Although Africa’s venture capital totals remained afloat in the first quarter, some investors and tech stakeholders think there’s still a good chance the continent will join the rest of the world in a slowdown.
Experts told TechCrunch that most recently announced deals were finalized months before macroeconomic challenges — high-interest rates, war, inflation — hit the global VC landscape. This means there’s a lag in what’s reported as the current state of VC on the African continent. Thus, as startup funding decreases in the U.S. and Europe, the consensus is that the economic downturn will soon start affecting developing markets — Africa, in particular.
“The moment of truth will be the end of the summer,” Max Cuvellier, co-founder of The Big Deal, told TechCrunch. “August [and] September in particular because this is when we saw a boom last year.”
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Last year, African startups received more than $1 billion in funding during those two months. Anything less than that contributes to a year-over-year decrease, Cuvellier noted.
Stephen Deng, co-founder and partner at DFS Lab, added to that, saying that the same investors that have inflated valuations in later-stage U.S. companies are also the same investors marking up African companies.
“I would not understand why, in the African context, this trend would not eventually hit the continent as well and that we’d see a slowdown,” Deng told TechCrunch. “One of the better-case scenarios is that we still see increased funding, but not the same type of percentage growth year on year.”
“If these global funds pull out and do less, it also means more room for participation from local funds into the extensions or their pre-Series A.” Sherpa Ventures co-founder Aaron Fu
Large firms like Tiger Global and SoftBank have already taken a beating in developed markets. Similarly large firms that earmarked a part of their funds into African startups might reduce the pace at which they invest on the continent, local investors told TechCrunch.
Funding data shows the African ecosystem has already seen inflows of around $2.7 billion in the first half of this year. That’s in excess of double what the continent raised by this time last year. In 2021, Africa produced five unicorns while raising $5 billion in total venture capital funding: Flutterwave, Chipper Cash, OPay, Wave and Andela.
No unicorns have been created so far in H1 2022. It’s true that stakeholders can perhaps overlook this given that four unicorns were announced in H2 2021, but it would be naive to project the same for the rest of the year; we’re in a completely different market.
But some experts say Africa might not witness a massive drop if large Africa-focused firms keep cutting checks.
Aaron Fu, the co-founder of Sherpa Ventures, told TechCrunch that there are still many funds that raised specifically for the continent and have a set deployment period that will allow them to continue investing in startups. He believes this capital allocation will continue throughout the year, even if there is a slowdown in the next three to four months.
“They still have two to four years to deploy,” Fu said. “They will likely keep the pace, so I don’t see any slowdown there.”
These funds include TLcom Capital, Partech, Norrsken22 and Novastar. With up to $800 million in capital available to deploy, these funds invest from seed to Series B. While they have moved the needle in growth-stage investment in Africa, there’s only so much effect they can have if left to invest in isolation in later stages, where foreign capital has become prominent.
Still, Cuvellier said much of what happens these next few months will depend on four countries in particular: Nigeria, Egypt, Kenya and South Africa. Depending on the period, these countries represent between 80% to 90% of all funding on the continent, he said.
“If any of these countries show a slowdown, it’s probably going to drag the numbers for the whole continent down,” he continued, adding that so far Nigeria, Kenya and Egypt are showing signs of growth, while South Africa started showing a decline in January.
“Maybe [South Africa] is suffering from what Europe is already suffering from and it’s just a sign of a slowdown coming maybe later to the other countries,” Cuveiller said. “Maybe it never comes to the other countries because they have dynamics — in terms of population, the structure of the economy and so on — that might still make them a very attractive target for VC funding.”
Regardless, what’s bound to happen is that global funds will implement stricter due diligence on the companies in which they invest — for example, a deal that once took days or weeks to close could now take months in the current market conditions. Also, taking additional risks by entering new geographies might not be as exciting as it used to be, especially because the ability to do so has been tempered.
Founders aiming to raise capital should expect their post-money valuations to drop 20% to 30% from whatever they were expecting, investors said. Deng added that those who raised money with less hype or without valuation-hungry investors on their cap tables will probably fare better in their next round of funding.
“They’ll have more room to take on money at lower valuations, [at] what I would probably call more reasonable valuations,” he continued. “Those that have overrun their valuations in the past will see flat rounds.”
Right now, top of mind for many investors who invested in Africa — most of whom are overseas — is focusing on current portfolio companies and providing financial and operational support. Last year, these funds fueled the rise in valuations among African startups (startups fresh out of YC’s Demo Day, for instance, command valuations between $15 million and $30 million) to the disadvantage of local investors.
But as they recede and African startups look to local funds for capital, flat and down rounds will become the norm as these founders come to terms with this market adjustment. Deng said he believes these market conditions present an opportunity for angel networks, local syndicates and small Africa-focused funds to step up their game.
“Hopefully, more funds that are only focused on Africa start keeping more reserves for this sort of situation, because stuff like this will keep on happening,” Fu also noted. “That’s a lesson there. If these global funds pull out and do less, it also means more room for participation from local funds into the extensions or their pre-Series A.”
Zach George, a managing partner at Launch Africa, shared a similar sentiment. “Where possible, we are trying to provide, where we can, follow-up capital to our existing portfolio companies,” George told TechCrunch. “This is a bad economic recession globally, and companies within our portfolio need to preserve cash. We are aware of it, and we will try where we can help them.”
Another bonus on the continent is that so far, there hasn’t been significant layoff news, with the exception of Egypt-born and Dubai-based companies SWVL and Vezeeta. Unlike a valuation crunch, African startups appear to have more immunity to the layoffs sweeping the U.S. Whatever happens, this is still just the start for what’s emerging as one of the most popular tech markets in the world, bustling with opportunities to reshape a global landscape.
In fact, Jasiel Martin-Odoom, an early-stage impact investor based in Ghana, said that if anything, this is the time to double down on Africa. His goal is to continue scouting out new companies and founders — regardless of global economic trends — as the continent continues on its path toward financial independence.
“I’m going all-in,” he told TechCrunch. “I’m moving to Lagos and going to invest on the continent.”