Coming on the heels of an impressive run last year, venture funding in Africa (un)surprisingly recorded a major downturn in the first quarter of 2023, no thanks to the global tech downturn and its attendant impact on funding inflow. For one, last year was a good one for the African tech ecosystem, as tech startups defied the economic downturn to attract more funding and saw more deals than in the previous year. Depending on who you ask, the total funding figure stood between $4.8 billion and $6.5 billion.
But despite this feat, industry experts and investors have since predicted a funding slowdown in Africa in 2023 as a ripple effect of the many troubles of the global VC space. The numbers for Q1 2023 paint a gloomy picture of the current funding landscape on the continent.
According to Africa: The Big Deal, a newsletter that tracks VC funding in Africa, African startups raised more than $1.3bn in Q1 2023 (including exits). This happened to be the best quarter since the start of the meltdown in mid-2022 and comparable to Q2 2022. The biggest deal in Q1 is the historic acquisition of Tunisian AI startup, InstaDeep by Germany’s largest vaccine maker BioNTech in January.
“That said, Q1 2023 missed the mark if we compare it to Q1 2022 with a -29% YoY decrease (- 52% YoY if we exclude exits -). The number of $100k+ deals is also a matter of concern with just over 150 recorded in Q1 2023, less than half the Q1 2022 tally (300+). In fact, you have to go all the way back to 2020 to find a quarterly number of deals so low,” Africa: The Big Deal noted.
The dramatic decline in venture funding
According to data from Disrupt Africa, African startups raised $649 million between January 1st and March 31st this year, representing a 57.2 drop in funding when compared with the corresponding period last year. For context, African startups attracted $1.5 billion in Q1 2022.
It gets worse when you look at the numbers of deal volume. In Q1 2023, only 87 African startups managed to secure funding, a significant drop considering that the figure stood at 175 in the same period last year. The implication is that if the slowdown trend continues, then the funding for this year is likely to decrease by more than 50%. This is because around 50% of the startups and total investment for last year were accounted for in Q1 2022.
In its funding report Partech, a Paris-based startup investor, reported that venture funding in Africa hit $6.5 billion across 764 deals last year — a combination of both equity and debt deals. For context, Partech only reports on venture capital equity and debt deals above $200K.
It’s no longer news that the sudden collapse of Silicon Valley Bank (SVB) shook the global tech ecosystem, although African startups were not greatly impacted. However, several African VC firms and US venture capitalists investing in African startups were named among those affected.
Segun Cole, the CEO/co-founder at Fund the Gap Alliance, told Technext that African startups can navigate the funding decline “by having a solid business model, a clear path to profitability, a strong track record of execution, and a strong management team.”
As a result of the SVB crisis, more investors are likely to be cautious with their investments, and this again brings to the fore the much-talked-about need for local investors in the African tech ecosystem. As Ayobamigbe Teriba, Venture Sourcing Lead at Founders Factory Africa, a Pan-African VC fund, told Technext, investors would rethink their approach to funding and demand more from startups in terms of due diligence and other conditions.
Segun Cole agrees with that assessment. Investors would continue to be more cautious and take a more hands-on approach to their investments. Post SVB Collapse, Investors are working closely with their portfolio companies to help them navigate the challenging economic environment, providing guidance and support where needed.
He said this would continue, leading to stronger, more resilient Africa-focused companies in the long run.”
More importantly, the SVB collapse holds key lessons for both investors and African startups — some of which have been forced to rethink their banking options. “From a financial systems banking perspective, we can learn the lessons from the SVB case. But when it comes down to thinking about those solutions that enable access of early-stage companies to finance, I think we still need to work hard to consider how best to do that, how best to protect the providers, the role of policy and regulation, and so on. The market is constantly evolving and requires different types of stakeholders to solve problems,” Anne-Marie Chidzero, chief investment officer at FSD Africa Investments, told Rest of World.
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