Despite witnessing a record fundraising haul in 2022, African startups failed to hit the ‘magic figure’ projected by experts.
While global venture funding declined due to certain uncertainties and upheavals, Africa remained the outlier, raising more funding last year than it did in 2021. For context, the continent was the only region to record three-digit growth in the first quarter of 2022: a whopping 133% increase in funding.
A report released last year by the African Private Equity and Venture Capital Association (AVCA), an industry group, projected that if the continent continues its impressive funding run, it might close the year with a record $7 billion, representing a 35% year-on-year increase from the $5.2 billion raised across 650 deals in 2021.
But, according to Africa: The Big Deal, a newsletter that tracks funding, venture funding on the continent stood at $4.8 billion by the end of last year. The figure exceeded $5 billion when undisclosed deals are included, according to data from London-based research firm Briter Bridges.
And despite the interesting fundraising, the continent failed to produce a new unicorn. In 2021, the continent, coming on the heels of impressive venture funding, welcomed five unicorns.
In a previous article, I attributed this growth in venture funding to Africa’s large population and huge market which has made the continent an attractive tech hub for investors, the ingenuity of African founders, and the concerted efforts of African governments — through policies and initiatives — to create vibrant and supportive tech ecosystems on the continent.
But there was a key factor that I missed: the fact that Africa’s investment landscape is shaped by the rise of investors interested in early-stage startups.
“The funding winter is felt mostly by startups raising big chunks of funding, say $100m+. African startups are still attractive for VCs because our funding rounds are still relatively small. Also, founders in Africa are building “primary” startups that will still be attractive to VCs, whether there is a funding winter or not,” Kenyan journalist, Jonathan Ntege Lubwama told me in a tweet.
Related article: Why African startups raised more funding in 2022 than last year.
All that glitters isn’t gold
In its Africa Investment Report 2022, Briter Bridges noted that as of the end of 2022, all of Africa’s venture funding combined accounts for about 1% of the global funding.
And of the investment attracted to the continent last year, the big four — Nigeria, Kenya, Egypt, and South Africa — alone accounted for about 75% — a reflection of the uneven distribution of funding in Africa.
For context, three out of four deals went to startups active in one of these four countries, with the rest of the fifty countries on the continent sharing the remaining slice, according to the report. But in recent years, other ecosystems have begun to emerge in Ghana, Uganda, Tanzania, Tunisia, and Morrocco, albeit all in their nascent stages.
Just last week, Instadeep, the Tunisian London-headquartered artificial intelligence (AI) startup got acquired by BioNTech, a German biotech company and vaccine manufacturer in a deal worth $620 million.
2023 might be challenging
With economic slowdown and uncertainty as the defining factors for last year, 2023 might start on a shaky note for global venture funding. Per the recently released CB Insights 2022 State of Venture Report, global venture funding fell by 19% quarter-over-quarter (QoQ) in Q4 2022 to reach $65.9 billion, bringing the total venture funding in 2022 to $415.1 billion — a 35% drop from a record 2021. However, the deal volume fell by only 4% YoY in 2022, reaching 36,177 deals.
A slowdown in the global markets means investors would rethink their approach to pumping money into African startups. This poses a big problem for the continent’s tech scene which thrives on foreign capital, meaning startups will have a hard time raising funds. But on the flip side, it raises serious questions about the need for local investors to ramp up their investment in home-grown startups.
As Briter Bridges puts it in its report, “The over-reliance on a few, overseas funders can alter the perception of capital availability within the continent and, when or if these overseas investors decide to pause or slow their down their investment activity in times of crisis — such as during COVID-19 or the bubble burst of mid-2022 — late-stage companies that had grown the period of capital abundance, may struggle to find available money pools.”
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