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LAGOS — African investors say they are stepping up to fill the region’s startup funding gap created by the reluctance of many US venture capital firms to return to the market over the last two years.
This year, African startups are on track to raise a smaller sum than a year ago given that the amount for the first nine months of this year was nearly $1 billion lower, according to data by Africa The Big Deal. The 2023 total was 37% down from the record high of the previous year.
The $110 million raised last month by Nigerian digital bank Moniepoint was only the second nine-figure startup round in sub-Saharan Africa after Moove’s $100 million round in March. While each deal featured a US-based ‘Big Tech’ company — Google and Uber respectively — institutional VCs like Tiger Global which invested in five African startups in 2022 have largely been absent from the scene all year.
After seeing valuations soar out of reach at the peak due to this Silicon Valley interest, African investors are now incentivized to better support local startups.
“They disrupted, mispriced and overheated the market somewhat,” said Kola Aina, founding partner at Ventures Platform, of US investors whose activity in Africa peaked when the Federal Reserve’s near zero interest rates enticed so much cash into Silicon Valley that investors turned to emerging tech markets. It created a “bubble that wasn’t really sustainable,” but valuations have now reset even as local investment fund raising and managing capacity is increasing, Aina told Semafor Africa.
“We don’t miss them,” Tidjane Deme, general partner at Dakar-based Partech Africa, said of rival US funders at a startup investors’ conference in October. Partech’s $300 million fund is one of the largest in Africa for startup investment. It led a Series A round for Ghanaian electricity grid management startup Beacon Power this month.
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Fundraising by Africa-focused investors has been one of the main highlights in another underwhelming year of startup dealmaking.
Funds announced this year by TLcom Capital, Verod-Kepple Africa Ventures, and Janngo Capital — in addition to Partech Africa’s — mean there is more than half a billion dollars that African startups can access. Paris-based investor Breega also secured commitments for 70% of a planned $75 million Africa fund back in June. Aina, of Ventures Platform, said he knew of “two or three” other funds that may be announced in coming weeks.
At Norrsken22, a firm that unveiled its debut $205 million Africa fund a year ago, up to four startup investment deals are on the verge of being finalized, people familiar with the company said.
Yet, Africa’s share of global venture capital remains at about just 1% and achieving valuable tech-enabled economic growth requires much more money than is currently available, investors and analysts say. One indicator of the prevailing funding gap: per capita VC investment in the US dwarfs Nigeria by a ratio of 257 to 1, according to an analysis by Efosa Ojomo of the Christensen Institute, a US non-profit research firm.
Alexander’s view
Africa’s startup ecosystem has so far come through the funding drought-induced rough patch without producing the flood of closures feared a year ago.
Some notable shutdowns have happened due to fundraising difficulties, to be sure. But my impression is that companies and their investors are navigating the post-low interest rate era with the kind of efficiency that seeds better-run companies and potentially stronger exits for the next bull cycle.
But rather than depress dealmaking, the takeaway for African investors should be that failure is a feature of the startup investing not a bug, said Eric Sippel, an American investor whose family office currently invests in Africa through two venture capital funds. He would like to see more investors on the continent take more risks with their bets, while founders should think bigger about the problems they aim to solve.
Macroeconomic issues around currency devaluation challenge the chances that venture capital will transform Africa, Sippel said. But a large enough variety of problems that can generate huge returns — from literacy to the effects of climate change — exist to warrant increased VC spending on the continent. “You’re going to have some failures along the way but there will be successes to drive prosperity,” he said.
Room for Disagreement
Investors should be more focused on driving portfolio companies towards consolidation, rather than adding more startups to a pool that is nearing saturation point, says Satoshi Shinada, a Nigeria-based partner at Verod-Kepple Africa Ventures.
“There are too many startups in Africa now. Do you want to keep adding more and the queue becomes 1,000? That’s not sustainable,” Shinada said.
He argues that creating large continental companies — by getting startups across multiple countries to consolidate into entities can be seen as the emerging market champions of their sectors — is the surest way for investors to achieve desired exits. “That really aligns with expectations from the public stock market investor.”