The last twelve months (from June 2022 to June 2023) have been marked by a drop in investment amounts. During this period, known as funding winter, funds invested in Africa were divided by three. But how did African startups deal with this situation?
The golden age of heatwave funding in Africa
The period from July 2021 to June 2022 marked the Golden Age of investment in Africa, during which the continent experienced a remarkables urge in funding for its start-up ecosystem. Investors from around the world recognized the potential of Africanstart-up ecosystem, infusing capital to support its growth and development.
This growth in investment was driven in particular by the Big 4 (Nigeria, Kenya, South Africa and Egypt), which together raised around 75-80% of the funds allocated to Africa. In fact, they raised $4.6bn between July 2021 and June 2022. In terms of distribution, Nigeria raised the most with $2bn, Kenya followed with $1bn and South Africa and Egypt shared the remaining $1.5bn.
Many successful startups have raised large amounts of funds in advanced investment rounds, which explains the high investment amounts these countries have received. For example, Nigerian fintech Flutterwave raised $250 million in February 2022, valuing it at over $3 billion. We can also mention other african startups such as the Nigerian mobility startup Moove, which raised $181.8 million, the Egyptian fintech MNT-Halan, which secured $150 million, and the Kenyan e-commerce platform Wasoko, which closed at $100 million. These important fundraisings are a perfect illustration of the investment euphoria of the funding heatwave.
Beyond the big four countries, heatwave funding also stimulated the startup ecosystem in other African countries. Ghana, Tunisia,Senegal, Tanzania and other countries have all seen a surge in entrepreneurial activity, boosting economic growth and regional development. These four countries raised more than $100 million during the heatwave funding period.
Moreover, seven other smaller countries in terms of investment announced that they had raised more than 10 million.
This period of heatwave funding illustrates that global investors, venture capital funds and multinationals have realized the potential of African startups and have been looking to establish strategic partnerships with the most promising among them.
Why has the funding heatwave disappeared in favour of funding winter?
From June 2022, funding heatwave was replaced by fundingwinter, a period characterized by a drop in investment worldwide. This slowdown in venture capital activity impacted fundraising for start-ups of all sizes and in all sectors. There are several possible reasons for this drop in investment and the funding winter start.
In 2020, as the VC industry reached record levels of startup funding and valuation, reports were already beginning to emerge about the overvaluation of some startups. Investors began to realize that these companies were not profitable, and that their valuations were perhaps too high. This was largely driven by the flood of capital into the VC industry, which reached record levels in 2018-2019.
The COVID-19 pandemic then accelerated this phenomenon, as tech start-ups were overvalued during this period, due to the trend towards all-digital and remote systems. So, in 2022, when the economy began to return to pre-crisis levels, investors realised that the tech start-ups of the covid period had been overvalued. This observation made, investors began to be cautious and funding winter set in.
Recent inflation due to the war in Ukraine has also encouraged the start of funding winter. Indeed, an investment whose return is lower than the rate of inflation no longer brings any profit. Investors therefore had to invest at a higher risk to hope for a good return, which discouraged them from investing heavily in the start-up ecosystem.
Inflation also led to an increase in key interest rates.This rise caused a decline in lending and therefore in economic activity, which encouraged investors to reduce their investments. This interest rate rise also contributed to a decline in the value of start-ups, since the value of their future cash flows is dependent on them.
All these factors have helped to create a climate of uncertainty in the start-up ecosystem, and thus to establish a funding winter. Like every continent in the world, Africa has not escaped this and has seen a significant drop in investment during this period.
How have start-ups and African countries lived through this period of funding winter?
As we said earlier, over the funding winter period, the total amount of funds raised was almost divided by three in Africa.
At first, Africa seemed to be able to resist the global decline in venture capital funding, as its startups raised $3 billion in the first half of 2022, when funding winter was already starting to set in. This was twice the amount raised during a similar period the previous year.
However, as elsewhere in the world, the funding winter of the venture capital market caught up with the continent in the second half of last year: ticket sizes fell and fewer investments were concluded. The slowdown in financing in Africa subsequently intensified in the first half of 2023, as investors continued to withdraw, making it more difficult for new and existing companies to raise capital.
African countries and stratups have reacted differently to this funding winter. Indeed, while the Big Four continued to capture 80% of the funds invested, the distribution changed drastically in the second half of the year.
