The global venture capital market is increasingly active, but few locales are seeing the sort of investment acceleration that African startups are enjoying this year.
New data indicates that African startups have already outraised all known prior years, meaning 2021 is sure to be a record. But, more importantly, the pace at which African startups are raising money in 2021 is accelerating, with September data indicating that it was perhaps the best month ever.
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Given that venture capitalists are putting more money to work in Africa this year as the quarters tick along, it’s reasonable to anticipate that 2022 could bring even greater total venture investment to the continent.
Investors told The Exchange that their investment pace is picking up tempo and prices are rising. But it’s not all good news on the African front. There may be a dearth of late-stage checks despite a surfeit of early-stage deals, and the African startup economy remains weighted toward a single country (Nigeria) and category (fintech).
Any heating market won’t warm evenly, and the African startup scene is no exception to the rule. Still, the type of funding that the continent’s startups may need is in rich global supply, so perhaps this is a supply chain issue that can be resolved?
Read on for more data and notes from Novastar Ventures’ West Africa director Brian Odhiambo and Acuity Venture Partners managing partner Lexi Novitske.
Strong totals, promising early-stage
While we don’t have full confirmation yet, we are pretty sure that Africa crossed the $3 billion milestone in VC funding this year so far.
African startup observer Maxime Bayen was first to point out that the milestone was impeding: According to data from his Substack newsletter, The Big Deal, the first three quarters already totaled more than $2.9 billion. His prediction? That, if things continue at this pace, startup funding in Africa for 2021 will amount to $4 billion.
The acceleration throughout 2021 is something that both our sources confirmed. As you may remember, unlike in other places, VC activity in Africa was negatively impacted by the pandemic in 2020, also affecting 2021, but only up to a point, Novitske said.
“We started slow, kicking off the year in a soft economic environment and concerns over COVID-19, but shortly into the summer saw a big increase in deal flow,” she said.
Novastar’s Odhiambo also confirmed this turning point from the second half of the year, saying, “We are much busier [now] than we were in H1.”
Putting this surge into context, Odhiambo conceded that “it is not unusual for companies to start their fundraise in H2 with a view of closing in Q1.”
However, there are unique factors at play this year: “The fact that historically, major global crises usually yield a lot of entrepreneurship and innovation,” as well as “a surge in companies raising money this year, perhaps driven by some of the success stories in the news,” including Paystack, the Nigerian payments startup acquired by Stripe.
Paystack is emblematic of where most money is flowing into: startups from Nigeria and fintech. But the picture is more diversified when it comes to early-stage deals, which account for a large majority of deal volume. Per The Big Deal, deals below $5 million accounted for 90% of all deals above $100,000. In other words, there are lots of early-stage African startups getting funded.
More granularly, there are also signs that future venture-backed startups will be more diversified: “The startups behind these smaller deals are less concentrated in Nigeria [and] less focused on fintech,” The Big Deal reported. This would mean a stronger African startup market over time, and there are factors on the VC side that are fueling this, especially for local investors.
“Toward the back half of the year,” Novitske said, “we saw valuations really start to increase.” Among other things, this led her firm to look “at other markets like Francophone [Africa] and Kenya that weren’t seeing the big valuation jumps.” In addition, she expects to see “much more diversification away from fintech.”
As to where else this money will flow, Odhiambo has recently been bullish on “health tech, mobility, tech-enabled B2B supply chain companies, edtech and agtech.”
With a $200 million fund, Novastar does have quite a bit of surface to spread out, and it can also count on a larger panel of co-investors to tag along. For instance, the Series B round it recently led into Nigerian fintech TeamApt saw participation from fellow pan-African VC firms, as well as foreign VC firms, development finance institutions and local angels — the latter being a new trend that Odhiambo and Novitske both welcome.
What’s missing?
The African startup scene is missing perhaps two things, one of which it shares with other markets and one that it does not.
African startup deal-making is similar to other markets in that investors are increasingly skipping traditional deal diligence. Novitske told The Exchange that competition for deals is rising as more global investors take a look at African startups. That competition is leading to now-familiar laxity in terms of pre-deal work.
Investors are “writing big tickets and doing it fast, frankly often without a lot of due diligence,” Novitske said, adding as an explanation that certain external investors are “betting on [Africa’s] total addressable market size” with checks that are “just a small part of their portfolio.”
The African startup market remains modest compared to others, meaning that what could be viewed as smaller checks in, say, the United States, land with more impact on the continent.
A lack of pre-deal diligence is having more impact than simply allowing for a faster investing pace. Per Novitske, the “big trend away from smart due diligence before investing” is being matched with a “lack of focus on building in governance systems and financial controls post-investment.” This leads to things like “investors [taking] reporting of metrics at face value” and not executing “soft-side due diligence on founding teams.”
If you view the implied risk from such investment activity in merely dollar terms, it’s not such a big deal. If a few global venture funds put some money into less hardy African startups that don’t work out, so what? Many startups fail, after all, in every mark.
But Novitske noted that a “few big ‘lessons learned’ by international investors doing fast deals in our market could mean negative repercussions for the overall ecosystem.”
This is especially true because African startups need more late-stage capital, the very sort of money that is plentiful in other markets thanks to crossover funds and rising venture capital fund sizes. If global investors with larger checkbooks get spooked by a few deals that go awry in a very public way — a possibility accentuated by the lack of preparatory work being done in the African startup market, as with others — the entire continent could find its late-stage capital access minimized.
Per Novitske, unlike in prior years, the “funding gap” in Africa is not early-stage checks, but late-stage monies.
Our first read of the comment was that it is solvable; Tiger et al. are having to compete with one another for deals, leading to ever-inflated valuations and increasingly aggressive round preemption. Those investors must appreciate a deal when they can get one, and given that the core DNA of startups around the world is pretty much the same — software revenues, which are famously fungible to the point of being likened to chicken by one prominent investor — why they wouldn’t look for deals in Africa is beyond us.
A major exit or two could help juice things, perhaps — an IPO that captures the public mind, or something similar. African startups have seen major M&A activity in recent quarters, but more would be, well more.
All told, the African startup market’s up cycle is fascinating and getting more so as it accelerates. We have eyes on it and will update as more data becomes available. The startup boom is truly a global affair.