After bucking global trends with a record year in 2022, Africa's tech industry experienced a reset of sorts in 2023 as global capital shortages began to deepen. The number of ventures funded and the total amount of money raised fell for the first time since 2016, although it was not as dramatic as many feared.
According to the 9th edition, African Tech Startup Funding Reportreleased last month in partnership with Disrupt Africa. Flourish Ventures, AAIC investmentand Atlantica Venturesa total of 406 startups raised a total of USD 2.4 billion during 2023.
This represents a significant decrease compared to 2022. In fact, this is the first time since 2017 that his total funding did not increase by more than 40%. The number of venture companies raised decreased by 35.9 percent compared to the 633 companies raised in 2022, and the total amount of USD 2.4 billion decreased by 27.8 percent compared to the USD 3.33 billion raised in 2022.
The number of active investors also decreased dramatically in 2023 compared to 2022. At least 527 different investors went public for African tech startups in 2023, down by almost half (46.6 percent to be exact) from the 987 they last went public with. 12 months.
At the time, in 2023, investments in Africa's technology sector, especially venture capital investments, decreased, but the likelihood of exits also decreased as well. IPOs have dried up, not just in Africa but globally, with outright acquisitions becoming the only market.
However, the number of such transactions decreased significantly in 2023 compared to 2022. There were 15 such transactions, a decrease of 61.5% compared to 39 in 2022. 2021 was a record year with 32 deals, following 14. This year's decline has pushed such activity in Africa's tech industry back to 2020 levels, a phenomenon that is being replicated in many countries and sectors.
So, first of all, what is the cause of the problem?
Ameya Upadhyay is the next venture partner. Flourish Venturesis an evergreen fintech-focused fund with a presence on five continents, including Africa, and whose portfolio includes the likes of Flutterwave and Fair Money. He told the Disrupt Podcast that this is a supply, not demand, issue and will be influenced by global conditions.
“There were plenty of financing opportunities, but there wasn't enough capital available. In recent years, the situation was different. But this time, I think it was a global macroeconomic issue. A strong dollar and high interest rates in the United States meant that capital flowed out of Africa, as always in these situations. And that was accompanied by the exit of global venture capital, which had an impact on Africa.” said Upadhyay.
But that was to be expected, and perhaps it wasn't as bad as it seemed in Africa.
“As you say in your report, we feel that Africa has weathered this storm better than many of us expected. VC funding is down 50% globally and , I think Africa has proven to be more resilient than many of us thought,” Upadhyay said.
Antonia Bosner is a capital markets leader. endeavor south africa, which is part of the global Endeavor network. Endeavor South Africa facilitates access to capital through its global network, its own Harvest Fund and investor introductions to the Endeavor Global Catalyst Fund. Bosner told the Disrupt Podcast that the economic downturn has been going on for some time.
“The global market has been cooling down for quite some time. Africa is coming off such a low base. We will always lag behind the global market,” she said.
The recession has been extremely damaging to Africa's tech startups, even if it is not as severe as expected for some time to come. Disrupt Africa reported We cover a wide range of closures and downsizings that affect many of the largest startups in the space.
“Especially for startups that have unfortunately been in a funding cycle for the past 18 months, they just need to tighten their belts, look closely at their cash flows and lower their burn ratios,” Upadhyay said.
But overall, there may be a larger problem: macroeconomic vulnerabilities in Africa's largest market.
“If we look specifically at Nigeria and Egypt, we can say that both countries are in a macroeconomic crisis. This means that there is a severe dollar shortage in both countries, leading to a significant depreciation of their currencies and some goods being imported. This is causing runaway inflation in both countries,” Upadhyay said.
“In other words, a strong dollar causes a weaker currency, which leads to higher import bills, which impacts the economy and negatively impacts the household discretionary income that many of these startups rely on. ” So this is a double whammy. These companies lack capital to shore up their balance sheets, but at the same time, their P&Ls are being affected as it becomes harder to bill both corporate and retail customers. You're stressing yourself out. ”
Therefore, this “double whammy” is a fundamental threat for many companies, and the situation is not likely to get easier soon. Upadhyay says 2024 is likely to be just as tough as 2023.
“If I keep my fingers crossed, I think it will continue this year. The reason I think that is that some of these challenges are structural, related to things like the dollar vs. local currencies and rising import prices. “This is because there is little chance of a reversal in the short term,” he said.
“I think these markets are incredibly behind. So I think it's going to get tough again. That being said, we've seen incredible inbound for South African entrepreneurs. I think regionally, people have sort of refocused and suddenly started to look up and say, “Actually, there are some really exciting opportunities out there.” So I think there will be more deals going on,” she said.
That doesn't mean everything is doom and gloom.
“I think there are some fundamentally strong companies that can reassess and really streamline their expansion plans, product portfolios and spending even in the face of more difficult financing conditions,” Upadhyay said.
Although it has been shrinking over the past four years, Africa is still doing quite well, Bosner said.
“It's a very good situation for incumbents. It's a less competitive space. If competitors can't raise capital, entrepreneurs need to refocus and figure out where their value is and how they're positioned to do so.” You’re really allowed to really understand,” she said.
“The best companies always keep growing. It really should be an alpha-driven investment. No one likes to see things go bad, but I think that's healthy in a way. There are positive signs for investors and companies alike.”
But every entrepreneur needs to realize that every dollar in the bank now is more expensive than it was before.
“That's because it's harder to find dollars to replace the dollars you spend, and the devaluation makes it more expensive,” Upadhyay said. “So the price of every dollar in the bank has suddenly increased, probably several times over. Entrepreneurs need to realize this is happening and tighten their belts.”
The way startups operate from a structural and ethical perspective may also be given a boost by the current situation.
“Focusing on what you can control and putting it into action will give you more ownership and confidence that you'll be on your way to profitability,” Bosner said.
So there are some positive aspects to the whole situation, which generally boil down to better governance, better diligence, and better spending control. But Upadhyay has to admit that these are just “signs of hope”.
“The situation for many startups at the moment is dire, and that's just the reality,” he says. “This is where long-term African investors need to be present, supporting start-ups and not flying out of Africa when the going gets tough. We are committed to doing so. And I know that some of our peers who are long-term investors on the continent are also committed to doing so.”