Africa’s VC funding slump raises concerns over startup viability

Onome Amuge

Africa’s tech ecosystem has experienced a range of performance outcomes since the start of the year. While venture capital (VC) funding has not reached the record levels seen in 2021 and 2022, regulations and standards have taken center stage in efforts to govern and support the growth of the digital economy across the continent.

In terms of VC funding, many African startups have seen a decline in funding levels since the beginning of 2023, but there are still a number of promising opportunities for growth, according to a report by TechCabal Insights titled “State of Tech in Africa Q3 2023”.

The report found that venture funding in Africa this quarter fell short of the half-billion dollar mark, a decrease from the previous quarter. However, acquisitions remain strong, as evidenced by the recent acquisition of Nigerian business banking startup, Bankly, by global technology giant, Google.

In the third quarter of 2023, venture capital funding in Africa reached its lowest level in seven quarters, falling to $547 million, down from $857 million and $916 million in the previous two quarters. This marks a significant slowdown in VC funding compared to the previous two years, which saw $5.2 billion and $6.5 billion raised in 2021 and 2022, respectively.

The decline in VC funding has been attributed  to a combination of factors, including global macroeconomic conditions, geopolitical uncertainty, and increased risk aversion from investors.

In the third quarter of 2023, African startups raised a total of $499 million across 97 deals, a 41.7 per cent decrease from the $916 million raised in the previous quarter. This decline also represents a reduction from the $675 million raised in the corresponding quarter of 2022.

While August was the month with the highest amount of VC funding ($243.96 million), July and September also surpassed the $100 million mark, with $141.1 million and $130.5 million in deals, respectively. However, these months saw more deals (38 and 33, respectively) than August (26). In contrast to the first two quarters of the year, there were no mega deals (deals worth over $100 million) in the third quarter. This trend indicates that investment activity has become more evenly distributed across a range of deal sizes.

The report also showed that the so-called “Big 4” countries in Africa including Nigeria, Kenya, South Africa, and Egypt, raised a total of $334.3 million in VC funding in the third quarter of 2023. Of these four countries, Kenya and Nigeria raised the most, with $131.15 million and $103.49 million, respectively. This is a significant drop from the previous quarter, when Kenyan startups alone raised more than the combined total of the Big 4 in the third quarter. South Africa and Egypt raised $82.43 million and $17.2 million, respectively.

Speaking on the challenges facing venture capital for startups with a pan-African focus, Hope Ditlhakanyane, investment principal at Founders Factory Africa, a venture development company, noted that there are several macroeconomic challenges that make operating across Africa difficult including  currency devaluation,which  makes it much more difficult to operate.

Ditlhakanyane also highlighted three other  founder-specific challenges, namely Product Market Fit, pursuit of exits and access to scalable distribution channels.

Ditlhakanyane emphasised that product-market fit is a concept that is often misunderstood by founders, not in its definition but in its practical application. While many founders understand that product-market fit refers to the degree to which a product meets the needs of a particular market, they may not realise how it should inform their key strategies and activities. According to Ditlhakanyane,  founders should focus on understanding and prioritising the needs of their target customers, rather than focusing solely on developing the perfect product.

“A founder’s focus on vanity metrics, such as gross revenue vs margins or retention/active usage vs user growth, etc., tends to not only skew the proposed value of a deal but

also affect an investor’s ability to align on value-add post-investment,” she stated.

Ditlhakanyane also highlighted the challenge of access to scalable distribution channels, particularly in the Business-to-Consumer (B2C) space. She noted that in a market with low consumer purchasing power, it can be difficult to reach and serve a large number of customers. On the Business-to-Business (B2B) side, she pointed out that long sales cycles and traditional corporate structures can make it difficult to grow at scale.

According to Ditlhakanyane, finding scalable distribution channels that allow startups to reach a large number of users in a commercially viable way is a significant challenge. This is particularly difficult in markets where traditional distribution channels are not well established, or where the infrastructure necessary to support a digital distribution model is lacking.

“In a funding winter environment where every cent should be stretched to

deliver value where it matters most, it becomes even more crucial for

founders to have clarity of thought on the right value drivers for their

Businesses.” she stated.

Ditlhakanyane noted that the pursuit of exits, or the realisation of value from an investment through a sale or public offering, is not just a challenge for investors, but for the entire ecosystem. She noted that as investors reach the end of their fund lifecycles, the need to achieve exits and return liquidity to investors and their limited partners (LPs) becomes more urgent.

“The question is not WHO to exit to, as we’ve seen

broad categories of buyers emerging as the ecosystem matures, but

rather WHAT they will be buying,” she remarked.

According to Ditlhakanyane, one of Founders Factory Africa’s biggest challenges has been working with founders to define what “acquirable assets” are within their solutions, and how to integrate the development of these assets into their roadmaps. This is because many founders have a product-focused mindset, rather than a business-focused one. By working with them to define and build these assets, Ditlhakanyane hopes to make it easier for founders to achieve successful exits in the future.