Venture investments in Africa have decreased by 43 per cent Year-on-Year in the six months to June 2023.
- Investors are retreating from super-sized financing deals due to economic uncertainty triggered by market fluctuations.
- The first half of 2023 saw 263 Venture Capital deals in Africa’s venture ecosystem, allocating a cumulative $2.1 billion capital to 258 unique companies.
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Africa’s startup investment landscape is encountering some headwinds, marked by a 43 per cent decrease in Venture Capital (VC) or a $1.4 billion dip in financing in the first six months to June 2023. The decline is attributable to market fluctuation and inflationary pressures across markets.
The funding crisis has defied early predictions that seed rounds would remain unaffected in 2023 against relatively strong fundraising by African VC fund managers last year. The latest data shows Africa’s venture ecosystem is no longer the last man standing. It is hurting from shifting market forces, with venture investments shrinking by 43 per cent in HY1 2023.
The report “Africa in the Global Context: Another Lean Year for Venture Capital,” by African Private Capital Association (AVCA), highlights that VC investors are applying a more judicious approach to investments. They are shunning big-ticket funding rounds, leading to fewer big investments overall.
In the period to June, only $1 billion was raised from five super-size deals. This was a decline from the $1.3 billion raised from nine such deals at a similar stage in 2022. Overall, global VC investors are exercising caution, pulling back from mega financing rounds. Instead, they are actively allocating capital to African startups with strong fundamentals.
As a form of private equity funding, venture capital finance African startups at the nascent stage money is given to firms with significant growth and revenue creation potential. Across economies, VC firms are critical drivers of growth and development in Africa. They drive job creation and innovation and finance the rollout of new products and technologies.
Pitchbook records that in 2022, $2.9 billion was invested across 689 venture rounds in Africa. The continent was the only region with a year-on-year deal value and count increase. Africa raised $5.2 billion in venture capital across 786 deals last year. This was three per cent of the total volume and 1.2 per cent of the value of global venture funding in 2022.
According to the AVCA report, the first half of 2023 saw 263 VC deals in Africa’s venture ecosystem. They got a cumulative $2.1 billion in capital towards 258 unique companies. This translates to a dip of 40 percent in both volume and value compared to the $3.5 billion raised during the first half of 2022.
Industry experts term the dip a ‘funding winter’ for African VC. Other analysts describe it as a funding plateau. But a keen look shows the downward trajectory started during the third quarter of last year. It is partly attributable to the turbulent global macroeconomic downturn fueled by the Russian-Ukraine war.
However, data shows that seed-stage deals in Africa got the largest proportion of venture capital in Q1’23 and Q2’23. This is because of the virtual absence of late-stage deals on the continent in 2023 H1, with five late-stage deals accounting for a cumulative $0.5 billion in VC.
Further, five high-profile late-stage funding deals took place in 2023 H1. These include $330 million Series F in drone designer and maker Zipline and the $77.8 million pre-Series C round in South African digital bank, TymeBank.
Albeit a recurrent trend in Africa’s venture ecosystem, seed-stage deals accounted for 71 per cent and 72 per cent of venture deal flow to African startups in the first two quarters of 2023, respectively. Nonetheless, deal counts fell by 55 per cent from in the first half of 2022. According to the report, venture debt, an emerging trend on the periphery and not a key component of the African investment landscape, has increased usage in Africa’s early-stage ecosystem.
African startups seek debt financing amid inflationary pressures
In half to June, venture debt remained relatively flat, with deals in the first and second quarters equivalent to the volumes and values recorded in the same stage in 2022. Overall, 25 venture debt deals totaling just over $0.4 billion occurred.
The debt was modeled in various instruments, including; direct lending, convertible loan notes, bonds, and lines of credit in local and hard currency. The report shows that venture debt assumes a larger component, while super-sized deals routinely comprise equity and debt. It, therefore, plays a more prominent role in these funding rounds.
In light of this, three of Africa’s five megadeals in 2023 H1 raised substantial debt financing as part of the investment round.
Kenya’s asset financing platform M-Kopa received over $200 million in sustainability-linked debt financing. South African car subscription startup Planet 42’s fundraising included $75 million in credit, while Egyptian FinTech unicorn MNT-Halan raised $140 million through two securitized bonds to complement their $260 million equity raise.
Nevertheless, the report projects an upswing in venture debt strategy in the short and medium term. This is because founders seek to maintain growth through the present macroeconomic downturn.
Experts predict that growth-stage startups might turn to venture debt as a financing alternative for business development and market expansion to navigate current liquidity crises.
Sectors Pioneering Africa’s Venture Capital Market
Regarding sectors, AVCA says Fintech continues to lead deal activity across Africa. Once again, Fintechs are the most dominant vertical amongst tech-enabled startups attracting funding.
