Tech funding in Africa reduces by 37% but here is the way forward

Absolutely no one would have predicted that 2023 would be seen as the year of ‘record lows’, especially not the paltry $66 million that was raised by African startups in March 2023.

2022 was predicted to be the Year of Recovery – from the pandemic doom – so, funding was said to keep going higher, but the second half of 2022 took a hit. The prediction numbers were reduced by December, but, the first half of 2023 was too cold for a regular winter season.

You’d say even the International Monetary Fund (IMF) predicted that global output growth will fall from 3.4% in 2022 to 2.8% in 2023, before rising to 3% in 2024.

IMF added that advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023.

So, why would tech funding record any phenomenal growth?

According to Africa: The Big Deal, the total transaction value of funding in Africa fell -37% from $6.5 billion [July 2021-June 2022] to $4.1 billion [July 2022-June 2023].

The report says most countries were hit by rocky snowballs, especially the Big Four – Nigeria, Egypt, South Africa, and Kenya.

Focus on Africa’s Big Four

Funding in Nigeria fell -77% YoY, which means Africa’s tech giant lost its number one spot to Egypt – whose cold temperature was relatively moderate (-25% YoY). In South Africa, the amount was halved (-53%); in Kenya, divided by 3.2 (-69%).

Egypt is the only ecosystem to maintain itself over the half-billion mark.

Meanwhile, in markets where over $100 million had been raised during the 2021-2022 period, the amount raised decreased dramatically during the 2022-2023 period: -68% YoY in Tanzania, -81% YoY in Ghana, ÷20 in Tunisia and ÷27 in Senegal (from $222 million to $6 million).

Four of the seven markets where $10 million to $100 million was raised during the former period also suffered very significant losses (DRC, Namibia, Zambia, and Uganda). In Morocco, the amount of funding raised was roughly flat YoY.

It goes deeper…

When you focus only on equity funding raised, you are looking at a -62% YoY dip. And the number of equity deals also contracted though less dramatically (-35% YoY), a trend affecting smaller deals ($100,000 to $1 million) and larger deals alike.

Fintech continued to be the lead sector in equity funding, though dropped from 53% to 43%. 

Investors drew back

According to Africa: The Big Deal, 800+ investors were involved in at least one transaction on the continent in the past 12 months [July 2021 – June 2022], but that is a -25% YoY decrease compared to the previous period [July 2022 – June 2023]. This drop affected the number of investors involved in just one deal and repeat investors similarly.

Commenting on investor drawback, the Head, of Lagos Innovates, LSETF, Hakeem Onasanya says, “If I bring it home to Nigeria and looking from the political-economy angle, the first quarter of 2023 was the period of politicking and the eventual election. In such periods, there are lots of uncertainties and investors typically keep their cheques closer until elections are over and they can sense some predictability.”

Besides that, the global economy is currently facing a number of challenges, including rising inflation and interest rates. This has led to a slowdown in investment activity across all sectors, including technology.

And, while there have been a number of high-profile exits from African startups in recent years, such as Jumia and Flutterwave, there have been fewer exits in recent months, which has made investors more cautious about investing in African startups.

Then, when you talk of the regulatory environment in Africa, you become weary. There are a number of different regulations that startups need to comply with, and these regulations can vary from country to country. This can make it difficult for startups to raise capital and operate their businesses.

Hakeem, however, foresees an upsurge in investor confidence as we begin the second half of 2023.

I foresee a positive growth in investments [in Nigeria] in Q2 and also due to the floating of the naira which has caused some improvement in investor confidence. In addition, with the new ECOWAS leadership and their commitment to a more political and economic stability, I am confident that the continent would be able to attract more funding from investors.

Hakeem Onasanya

Agreeable, because, notwithstanding the winter, funding grew in Côte d’Ivoire (+15% YoY) – attributed to political stability and economic recovery and the emergence of hubs, accelerators and incubators such as Seedstars Abidjan, Bond’Innov Côte d’Ivoire, Akendewa, BabyLab, and La Fabrique.

Cameroon (+34%) also crossed the $10 million mark. The biggest jump by far was recorded in Algeria (x5, from $30 million to $150 million), a prowess almost entirely attributable to a single deal: Yassir’s $150 million Series B in November 2022.

What should happen from here?

Hakeem says “there is a need to keep the pipeline of credible startups patent,” as investors get more confident.

He continues, “This is where our various interventions at Lagos Innovates come in, our incubation program (Idea Hub), access to workspace vouchers and investment in tech talents as well as the work towards domesticating the Nigeria Startup Act in Lagos is playing a huge role in that regard.”

Meanwhile, there are a number of things African startup founders can do to attract investors, including:

• Building a strong team: Investors are more likely to invest in startups that have a strong team with a track record of success. There are arguments that investors now look out for teams that have experience.
• Having a clear business plan: Investors need to know what your startup is doing and how you plan to make money, as it is not an NGO.
• Demonstrating traction: Investors want to see that your startup is already generating revenue or has the potential to do so.
• Being prepared to answer tough questions: Investors will ask you tough questions about your business. Be prepared to answer these questions in a clear and concise way.

@Lord_Rickie