The Big Four have seen a significant fall in investment. Nigeria is the country that has suffered the most, with funding down by -77%,i.e. divided by 4.3. As a result, Nigeria lost its leading position to Egypt, whose drop in investment was the smallest of the big four countries with -25%. Egypt is the only country of the four to have raised more than half a billion dollars during the winter funding. In South Africa, the amount invested was halved, i.e. a fall of 53%, and in Kenya it was divided by 3.2, i.e. a fall of 69%. So, even the Big Four have suffered from this winter funding period, since the amounts invested in their start-ups have declined significantly compared to the heatwave funding period.
The four markets that had raised more than $100 million during the funding heatwave also suffered a spectacular fall in the funds invested in their startups. During the funding winter, investments were dividedby 3.1 in Tanzania, a drop of 68%, by 5.4 in Ghana, a drop of 81%, by 20 in Tunisia and by 27 in Senegal. Investment in start-ups fell from $222 million during the funding heatwave to $6 million during the funding winter.
Finally, four of the seven countries that had raised between $10 million and $100 million during the heatwave funding period also suffered very substantial losses (DRC, Namibia, Zambia and Uganda).
At the same time, and surprisingly, some countries resisted well and even increased their investments during the funding winter. Investments in Ivorian start-ups rose by 15% and those in Cameroon by 34%. Cameroon even reached the $10 million mark in investment. Finally, the country that experienced the biggest growth in its investments during the fundingwinter was Algeria, which multiplied by 5, from 30 million dollars to 150million dollars. However, this Algerian increase was mainly driven by the $150 million raised by Yassir in November 2022.
As a result, many Ivorian and Cameroonian start-ups raised funds during the funding winter. Saviu has also invested in several start-ups in these countries during this period. In particular, we have invested in Waspito, a health platform and at-home laboratory services in Cameroon, and in Julaya,a B2B neobank in Ivory Coast. For more information, please consult our portfolio.
Why did investment grow in these countries during the funding winter?
There are two main reasons for the Cameroon, Ivory Coast and Algeria resilience to the funding winter: African startups in these countries are raising seed capital, and investors have seen this as a more attractive buying opportunity for them, in terms of valuation.
First of all, we can see that while fund-raising has fallen, seed funding has remained strong. On a worldwide scale, late-stage financing fell by 19%, while seed funds increased their investments by 14% during the funding winter. So, knowing that ecosystem VCs in the Ivory Coast and Cameroon are quite young, their startups are raising seed capital and therefore benefited from more funds during the funding winter.
Investment was also able to increase, because when funding winter arrived, startup valuations fell, enabling investors to invest by increasing their share of capitalizations. They saw this as an opportunity to invest at a higher return. However, investors don't want to invest large amounts in companies with huge valuations, but prefer to invest in seed-stage startups for valuations that are more attractive to them.
Also, the higher the risk, the higher the returns. In times of inflation, seed venture capital is an attractive return, hence the interest of investors in these African startups.
What can we expect for African start-ups in the months following the end of this funding winter?
Summer 2023 seems to mark the end of this funding winter cycle, after more than a year of investment freezes around the world.
Like all markets, Africa has suffered during this period and is therefore tending to experience a new investment cycle. We probably won't see funding heatwave in the coming months, but we will at least see an improvement in investment after this freeze. However, opinions are divided on the recovery, with some specialists predicting that Africa will continue to suffer from a late-funding winter in 2023.
In any case, some markets have already been targeted a spromising, even though funding winter has just come to an end. Indeed, The African Angel Academy, in collaboration with DGGF and FMO, has identified four countries that have reached a sufficient level of maturity to grow their startup ecosystems, and has chosen to open its AAA cohort program to them. This program enables angel investors from Uganda, Rwanda, Tanzania, Ghana or Zambiawho have the capital, experience and determination to participate in their country's venture capital industry. They will be able to co-invest and network with other investors, benefit from mentoring and source startups.
This program, gives a good idea of the market trends for African startups, and of which countries are tending to experience entrepreneurial growth and funding investment.
Even if the big 4 keep their place on the podium after the funding winter, the countries that have benefited from winter funding and the promising countries show that West African is experiencing an undeniable growth in investment. It is for these reasons that we believe in West Africa and have been investing there since 2018. So, if you're an African entrepreneur and you are raising funds, don't hesitate and contactus at Saviu.