By the same token, the finance sector showed resilience in the half. It maintained historical averages regarding the proportion of funding in the two successive quarters. The finance sector also accounts for several of the largest deals for the period.
These include a $35 million Series B round in Lulalend, a South African digital lender. There is also a $30 million pre-Series B funding round for Nomba, a Nigerian payment service provider. Overall, finance area accounts for a combined $615 million in the period.
What’s more, cleantech made waves in the global venture capital landscape. Cleantech is tied with Fintech as the most popular vertical amongst the top 10 highest-funded startups globally. Cleantech, Renewable energy, and Energy Storage are increasingly garnering interest and investment from European VC investors, partly due to the Russian-Ukraine war. The new trajectory is also fueled by the availability and energy cost in the last 18 months.
The rising tide of cleantech globally was also visible in Africa’s early-stage ecosystem. Cleantech was the second most active vertical amongst African VC-backed technology or tech-enabled companies in 2023 H1. Cleantech is responsible for the modest deal activity increase channeled to the utility sector in recent years.
Globally, funding recipients are leveraging technology to improve environmental sustainability. These include $ 20.7 million to WeLight, a clean energy provider in Madagascar, and $8 million Series A for Qotto, a solar kits provider with operations in Burkina Faso and Benin.
Regions spearheading Africa’s VC landscape
Regarding regional segmentation, West Africa narrowly assumed the top spot in the half. The region attracted the highest overall volume of VC Deals in Africa, closing at 35 deals in Q1’23 and 33 in Q2’23. This translates to 22 per cent and 31 per cent, respectively.
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East Africa came in second place after particularly strong deal-making activity in Q1’23. Although both regions dominated the number of deals, the value of funding raised slightly lagged behind the Southern region at 19 per cent and North Africa at 18 per cent.
Startups with a multi-region geographic footprint typically account for a small volume of VC deals yearly. According to AVCA, they routinely comprise the largest share of deal value, and 2023 H1 was no exception.
In the six months to June, multi-region deals were 7 per cent of VC deal volume in Africa. They, however, represented 60 per cent of the deal value between April and June 2023. These include the $14 million Series B for Yellow Africa, a solar energy and digital devices asset financier, and the two megadeal rounds in Zipline and M-Kopa, respectively.
Moreover, the proportion of overall funding assumed by these large, high-profile funding rounds in each quarter remained consistent with the historical average.
Hope in the Horizon for Africa’s VC Market
Despite the VC retreat, hope is on the horizon for the latter half of the year. In light of this, South African VC firm, Knife Capital, is eyeing a $50 million African Series B expansion fund, dubbed ‘Knife Fund III’.
The growth-stage investor focuses on innovation-driven ventures with proven traction. Typically, it promotes the international expansion of African businesses. It helps address a vital funding gap in growth stages where local investors often fall short. The fund will also support entrepreneurs in other African countries who fit this investment profile in collaboration with experienced local partners.
The firm has brought together a one-of-a-kind investor base to boost VC investments in Africa. It will also co-invest in businesses from other African countries with local investors. The focus is on high-growth, capital-efficient scalable South African B2B technology companies. It will target high-impact potential and strong returns through exit optionality.
The firm targets industries that can help solve real challenges in ed-tech, health tech, fintech, AI, and Agritech. The Cape Town-based VC plans to invest 10-12 firms in this fund, with an average cheque of $3 million. So far, it has invested in a South African AI-as-a-service business, DataProphet, and Kasha.
In the same breath, Seedstars Youth Wellbeing Ventures is a $ 20 million investment vehicle targeting early-stage African startups. Seedstarts Youth Wellbeing was launched in June 2023 by Seedstars Capital and the Swiss philanthropic Foundation Botnar.
It seeks to boost the well-being of people under 30 in low and middle-income countries. The entity will support pre-seed to Series A African startups across a broad spectrum, including local food security, waste management, affordable housing, access to employment, environmental sustainability, clean energy, water and sanitation, and safe and sustainable transportation in Senegal, Ghana, Egypt, Morocco, and Tanzania.
The two firms in Chargel, a Senegal-based logistics startup that matches shippers with transporters, have already made a joint investment. Initially, startups will get a capital injection of $250,000 and follow on investments of up to $500,000.
Plans are underway to invest and scale startups, potentially transforming young people’s lives across its target markets. Fondation Botnar aims to improve the health and well-being of young people in urban areas globally. Moreover, Seedstars Youth Wellbeing Ventures adds to the growing list of funds under the Seedstars Group, an accelerator and VC active globally in more than 30 emerging markets.