Why African startups have raised more funding in 2022 than last year

This year, the global downturn in terms of venture capital (VC) funding affected nearly every region, with Africa being the only exception. For context, Africa was the only region to record three-digit growth in the first quarter of 2022. Last year, 604 African startups raised a record-high figure of $5.2 billion, according to the African Private Equity and Venture Capital Association (AVCA), an industry group.

While global venture funding has been declining, the African startup ecosystem continues to be a story of record growth. Startups in Africa have raised $1.8B in Q1 and $1.3B in Q2 '22, which adds to $3.1B in the year's first half.

— Eunice Ajim (@euniceajim) August 2, 2022

But the continent was hit in the third quarter of 2022, recording “slightly disappointing” numbers. Per the CB Insights State of Venture Q3’22 Report, VC funding in Africa surprisingly dropped by 54% in Q3 2022, just as global funding fell to its lowest levels since Q2 2020.

According to the report, African startups raised a total of $367 million in Q3 2022, representing a significant decline when compared to the $804 million raised in Q2 2022. Also, the volume of deals fell from 135 recorded in Q2 2022 to 117 in Q3 2022.

Read also: Venture funding in Africa fell by 54% in Q3 2022 – report.

Africa is the only continent to record growth in VC funding in 2022

In truth, 2022 has been a remarkable year for African startups. According to The Big Deal, a newsletter that tracks funding in Africa, the continent is on course to record more VC deals before the end of 2022 than in the previous year.

So far, African startups have now raised more funding in 2022 than in 2021. As of December 1, the number stood at $4.6 billion in total. Not only have startups on the continent crossed the $1 billion mark in terms of funding raised earlier than ever before, but they have also raised their first $2 billion faster than they ever had.

Per The Big Deal, much of the 2022 funding for African startups came in Q1 and Q2, before the decline in Q3. The second half of the year, in particular, has been less dynamic when compared with the first as $282m raised monthly on average in H2 so far, roughly half of the H1 average of $532m.

And with less than four weeks to the end of Q4, barring any spectacular turnaround in another region, Africa is certain to be the only continent to have recorded positive YoY growth in terms of VC funding in 2022 — a big win, if you ask me.

Recall AVCA, in its 2022 H1 African Venture Capital Activity Report, had earlier projected that the amount of VC investment in African startups will hit an all-time high of $7 billion by the end of the year, a 35% YoY increase from the US$5.2 billion raised in 2021.

The differing figures and projections aside, heightened activity in the remaining weeks of this year is certain to produce more VC deals for the continent.

Read also: Venture capital investment in Africa will hit $7bn by the end of 2022- Report

Why VC funding in Africa is on the rise

Compared to last year, startups across the globe raised significantly less venture capital funding in 2022. For context, Crunchbase data shows that global venture funding fell to $39 billion in May, marking the first month in more than a year when it dropped below $40 billion. Experts have since attributed the slowdown to venture capitalists becoming more frugal with their money.

But while VC funding reduced by 3% in the first half of this year compared to last year, African startups on the other hand recorded a 133% increase. The reasons for this aren’t far-fetched.

For starters, Africa — thanks to its large population and huge market — has become one of the most attractive tech hubs for investors in recent years, spurring venture capitalists to pump money into African startups.

One has to equally give credit to the founders of African startups who are leveraging technology to solve important socio-economic problems on the continent ranging such as financial inclusion, access to healthcare for the underserved and vulnerable, and bridging the education gap.

Government intervention is also central to the growth of VC funding. The AVCA report cited earlier, noted that there have been “concerted efforts by African governments” who are responsible for nurturing “vibrant and supportive ecosystems, enabling entrepreneurship and investment to thrive”.

For instance, the Zambian government has perfected plans to transform the country into Africa’s tech hub, a move backed by Ethereum co-creator Vitalik Buterin. In August, Zanzibar launched its “Silicon Zanzibar”, aimed at attracting tech companies from across Africa to the island through tax incentives and easier work visa requirements.

The Nigerian legislature also passed a startup bill to create a friendly environment for tech-based startups in the country. The Democratic Republic of Congo (DRC) recently introduced a similar law that offers a number of support for startups in the country including tax benefits, intellectual property protection; funding for research and development; days off work for startups founders who are currently employees in order to work on their startups, among others.