The map of Africa depicted with coins
The business environment is being plagued by challenges such as inflation, macroeconomic setbacks, etc., and these have led investors across various sectors to pull back on their investments. One sector that has felt the impact of investors’ cold feet more than others is the startup space. The startup space encompasses various types of businesses that leverage technology for their operations. They vary and include businesses in finance, health, insurance, education, mobility, transportation, etc.
The recent macroeconomic realities have pushed investors to pull back on their investments in startups. Globally and collectively, there has been a decline in investments in startups and this is beginning to show. One thing that is also evident is the fact that amid a global decline in startup funding, Africa continues to experience a surge in funding, making it a notable exception from the pack. Funding in Africa, unlike in other regions, is not slowing down.
Africa’s under-served population has overcome the impact of factors such as inflation, slowing economies, etc. Africa continues to be the hub of funding amid a global trend of slowing investments, lay-offs, bankruptcies, etc., that have ravaged the tech/startup space.
Let’s Look At Some Numbers…
According to research firm Africa: The Big Deal, in the first half of 2022 African startups received $3.14 billion in funding. Compared to the same period last year, this more than doubled. Juxtaposing this result with other regions, Africa is ahead of other regions in terms of funding. Europe saw a decline of 3.7 percent in funding while Latin America and the Caribbean had a decline of 43 percent. “June 2022 was the ecosystem’s strongest June ever in terms of fundraising. Q2 2022 was the ecosystem’s strongest Q2 ever. H1 2022 was the ecosystem’s strongest H1 ever. And we’re not talking small increments here; we’re talking 2.7x, 2.3x, and 2.4x year-on-year growth, respectively,” the research firm noted in its report. Compared to the first half of 2021, startup funding in Africa grew 139.7 percent.
Notably, in the second half of this year, African startups have already raised $1.3 billion, adding to the $3.14 billion raised in the first half of the year. Africa seems to be mostly unaffected by the global trends affecting startups across the world. “Macro trends affecting developed-market tech names will be less impactful to Africa. Klarna, Paypal, and others are being hit by fears over inflation and what that means for consumer transactions. Africa’s story is more around bringing the under-penetrated market online,” Lexi Novitske, a general partner with Norrsken22, an Africa-focused tech fund that was set up by Swedish startup founders, said.
If funding in Africa continues to tow this path, startup funding could exceed the record $5 billion raised in 2021. We have seen more and more startups, as well as entrepreneur-founders looking to become the next big thing. They are not slowing down in the provision of services that range from finance, health, insurance, etc., and Africa has the population to match the supply of these services. We have seen startups going the extra mile in the provision of their services. Some of these startups have embarked on the provision of financial infrastructure and last-mile delivery which are some of the major challenges plaguing the African startup space.
Although Africa is leading in funding, it is pertinent to know that when compared to other regions, the funding received by African startups is quite small. For example, the US alone raised $123 billion in the first half of this year. These other regions may be raising much larger funds compared to Africa, they, however, continue to experience declines in funding. Compared to last year, funding received by startups in the US declined by 11 percent.
Africa: The Opportunity Hub
Although Africa’s startup space may be less developed and rakes in lesser funding compared to other regions, some investors see this as an opportunity. Africa has been tagged as an opportunity hub for investors. This is because the continent has a population that needs to be served, technology still has a long way to go, the potential for growth, etc. According to Amrish Narrandes, head of private equity and venture capital at Cape Town-based Futuregrowth Asset Management, “The African venture capital market is far less advanced than that of the developed markets. It follows that more growth can be expected in the African market.”
Why Is Startup Funding Not Slowing Down In Africa?
A lot of factors contribute to why startup funding isn’t slowing down in Africa, and we are going to be examining some of them.
The first of these many factors is that Africa’s markets remain undeveloped compared to its budding young population who align very well with the technology being offered by startups. Compared to 31 in South America and Asia, the average age of an African is 18, according to Visual Capitalist. This shows that there is quite a wide gap to be filled hence investments in Africa.
Startups identify and tackle a problem faster and better, compared to the traditional system. For example, fintech startups broaden access to financial services and delivery companies leverage the shortcomings of decrepit state postal services. These days, the traditional system is aligning with technology. According to the African Private Equity and Venture Capital Association, “Startup companies in Africa are solving real problems, where existing businesses either do not exist or do not have the dynamism to make changes.”
Another reason why investments in African startups are not slowing down is that investors recognize the growth potential. Many African startups are still in their infantile stages compared to their counterparts in other parts of the world but they still manage to churn out good numbers. These startups continue to report higher revenue and user numbers.
Although Africa is at the leading position in terms of startup funding, it is pertinent to know that these startups within Africa are not growing at the same speed. Their growth varies from country to country and from region to region within Africa. According to Narrandes, in the first half of 2022, the amount of startup capital raised increased in Kenya the most (increasing x4), doubled in Nigeria while remaining constant in South Africa.
It is also relevant to know that like their counterparts across the world, these African startups are being hit by the current macroeconomic realities and some have been forced to cut down on their workforce. According to Ido Sum, partner at TLcom Capital, a pan-African fund, “I do hear from many founders things are slower. Fundamentals are still very attractive, probably more than many other regions.”
Although Africa is doing well in the face of these realities, the rate of increase is expected to increase as the impacts of these macroeconomic challenges reduce over time.