Could African tech be immune to the global funding slowdown? It sounds like a counterintuitive question to ask. “Africa, being home to several economies largely based on the export of natural resources, has historically been the opposite of immune to global shocks,” Briter Bridges director Dario Giuliani pointed out.
And yet, the data are here: African startups had a very solid Q1 2022 in terms of VC investment, both in dollars and in deal volume. This is news in itself, but even more so when venture funding was simultaneously declining in the U.S., Asia and Latin America.
It is worth keeping in mind that we are only talking about a small fraction of global VC activity. According to CB Insights’ latest Venture Trends report, African startups attracted a mere 1% of all funding last quarter, with a 2% deal share. But still, the fact that it is trending in the other direction as most of the world is curious.
To understand what made Africa’s strong Q1 funding possible, and what it could augur for 2022, we talked to Giuliani, whose intelligence firm, Briter Bridges, collected interesting data points that we contrasted against CB Insights’ report. And for the VC perspective, we collected notes from Tidjane Dème, general partner at Partech and from the team at Ingressive Capital.
A strong start to 2022
According to Briter Bridges, $1.77 billion of VC funding went into African tech in Q1 2022. That’s close to the $1.8 billion estimate of Africa-focused newsletter The Big Deal, but much higher than CB Insights’ tally — $923 million.
The discrepancy between these different counts is fairly easy to explain: CB Insights bases itself on HQ location, regardless of a startup’s main markets. For instance, it considers companies like Flutterwave and Clickatell to be U.S. entities, whereas Briter Bridges sees them as part of Africa’s tech. Considering that the former recently raised a $250 million Series D round and the latter a $91 million Series C, this has a pretty big impact on calculations.
The fact that including or excluding a handful of deals can sway numbers so strongly is also a good reminder that things need to be put into perspective. With growth “vastly driven by mega-deals,” Giuliani said, “quarterly predictions are statistically spurious because they don’t reflect predictable patterns.”
In addition, “closing [deals] typically takes a bit more time in Africa, leading to a greater lag in the data.” Dème noted. “Several deals announced in Q1 were in fact closed in Q4 [2021]” — which means we could be looking too early for signs of a slowdown that will only manifest itself in future numbers.
With that said, we still think that it is significant to see VC funding in Africa have such a strong year to date. The $923 million that CB Insights counted was distributed across 170 deals. If 2022 were to continue at the exact same pace, that would be $3.692 billion and 680 deals — a higher tally on both counts than 2021’s $2.285 billion volume and 529 deals, both of which were yearly records.
Looking more granularly at quarter-on-quarter evolution, we gather from CB Insights that dollar funding was up 37% from the previous quarter, and deals up 7.59%. That’s more deals than in all quarters since 2018, and also more funding (with the exception of Q3 2021). The Big Deal wouldn’t make such an exception: Based on its $1.8 billion tally, it reports that this broke “the record established in Q3 [2021] by just a few millions.”
Year-on-year comparisons are also interesting. The Big Deal, again: “Compared to last year, there’s been 2.5x more funding raised in Q1 [2022] than in Q1 [2021].” Briter Bridges also has an interesting chart on pre- and post-COVID trends, showing that VC investment into Africa in Q1 2022 by far outdid the first three months of 2019, 2020, and 2021.
Mitigating factors
According to CB Insights, 84% of 2022’s deals in Q1 went to early-stage companies — a fairly consistent proportion year on year. This, we assume, is one of the key reasons why Africa’s deal count is resisting the slowdown.
Dème granted that our assumption was fair, and the team at Ingressive elaborated on that thought: “We think,” they wrote in a statement to TechCrunch, “[that] the global deal activity was impacted by the larger public market rout and growth stocks sell-off. … In contrast, most of the deals in the African tech ecosystem are still in the earlier stages: pre-seed, seed and pre-Series A.”
Both the Partech partner and the Ingressive team agreed that Africa’s tech ecosystem remains very young, which creates some protection against declines. “Even with a slowdown of the activity, it should do better than other regions,” Dème predicted.
