Why the ‘Big 4’ remains the darlings of venture funding in Africa

When you talk about venture funding in Africa, what ordinarily comes to mind is the ‘Big Four’—Nigeria, Egypt, Kenya, and South Africa. The reason isn’t far-fetched; you’d be hard-pressed to find news about a startup raising funds, and the startup in question doesn’t have ties to these nations.

The Big Four accounted for 75% of VC funding attracted by African startups last year, according to Briter Bridges. For one, 2022 was an interesting year for the African tech ecosystem from a venture capital lens, as African startups raised more funding than in 2021.

According to the funding tracker, Africa: The Big Deal, Nigeria led the pack in terms of VC funding on the continent with $1.2 billion in 2022, followed closely by Kenya with $1.1 billion, while Egypt and South Africa hold the third and fourth spots with $820 million and $555 million, respectively.

Expectedly, the Big Four dominated the venture capital funding scene in their respective regions: South Africa snagging 95% of all the funding in Southern Africa, Nigeria taking 65% in Western Africa — the most-funded region, Egypt continued its lead in Northern Africa with 74%, and Kenya outdistanced the pack in Eastern Africa after taking 86% of the region’s funding.

Read also: Despite impressive run, Africa’s venture funding failed to hit ‘magic figure’ in 2022

Why always the Big Four?

According to a 2021 report by the African Development Bank (AfDB), the Big Four account for about a third of the continent’s start-up incubators and accelerators and receive 80% of foreign direct investment (FDI) into Africa. AfDB noted that this results from these four nations’ large economies and sizeable populations.

“Some of the key things we have seen in the four markets include talent, existing innovation, and infrastructure that need disruption, the deepness of technology infrastructure which covers telecommunications, mobile money penetration, government alliances, and clear regulations,” Ayobamigbe Teriba, Venture Sourcing Lead at Founders Factory Africa, a Pan-African VC fund, told Technext over a call.

Read also: With fintech predicted to lose its popularity, where is Africa’s venture funding headed in 2023?

What others can learn from the ‘fantastic four’

Interestingly, venture capital on the continent is becoming slightly more evenly distributed, thanks to the rise of other African ecosystems. For context, BioNTech, the German biotech company and vaccine manufacturer, acquired Instadeep, the Tunisian artificial intelligence (AI) startup, in a deal worth $620 million. Last year, Algeria’s Yassir raised $150 million in Series B funding.

According to Africa: The Big Deal, Tunisia and Senegal ranked among the top 10 in VC funding in 2022, despite not being part of the ten African countries with the highest GDP and population. Experts have argued that to replicate the successes of the Big Four, African governments must begin to provide fiscal and non-fiscal incentives for venture capitalists to invest in the financial and tech sectors. 

Government intervention is key to the growth of VC funding on the continent, the African Private Equity and Venture Capital Association (AVCA), an industry group, noted in a report. For Teriba, every market is unique, and duplicating the models of the Big Four might not be the way, stressing the need for other African countries to have a stable regulatory landscape because policies affect investment activity.

“A lot of African countries need to get it right in ensuring stability around currency, regulations, and government structures. Two, the more internet penetration and literacy [education] are deepened across Africa, you begin to see dynamic innovations that are familiar to those demographics will spring up and will attract investors.”

Post SVB, what’s next for African tech?

The sudden collapse of Silicon Valley Bank (SVB) took the global tech ecosystem by storm. While African startups are largely unaffected by the crash, some African VC firms were listed among those affected, per a US-based due diligence and research firm, Castle Hall Diligence.

Already, industry watchers have said that African startups will record a slowdown in VC funding this year, thanks to the uncertainties in the global tech space that have led to funding freezes, valuation plummeting, closures, and even forced startups to embrace cost-cutting measures, including layoffs. For context, the number of affected tech workers this year has already exceeded half of 2022’s total.

But some VCs believe Africa will be less affected by the global economic crisis. “I am pretty sure African startups would raise a lot more money than they did in 2022 despite the current market. The reason is that a lot of VCs are now interested in Africa. They want to know what is happening in Africa. Africa does not have to reinvent the wheel,” Eunice Ajim, Founding Partner at Ajim Capital, said in an interview in January.

The ripple effect of the SVB debacle is that more investors will tighten their purse strings. As I argued in this article, the sudden crash of the California-based lender “and its attendant implications on the African tech ecosystem bring the need to jerk up local funding to the fore.” Ngozi Dozie, the co-founder of the Nigerian fintech startup Carbon, also stated in a blog post that the African tech ecosystem needs “local investors who can help us on the ground”.

Founders Factory Africa’s Teriba said that investors would rethink their approach to funding and demand more from startups in terms of due diligence and other conditions. “We are definitely still going to see VC activity. The difference is that investors would be more strategic about investing, and some might pull out. We still have a chance of breaking last year’s record but the optimism to achieve that is relatively low,” he said.

Read also: SVB collapse: Now is the time for African startups to rethink VC funding