Venture Capital Funding in Africa is expected to drop at least 40% or about $800 million by the end of 2020, according to early estimates by the accelerator AfricArena.
This is the first time investment in Africa will drop in the past 5 years. The continents appeal as a VC investment destination has been growing, leading record-breaking amounts of funding being raised by African tech startups each year.
In 2019 alone, an all-time high of $2.02 billion was raised in equity funding, representing 74% YoY growth with 250 equity rounds and an average deal size of $8.08 million.
However, the growth has been stunted in 2020 as the adverse economic effects of the Covid-19 pandemic has caused a huge drop in funding. According to Briter Bridges, a total of $350 million was raised in the first quarter of 2020 before lockdown in March, which saw an 80% drop in funding.
South Africa ($112 million), Nigeria ($74 million), Kenya ($62 million), and Egypt ($51 million) remained top funding destinations in Q1 2020
The effect of the virus persisted into the second quarter as funding dropped 60% in Q1 and Q2. The continent raised $143.5 million during the quarter with health tech startups closing largest funding rounds as governments and organizations hunted for solutions to the health crisis.
In May alone, Ghana’s mPharma raised $17 million while two startups from Nigeria, 54gene and Helium Health brought in $15 million and $10 million respectively.
Early stage and pre-seed funding suffer
Early-stage pre-seed funding is the category most affected by the pandemic as investors become more risk-averse amid economic uncertainty.
According to the e-Conomy Africa 2020 report released by Google and the International Finance Corporation (IFC), investors will likely shift away from early- and seed-stage investments and toward companies that are more established and with clearer paths to profitability.
Last year alone, Partech’s report shows that the early stages (Seed and Series A) accounted for 206 of the 250 deals in 2019. This represents over $600 million of the funds raised.
In 2019, more investments were made in earlier stages and deal sizes were growing, highlighting increasing investor confidence and the attractiveness of the African startup ecosystem.
This year, however, most of the investment has been directed at established startups like Jumo’s $55 million debt and equity finance round in South Africa, Flutterwave’s $35 million round in Nigeria, and Sendy’s $20 million round in Kenya.
Despite the effect of the pandemic and other wide-ranging numbers of challenges confronting startups in the African ecosystem, the venture capital landscape is poised to recover and continue significant expansion in the coming years.
AfricArena predicts full economic recovery by 2022 at the earliest
Nigeria remains No 1 Funding Destination
According to Google’s report, Nigeria remains the top destination for startup venture capital investment on the continent.
Averaging the funding amounts documented in the Partech report, Disrupt Africa and WeeTracker 2019 Africa tech startup funding reports showed that Nigeria received twice as many investment dollars as Kenya, the country with the second-highest average of funding.
Egypt took the third spot, replacing South Africa’s in the top three African investment destinations in 2019.
Low investment in Francophone countries
Although VC investments are increasing across most of the continent, French-speaking countries in Africa have not yet benefited from the same rising equity figures.
According to Partech, only $54 million out of the total $1.1 billion raised in 2019 was invested in tech startups in Francophone countries.
Senegal leads non-Anglophone funding recipient, raising $22 million in four deals.
According to the report, language has been identified as the major problem affecting investors ability to engage with information about the markets, such as in publications and press releases.
However, it also pointed out that angel networks, new funds, government policies, and startup acts are beginning to address the imbalance by creating favourable conditions for startups in Francophone Africa.
In summary, reports show the extended effect of the pandemic on the funding landscape in Africa has been damaging. However, it predicts a strong recovery that will spread into the next few years.
The report is available for review and download here.
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