Africa’s VC industry growing slowly: $4.8b raised in 2022

Africa’s venture capital (VC)  industry experienced a downturn in 2022, with only $4.8 billion raised in the continent, according to Oliver Dickson, an SAFM radio presenter. Leading a panel discussion at AfricArena’s Johannesburg summit, he added that more than 1 000 unique investors took part in over 1 100 deals across Africa, with Nigeria, Kenya, Egypt, and South Africa leading the way in terms of deal activity.

Of the deals tracked, 37% were related to fintech, with the sector remaining a key focus for investors on the continent. However, despite the relatively high number of deals, only 144 start-ups that were tracked here announced million-dollar deals, with the majority still in early-stage investments.

This indicates a larger appetite for early-stage investment, which is essential for the development of Africa’s VC industry. Clive Butkow, chief executive of Kalon Ventures, said that the $4.8 billion raised represents just 1% of the global venture capital industry, indicating that there is plenty of room for growth. “It’s still a pimple on an elephant’s bum,” he said.

During the discussion, Darren Lang, chief executive of Kepler & Co, warned that the valuations of some start-ups in Africa were low because they lacked fundamental principles. He said that start-ups with strong fundamentals were receiving more funding from the VC world than those that were driven more by media hype.

Matsi Modise, vice chairperson of SiMODiSA, noted that fintech still presents a significant opportunity in Africa, as moving money around the continent remains a challenge. She cited the Nigerian Paystack as an example of a successful African fintech start-up that was acquired by Stripe for $200 million.

Modise said that the difficulty of transferring dollars between African and international banks presents a significant opportunity for fintech firms. “Money still needs to move around in Africa, and fintech will continue to be a key industry for investors,” she said.

Dickson also highlighted the need for more early-stage investments in Africa. He said that the fact that only 144 start-ups announced million-dollar deals indicates that there is a bigger appetite for early-stage investment, which is essential for the growth of the VC industry in Africa.

During the discussion, Dickson brought up the topic of the mismatched expectations between start-ups and venture capitalists. He asked: “Clive says, this is a VC, he’ll still go for the big fish. Uh, he’ll want the 10 x 12 x, uh, return. Does that work?”

Lang replied: “But they know in the back of their mind, they may not get their 10 x return. So do we feel pressure from our VCs? No, because we are working very closely with them. If you’re raising cash upfront in order to build something, in order to build a sales team, in order to build a product, in fact, you put a post about that before, in my opinion, it’s a mistake.”

Lang continued to highlight the disparity between start-ups and VCs, stating: “I think that that’s where there’s a huge misalignment between start-ups and VCs because the VCs, the start-ups saying to the VC, oh yeah, we are gonna break even in five years. Where does it come from? There’s no fundamentals behind it.”

When asked if cases like the Nigerian Flutterwave scandal affect the confidence VCs have for investing in the continent, Modise stated: “I say yes. It also depends on risk, because by the time you decide to play in Nigeria, you better know what you’re doing.”

Meanwhile, South Africa’s technology industry has been grappling with policy challenges that have made it difficult to attract talent and funding. Eimear Costigan, senior portfolio manager for technology at Wesgro, said that people come to them thinking they have a blank chequebook, which unfortunately is not the case.

However, they support platforms like AfricArena, which connect companies to investors. Modise pointed out that the challenges in growing and scaling a business are immense. She sits as a chairperson of the Technology Innovation Agency, which is a government agency co-sponsoring the Johannesburg summit.

Matsi said, “We have nothing to gain from what we are doing, but the biggest gain is by ensuring that we have an environment that’s thriving, right?” She also pointed out that the Start-up Act is still around, and that they have been very clear for the past ten years about what South Africa needs to change in order to create a more conducive environment for start-ups.

One of the critical changes that the government needs to implement is to remove exchange control, bring back tax incentives that incentivise investment in early-stage ventures and create more attractive incentives for talent to come to South Africa.

In a question-and-answer session, an audience member asked what the government was doing to help people become entrepreneurs instead of employees. Matsi replied that more and more people from the private sector need to get into government and be part of the solution. She further stated that they are very clear on technology skills from SiMODiSA’s perspective.

A Kenya-based attendee then asked about the implementation of a start-up bill in this country. Modise mentioned that Tunisia was a pioneer of the Start-up Act on the continent and was able to gather as an ecosystem within a very short period of time to get it as an act. She explained that Tunisia had three pillars, which were funding ecosystem and capacity building.

As the discussion came to a close, the speakers agreed that start-ups should focus on creating value and not just on revenue. Lang cautioned against relying too heavily on the rule of 40 and urged start-ups to focus on providing shareholder value and giving themselves value. He also highlighted the importance of networking and speaking to people to get through brick walls and find alternative ways of getting funding.

Butkow stressed the importance of hustling and not just waiting for business to come in through marketing campaigns. He encouraged start-ups to explore different ways of getting funding and to be persistent in their efforts to succeed. Modise emphasised the need for intentionality by governments in nurturing start-up ecosystems and creating the necessary policies and infrastructure to support them.

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