Giuliani is less keen on making predictions, but hinted at long-term dynamics at play. “I believe the rapid growth of Africa’s venture space is not simply driven by the general fluctuation of VC globally, but it reflects the drastic narrative shift about its risks and opportunities on the continent, and the increase in interest from local and international investors is a byproduct of such shift.”
Bifurcated outcome?
Because foreign funds — especially cross-stage ones — won’t be siloed from global dynamics, there are still reasons to think that Africa’s VC activity will eventually be impacted. The team at Ingressive anticipates “a bifurcated outcome” that will see funding “slow down for later-stage deals” – but not for early-stage ones.
Deal size might also be affected, Dème said. “Investors are getting more careful on the valuations they pay at later stages, and it might trickle down to earlier stages too with a few quarters of delays.” Even if it doesn’t, “rounds above $100 [million] might be less common in the coming quarters [compared to] what we saw in 2021,” he predicted.
There’s also a difference between global investors and those who are committed to Africa. “We can confirm that investors with a mandate to invest in Africa or focused on Africa will keep on deploying capital in the region,” he told TechCrunch. This includes his firm: “We [at] Partech are not expecting to change our investment pace and will keep on doubling down on our portfolio as well as investing in new exciting companies.”
The question is, will there be enough Africa-focused investors for the best deals to go ahead? Dème thinks so: “There has never been as much capital available, so we do expect great companies to keep raising capital at any stage.”
There’s definitely more dry powder available for African startups than in the past. Giuliani pointed out “the structuring of several financial vehicles, both public and private, which have only just begun deploying capital and whose returns are not expected for almost another decade.”
While a less solid sign than pure funding, interest is also on the rise. As TechCrunch reported, there have never been more African startups at Y Combinator than in its latest batch — 24 out of 414. In addition, Giuliani said, “several corporates are also just beginning to shift their attention toward the continent, setting up offices, operational and sales teams.”
Where to go from here
Where will capital be deployed? There are quite a few options, according to Briter Bridges. The research firm mapped out what it refers to as Africa’s tech investment potential, based on funding already raised so far. For instance, Giuliani said, “there are around 200 companies that are known to have raised between $5 [million] and $50 million to date, which means they may be the next $100 [million] rounds over the next few months.” They could also get acquired — CB Insights data indicate M&As have been the almost sole exit route for African startups so far.
In terms of sectors, there’s a good chance that fintech will remain in the lead. “While it might change slightly, we’ve not seen significant deviation so far and do not expect any major shift,” Dème said.
The Ingressive team expects the gap with other sectors to decline, but also notes that fintech is much more diverse than it may sound. “Fintech is cross-vertical” and often embedded into products and services for agriculture, logistics, health tech and more. Recent data also confirm this.
“Only four of the top 10 deals this year were plain fintechs. Rather than fintechs per se, what is becoming interesting is the ‘fintech twist’ that many non-fintech companies are taking as they raise both equity and debt, e.g., logistics and commerce platforms that add credit lines, insurance and working capital to their fleets and riders,” Giuliani said. “Social commerce is also an interesting intersection of financial technology that is picking up.”
Just like fintech remains dominant, it seems likely that the “big four” countries — Nigeria, Kenya, South Africa and Egypt — will stay the region’s leaders, at least for the time being. But there are also signs of change, Giuliani said. “Most definitely, non-big-4 countries are increasingly seeing companies expanding and attracting larger sums. Uganda, Tanzania, Tunisia, Morocco, Senegal and Côte d’Ivoire are ripe for investment and they’ve long been underserved.”
Ingressive Capital’s statement names two factors that would support a diversification of investment destinations within Africa.
On one hand, “the success of outlier companies like Wave (Senegal) and the rise of adjacent ecosystems will raise investor attention to startups playing in those ecosystems.” On the other, “the continued success of incumbents … in the broader African ecosystem will bring attention to these tier-2 markets via incumbents’ expansion into such countries.”
Why? Because it “will open up the market in terms of the availability of market data and infra for builders to flood the market with new/similar solutions that receive funding based on the proven viability of such markets.” That’s only a prediction, but one we will happily track.