What does the future of Venture Capital in Africa look like? This is probably the most prevalent question in Africa’s startup scene in recent times.

Over the last decade, venture capital funding has played a significant role in developing Africa’s digital ecosystem and resolving the long-standing problem of limited financing availability. This was not the case last year, however, as African tech startups faced a myriad of challenges. As predicted, raising venture capital turned out to be a daunting endeavour. As word spread across the continent about startup closures and employee layoffs, bridge and down rounds became more frequent.

Preliminary reports suggest a notable downturn in the total venture capital funds raised in Africa during 2023. This decline follows a decade of consistent expansion and outstanding achievements in the preceding two years. Africa’s startup scene has been severely impacted by this change in the investment environment. Notably, following a period of plentiful funding and skyrocketing valuations, growth-stage companies have been disproportionately impacted.

The Current State of VC in Africa

In 2023, venture capital funding fell considerably all over the world, and while there was a ton of optimism that the African tech economy would avoid too much harm, according to sources like Disrupt Africa, African Tech Startups had raised Us$649,303,000 by Q1 2023, a total of US $1.19 billion by H1 2023, and further raised US $492,418,000 in Q3 2023, taking the total for the first nine months of the year to the US $1.4 billion, down 48% on the corresponding period in 2022.

This makes it more challenging for founders to raise money, which adversely impacts startups that have only recently begun their Series A and B rounds. This is because, in a market with abundant liquidity, startups at this point had profited from higher valuations. Series A and B founders have therefore been forced to reduce their valuations. Because these companies’ business models were built on the assumption that capital was cheap, jobs have been cut and ventures have been forced to reduce their operations to squeeze out every last penny of their currently available funding. Chipper Cash, a fintech company, faced the ongoing cash crunch and further difficulties due to the collapse of FTX and Silicon Valley Bank, the key backers of its $250 million Series C and extension round in 2021, which were expected to provide support during tough times. As a result, Chipper Cash had to implement multiple rounds of layoffs. Cellulant also opted for a more streamlined approach, adopting a “product-led growth strategy” and reducing its workforce by 20%. Further to the West of Africa, Ghanaian health-tech firm mPharma had to let go of 150 employees.

Women founders have had it worse. “Setting up an entrepreneurial venture is not an activity for the faint-hearted and neither is raising capital as an early-stage entrepreneur. Add being female to this mix and life becomes difficult overnight,” Kanini Mutooni, Managing Director for Africa at Draper Richards Kaplan Foundation, highlights. But that’s what you’re up against when you’re a female founder. In the world of VC funding, recent data shows that women-owned businesses receive just 1.9% of funding compared to their male counterparts.

Despite these challenging times for Africa’s venture capital landscape, startups are finding other ways to address these issues, so all is not lost. Ironically, an economy that emphasises resilience, product-market fit, and product development is gradually shaping pre-seed and seed founders, even as they battle to raise capital. Founders and startups that make it through this particular period will undoubtedly have had to mature in a challenging economic climate. The pre-seed and seed founder class of 2023 will be stronger as a result of their unique experiences.

“Over the last few months, we are seeing a lot more startups come with entirely new and better business models as a result of lessons learnt from failed businesses or their progression. The current market conditions have grounded a lot of founders resulting in a lot more creativity and innovation, with founders being driven to build for sustainability, ”Adelaide Muthang’i, Investment Analyst at Founders Factory Africa, says.

Outlook of Africa’s Venture Capital Scene

More investors are expected to be cautious with their investments as a result of the SVB collapse. Traditionally, a lot of African startups have looked outside of the continent for funding. According to recent data, foreign venture capitalists account for approximately 77% of venture funding in Africa. This highlights how important it is to make domestic investments in the tech sector of Africa. Nonetheless, startups will be able to successfully raise the necessary funding if they have solid business strategies and focus on finding solutions to critical issues.

Investors will be cautious as the global economy slows due to inflationary pressures and tighter monetary policies. African entrepreneurs may find it difficult to raise capital due to investors’ cautious approach and their careful evaluation of risks and returns in the current economic environment.

In this regard, African businesses need to show strong capital efficiency and attractive value propositions to get past funding barriers. Startups need to approach navigating the economic downturn strategically. This demonstrates how important it is to have solid business ideas and address pressing problems to attract investors searching for the best possible investment opportunities.

Gullit VC’s Managing Director, Hiruy Amanuel, predicts that startups exhibiting strong capital efficiency in the upcoming year will garner the valuations they deserve. A sizeable amount of investment capital is constantly available to pursue the most promising opportunities. “In the current climate, effective capital management is crucial. A startup is at a safe place if it is spending $2 million and generating $2 million in new average revenue run rate. A VC would simply not be interested in taking on an alternative scenario, such as burning $4 million and only making $2 million. For a venture capitalist (VC), bottom-line growth and profitability are far more important during such times.”

Since the tech sector has traditionally been highly male-dominated, investors are overwhelmingly male and so are the entrepreneurs. This can be attributed to the fact that the VC industry, having sprung up in Silicon Valley, is still heavily influenced by ‘tech-bro’ culture. But barring a massive, sudden shift, female founders will be up against steep odds for years to come. “If you are a female founder looking to raise venture capital: focus on being super clear about the problem you are solving, execute on a revenue model that has impact baked in and that will generate consistent revenue and lastly, have a clear scale strategy and an end-game,” Kanini Mutooni explains. Networking, especially for female founders, is also crucial. When you actively seek out people who could help you in any phase of your business, you might be surprised at how many people give you the time and resources. Purity Kimani, Investor Relations Manager at Lokal Capital highly advocates for this, saying, “While female-led organizations currently receive only 1% of VC funding, it’s vital to address systemic challenges rather than perpetuating stereotypes. Initiatives like the Female Angel Network (F.A.N) by Lokal Capital are actively empowering women to embrace risk-taking and seek funding confidently.”

State of VC Funding in Africa in 2024

Startups need to figure out the unknowns that will shape 2024. Founders need to ask themselves the tough questions ahead of the incoming year. Beyond funding, most venture capital firms and angel investors want to be involved with startups creating impact. Now more than ever, founders in the growth stage need to meticulously research potential investors before involving them. Additionally, startups should create a strong working capital plan that emphasises higher-margin services and products renegotiates credit terms with creditors and debtors, and improves inventory control.

The continent’s diverse markets provide untapped markets in different industries and as consumer demand for digital services, e-commerce, fintech, and other solutions increases, there is a corresponding demand for startups that can effectively address these local needs, while also having the ability to scale rapidly.

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