How Will Africa Fare During the Global Tech Downturn?
Will African startups suffer pneumonia when the rest of the world catches a cold? Or can the region ride out the global slowdown in VC funding?
At the recent BigFive Summit in Cape Town, there was one big question we wanted to ask our panel of African venture capitalists. How will Africa’s vibrant but still nascent startup scene be impacted by the global slowdown in venture capital investing?
The data we have seen so far suggests that Africa has not yet suffered any slowdown in investing. This despite the battering Western markets are experiencing, spurred on by inflation and the rising interest rates designed to combat it, plus the war in Ukraine.
Times like these, when capital quickly goes from being cheap to expensive, usually result in an abrupt shift in the types of companies that investors favor. Today, blitz-scaling would be unicorns seeking solutions for problems that might not even be problems are losing favor to more established, profitable businesses addressing real world challenges.
According to our fellow Substackers at “Africa: The Big Deal”, Africa has stood out for its perseverance in continuing to fund new tech companies in the face of the global bloodletting. Whatever the world is experiencing has thus far bypassed Africa.
Though this perseverance hasn’t been even across Africa. According to ATBD, South Africa has seen a steady drop in startup funding activity this year, while others are booming.
Here is what they said.
“The country has underperformed YoY every single month since the beginning of the year. As it stands, start-ups in South Africa have raised -30% in the January-May period compared to how much they had raised during the same period last year. This compares to growth of +154% in Nigeria, +212% in Egypt and +436% in Kenya.”
Maxime Bayen, one of the folks behind the Big Deal, was emphatic recently on LinkedIn.
“In the context of a global VC slowdown, Africa was the only region to maintain triple-digit year-on-year growth in Q1 2022,” Bayen wrote. “And as of yesterday, the Q2 2022 funding was already at $875 million. That’s already a 50%-plus year-on-year growth with one month to go.”
In 2021, investors poured about $5 billion into Africa tech startups. Year to date in 2022, the figure is already $2.7 billion.
Then Bayen poses the critical question.
“Do you think this will last?”
We asked Firas Ahmad, Group CEO of AzamPay in Tanzania, and a keen observer of Africa’s technology ecosystem, for his take on this question.
He is cautiously bullish that Africa will buck the global VC trend. And he offered a few reasons why he thinks so.
“For one, valuations in Africa, while perhaps higher than is necessarily warranted, are still likely significantly less than what is expected in the US or European markets, so investors may be perceiving a good deal,” Ahmad said in an email.
“And two, most of the investments are for companies building core infrastructure with mass-market implications such as payments, basic healthcare, energy, transport. These are very large total addressable markets in economies that will continue to grow significantly over time.”
And finally, he thinks investors understand that it’s still early days in Africa, with huge upside opportunities.
‘There is also probably a FOMO effect setting in for investors who don't want to miss the boat given the kinds of returns we saw in places like China, India, and Indonesia over the last 20 years. Africa is the next frontier in this regard.”
Back to the BigFive Summit’s Investor Panel, which featured three VCs deploying capital to early-stage tech companies, many with an SMME angle. In general, these investors were also optimistic about Africa’s ability to ride out the global storm. And they cited a variety of reasons for their bullishness.
“Investors are still looking for opportunities,” said Wen E Chin, part of the investments team at Launch Africa Ventures. “So what is happening in the U.S. could actually be an opportunity for Africa, where technology is solving very real problems. And there are still a lot of underserved markets on the continent.”
Chin noted that six years ago, there were no African tech unicorns (privately held companies with a billion-dollar valuation). Now there are seven. That fact has been a major confidence builder for those investing in Africa.
“Last year, startups in Africa raised a total of $5 billion. And this year, the figure has crossed $2 billion by the end of April. We're still seeing interest.” Chin said. “Given the amount of opportunities available, I am personally optimistic.”
Chin’s firm has invested in many companies we’ve written about here, including PayHippo, Omnibiz, MarketForce, Flexclub, Gozem, Zindi, and many others.
The other investors on the panel did think the global environment is leading to a touch more humility in founders raising capital. And a bit more realism around valuations. It also might influence a change in the kinds of companies and business models that investors in Africa focus on.
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