Terms oft-mentioned in the African investor and startup landscape in 2023 would include the likes of “reset”, “funding winter”, “return to the fundamentals”, and “resilience”.
For founders especially, the decline in funding from 2022 to 2023 has been marked, with the drop-off equating to around USD 1.8 billion as of 30 November 2023. In January 2024, Partech reported that total funding declined 46% from 2022 to 2023 across the ecosystem. The decline in funding was accompanied by a 28% decline in deal count.
At the Africa Early Stage Investor Summit 2023 (#AESIS2023) hosted by VC4A and ABAN. At the event, held in Cape Town between 30 November and 2 December 2023, this context informed much of the conversation between investors, founders, and ecosystem stakeholders. Over the 3 days, several themes came into focus that are expected to strongly influence investor interactions with the ecosystem in 2024. Among them were:
- The African tech ecosystem’s return to the status quo of pre-2021.
- The increasing prominence of impact capital within the tech ecosystem.
- Investors playing a greater role in helping their portfolio startups become exit-ready.
Navigating the funding landscape in 2023: Understanding the ecosystem’s return to normalcy
The speed at which the tech ecosystem moves on a quarterly to monthly (to even weekly) basis almost makes naval gazing inevitable within the ecosystem. Founder behaviour and the deadlines in part imposed on them by investors seeking regular updates means that their behaviour and that of investors are structurally driven to be short-term. Perception reinforces reality.
In 2023, founders found it much harder to raise. Investors were increasingly watchful of the macro environment in core ecosystem constituencies such as Nigeria, Kenya, and Egypt, hammered by factors including rising interest rates and depreciating local currencies. A business in Lagos may grow sustainably in Naira, but when earnings are converted into US Dollars, their growth is flatlining or has even gone backwards, a hard sell to USD-denominated investors.
2021 and 2022, by comparison, were boom times for the ecosystem. Founders could tap into the “easy money” central banks created by zeroing interest rates and printing vast sums of money as part of their national stimulus programs during the COVID-19 global recession, with the US Federal Reserve a leading culprit.
However, as relayed by several attendees at AESIS2023, the ecosystem existed before 2021. A very different picture emerges if you widen your lens and sketch out the ecosystem’s funding journey between 2013 and 2023. In 2013, startups in the African tech ecosystem raised approximately USD 12 million in total that year. In 2014, that figure rose to USD 17 million. Fast forward to 2023, with total fundraising reaching USD 2.6 billion by the end of November. Between 2014 and 2023, funding in the African tech ecosystem increased by 119x.
Furthermore, if you remove 2021 and 2022 from the funding equation and plot 2023 against its predecessors, the story is of steady, year-on-year growth, a growth path a value investor would be proud of, with the ecosystem as of 2023 still in its infancy (or a “toddler” as one investor noted).
This gradual maturation of the ecosystem is cold comfort to founders raising now. Still, the last 10 years tell us that classifying 2023 as a “funding winter” or “reset” mischaracterises the year that has passed. Funding winter implies that 2023 is an aberration (it isn’t), and reset (while more accurate) implies a “starting over” that is not possible with 10+ years of history behind us.
What happened in 2023 is the ecosystem reverting to the mean. As one ecosystem stakeholder described it, the shock experienced in 2023 should be balanced with the hard-fought wins achieved by the ecosystem over the last decade. Founders quickly became accustomed to and accepting of the distorted valuations that defined 2021 and 2022, making 2023 a tough pill to swallow.
The evolving exit landscape and impact capital in African tech
Beyond the funding downturn, another word on many investors’ lips at AESIS2023 was exits. Data suggests that M&A is a leading form of exit on the continent. Some of the causes holding back the ecosystem’s ability to generate exits include a lack of liquidity in local markets, corporate conservatism on the continent, and the ecosystem’s less-than-flattering DD and compliance reputation in critical stakeholder circles. These causes, while real, do not preclude investors from actively supporting their portfolio startups to become exit-ready.
A view expressed at the Summit suggested that this is what investors should actively seek to do. Rather than treating an exit as an outcome of building or supporting a great business, investors should be more intentional in communicating with their portfolio startups regularly, with the exit conversation and process firmly on the agenda over a long period. As one speaker highlighted, it takes an African startup around 10 years to exit, while another spoke of the importance of treating the investment cycle as a 10 to 15-year commitment versus 5 years. Another investor noted that it takes 3 years for startups to reach seed stage and up to 7 years to reach Series A.
Another shift underway in the ecosystem over the last few years is the increasing prominence of impact capital, with this gradual shift noticeably observable at AESIS2023. The attendee list contained the expected presence of well-known and highly regarded VCs who were complemented by organisations whose financing mandate is closely or thoroughly tied to impact objectives.
In the not-to-distant past, impact capital was treated as a shibboleth in the ecosystem. A difficult raising environment has played a role in dispelling this view. Impact-orientated investors have also shown increased agility and interest in the ecosystem’s ability to drive social change in Africa’s different regions by serving underserved markets and populations. Supporting diverse fund management teams is part of this narrative since a diverse leadership team filters into a fund’s strategy and execution.
The views expressed are wholly those of the writer and do not necessarily reflect the views of the Africa Early Stage Investor Summit.