Analyst sees success for African firms prioritising profitability over growth

• FX, inflation dampens African markets in 2023

• But business ecosystem more mature, robust

Business a.m. Reporter

Successful outcomes await African businesses who choose to prioritise profitability over unbridled growth this year and beyond, says London-based analyst Risana Zitha, managing director and head of Africa at DAI Magister in a note to Business a.m.

Zitha said this projection is on the back of happenings in 2023 globally and in particular, in Africa, where notable currency depreciations created unfavourable market conditions with Nigeria seeing its currency, the Naira, depreciate by 40 percent and Kenya experiencing a 20 percent depreciation in the value of its currency.

He said the stage was set for last year’s outcomes in Africa by a global business landscape that underwent a profound transformation, triggering a turbulent year for companies worldwide, noting that geopolitical turmoil, inflationary pressures, and a shifting economic landscape unleashed a torrent of challenges, particularly for start-ups and growth-oriented companies.

As a result, Zitha said there was a contraction in the size and volume of VC [venture capital] deals, with both metrics decreasing by 40 percent when comparing H1 2023 with H1 2022.

“2023 brought about a familiar challenge to the African market – foreign exchange volatility and depreciation. While many anticipated some level of volatility, the depth of currency fluctuations unfolding throughout the year left many industry experts and observers taken aback,” Zitha said.

According to him, discussions with investors well-versed in the African business ecosystem, provide evidence that many have steered clear of engaging in markets marked by significant foreign exchange uncertainties, noting that this caution stems from a keen awareness that pronounced currency fluctuations can be the chief catalyst for eroding the value of their portfolios.

Zitha further said: “Many of Africa’s brightest stars were also entangled in financial turmoil. Dash, the Ghanaian fintech darling, which had garnered an impressive $86 million in funding over five years, was entangled in a web of financial issues and shut its doors. Similarly, Zumi, a Kenyan B2B e-commerce start-up, couldn’t secure crucial funding at the eleventh hour, marking the end of its operations.

“However, despite reports of macroeconomic challenges and reduced funding dominating the headlines, a positive development is worth underscoring: the African business ecosystem is transforming into a more mature and robust landscape. As global funding and venture capital activities enter a period of recalibration, the focus is shifting away from unbridled growth. Investors are now placing increasing importance on factors such as cash flow predictability, profitability, and efficient capital utilisation.”

He said the outlook of DAI Magister on the African business environment is one of optimism, especially as it enters a phase of ‘growth territory.’ 

“Notably, there is a rising trend in deals at the growth stage, representing a significant departure from a market primarily focused on seed and Series A funding rounds just five years ago. This signifies an evolving market that is inching closer to ‘consolidation territory’, indicating the arrival of M&A as a viable option for an increasing number of businesses,” Zitha said.