The tech startup scene has grown significantly in Africa over the past decade, with huge increases in deal sizes, ticket sizes, and overall funding. Most of this capital has focused on the “Big Four”: Nigeria, Kenya, South Africa, and Egypt. These nations represent more than 70% of venture capital investment into the continent.
Despite the continuing success of these markets, today’s investors are scouring new horizons on the continent for underpriced opportunities: high-potential startups in markets in which other investors aren’t looking.
The case for catalysing Africa’s venture ecosystem with venture capital is clear. Founders tackling the most meaningful challenges on the continent have already captured the imagination of investors around the world. During COVID-19 the tech thesis in Africa was proven: its acceleration by five to ten years is due in large part to the pandemic’s effect in bridging the digital divide.
However, global investors have often made errors in evaluating African startups compared to their international counterparts. In Africa, there is a unique “need-to-have” versus “nice-to-have” focus within investment sectors, due to the huge potential to improve the quality of life for hundreds of millions by introducing technology.
That’s why Africa’s startup ecosystem has attracted record levels of investment in recent years, growing six times faster than the global average in 2021. But in that same year, $3B of the amount raised went to 20 companies, while it took 700 other startups to raise nearly $2B. The ratio of funding dollars to early-stage startups remains low.
Among the causes of funding bottlenecks, there’s the fact that smaller markets offer more limited prospects versus the outsized returns seen in legacy giants. Paradoxically, in West Africa’s Francophone markets, the challenges of fragmentation we see around the continent have been mitigated by closer integration within that region.
In 2021, funding into French-speaking markets grew by 695% year-on-year. Limited competition and regulatory alignment present a massive market opportunity for investors eyeing the region.
Across the continent, investors are setting their sights on those markets that offer strong internet penetration and market readiness, with high literacy rates amongst their populations. While countries on the lower end of this scale have aroused limited interest from investors, the need for funding remains high within those ecosystems.
Amidst all this, one thing is almost certain: African startups’ share of global venture funding will continue to rise. As the challenges of the pandemic shrink away in the rear-view mirror, the growing digital footprint will continue to spur a growing tech ecosystem and a new wave of entrepreneurial ventures, as youthful and dynamic as the populations they serve.
Africa has proven itself to be the resilient continent. As the respective startup ecosystems, globally, weather the adverse effects of falling valuations and a tougher economy, more upside appears possible from the launchpad of Africa.
Today, there is a sizeable pool of early-stage venture capital funds focused on Africa, and they will continue to invest in local, early-stage startups with high potential to scale.
In the market we’re heading into, the biggest perceived funding slowdown will be for late-stage companies that are looking to raise big ticket sizes with no clear exit plan, as listing on public markets becomes less attractive in the current environment.
Knowing that “fortune will favour only the brave”, Africa’s venture ecosystem has no choice but to continue to favour the bold path forward.