad governance from small startups like Bento to larger companies such as Capiter and Flutterwave. For Capiter, a B2B e-commerce startup, these issues proved fatal: After raising $33 million in 2021, Capiter capitulated in the face of the current fundraising market and a collision between the founders and the company’s board over management and responsibility to pay employees’ salaries and outstanding debt to creditors. Its investors are currently seeking a buyer.
“I keep reminding founders and investors that we are ultimately still a relatively immature ecosystem, not just on the funding side but also in terms of experience,” said Eloho Omame, a general partner at early-stage fund FirstCheck Africa and partner at Africa-focused growth-stage fund TLcom Capital.
“I’d like to see more good-faith collaboration and mutual respect on both sides of the aisle. Discipline, strategy and excellent company outcomes will be critical for survivability in 2023,” Omame said.
As stakeholders anticipate a tough year for startups, they are convinced that only startups building sustainable businesses will attract funding, as VCs lean less on hype and more on the viability and profitability of businesses. This is as VCs pay greater attention to fundamentals such as due diligence and the timeline for growth.
Lexi Novitske, the managing partner at pan-African fund Norrsken22, stated that African startups that stay afloat should focus on expanding margins with a goal of near-term profitability, on accretive consolidation strategies and on a “narrow problem-set” supported by lean staffing.
“Good companies in Africa, which are solving problems for a large addressable market, will still have global investors wanting to partner with them, but valuations, round sizes and the speed of investments will not (in the near term at least) return to what we experienced in the past couple of years,” she added.
Amid the VC deal activity slowdown, local investors are expected to take advantage of the favorable valuations and terms on offer, which will drive investment activity at the pre-seed, seed and pre-Series A stages, Boreto predicts. He added that agtechs and climate tech startups will continue to attract increased funding and support as investors focus on climate adaptation, resilience and food security solutions.