Been last year a good 12 months of firsts for African tech startups.
For the first time in 2022, the industry attracted more than 1,100 unique investors, which in turn resulted in a record $6.5 billion in fundraising, according to data from Partech.
In fact, some of the excesses of 2021 were overshadowed as investment in the continent soared higher in 2022 than a year earlier, boosted by early-stage companies flocking to fund startups in the wake of historic exits from homegrown companies like Jumia and Paystack.
What drove such volumes as the rest of the world reined in the collective enthusiasm of 2021? To find out, we surveyed a few investors who had the highest number of deals in Africa last year.
As it turns out, while later-stage investors, mostly international VC firms, made headlines by writing huge checks, pre-seed and seed-stage investors were essential to the growth of the continent’s tech ecosystem.
In Africa, there are easily more incubators, accelerators, angels, and seed investors than larger funds — simply because it’s much more difficult to raise a large fund here. They accounted for more than 70% of the more than 1,100 investors who participated in at least one deal on the continent last year.
“This shows that the investment landscape in Africa continues to hold promise as it continues to grow and there is increasing interest in multiple startup ecosystems, including emerging ecosystems. There has also been an increase in syndicates and investment groups made up of Africans domestically and in the diaspora, as well as an increase in founders of later companies who are now investing in other founders,” said Kola Aina, general partner on the Ventures platform .
“These are all indications of a growing ecosystem,” he added.
However, the investment community also recognizes that there is still a long way to go and a range of opportunities to be exploited.
“We are slowly building a more sustainable capital base for African technology. Having 1,000 active investors is not enough,” said Stephen Deng, founder and partner of DFS Lab. “We need thousands of active investors to support the various start-up phases, especially on the growth side, with both equity and debt.”
That said, Africa was not unscathed – several investors noted slowing deal flow and cadence in 2022 and expected investors to be more careful about who they invest in and at what point.
“We definitely noticed that deals were slowing down,” said Karima El Hakim, country director of Plug and Play Egypt.
“A round that would have been completed in one or two months in 2021 took three or four months in 2022 [ … ] We have certainly seen valuations tighten and many startups move to less cash intensive business models.”
Read on to find out what these prolific investors have to say about hot startup sectors in Africa, investment trends, their 2023 predictions, how to pitch them and more.
We spoke with:
- Cola Ainageneral partner, Ventures platform
- Zechariah Georgemanaging partner, Launch Africa Ventures
- Olumide Soyomboco-founder, Voltron capital
- Stephen Dengco-founder and managing partner, DFS lab
- Karima El Hakimcountry director, Plug and Play Egypt
- Iyinoluwa Aboyejico-founder, Future Africa
- Maya Horgan Famodufounder and partner, Ingressive Capital
- Kyane Kassiripartner, RaliCap
Kola Aina, General Partner, Ventures Platform
Last year, your company was among the African investors who wrote the most checks to early-stage startups. How do you balance writing so many checks and funding the best companies?
We go back to first principles, starting with the core of our thesis. We also have a very broad top funnel, so by 2022 we made first contact with over 2,500 startups and ideas, and ended up working with only less than 1% of those top of the funnel. We also get strong referrals from our community of founders, which improves our signal-to-noise ratio.
There’s a pretty strict house process no matter how many deals we do. Over time, we’ve continuously optimized that process to make sure we’re efficient in how we review deals and how quickly we can provide feedback to founders.
Companies that support many startups are often criticized for not doing their due diligence and labeled as lazy for using “spray and pray” tactics. How does this affect the investment landscape? Has this led to unrealistic valuations?
Markets are cyclical: founders and investors adapt to prevailing market conditions. Today, the market dictates a slower and more deliberate pace in the face of global economic uncertainty. This is a development we welcome as it means that our penchant for due diligence and scrupulousness is now back in vogue. The investment landscape remains unchanged, albeit at a slower pace; startups with strong fundamentals and good traction will raise capital and do well.
The most active African investors were involved in 15-20 deals, according to one report on African VC activity in 2022. How was that volume of deals possible in a year of sharp investor pullback? Will we see similar figures in 2023, or will something change?
Despite the gloomy macroeconomic conditions, many investors still believe in what is possible in Africa. We expect to see more investment this year in the context of some market trends, such as lower valuations, increased focus on profitability and capital efficiency, increased cost reduction initiatives, and opportunities for corporate buyers with strong balance sheets to acquire startups.
“We saw some unrealistic valuations in 2021 — it was almost like founders forgot how to build with, say, $200,000. I stayed away from such deals. Olumide Soyombo, co-founder, Voltron Capital
What differences did you notice in the investment landscape in 2022 compared to 2021? Were deals less or more competitive?
For global venture capital, 2021 was an outlier. But last year it started to cool, starting with public markets and then manifesting itself in the late stage startup cycle.
The challenging market conditions impacted fundraising — we noticed that, compared to 2021, some rounds took longer to close, some founders had to raise less than they initially planned, and at more conservative valuations. Unfortunately, some investors have pulled out of deals.
We also noticed an increase in debt financing, which doubled from 2021 to $1.5 billion, which we believe is indicative of the maturity of the ecosystem and the growing/diversified financial needs of entrepreneurs.
Have your investment strategies changed with the current market conditions?
Not really; if anything, we feel the market is aligned with where we were: choosing dedication and rigor over speed.
The African technology market had more than 1,100 active investors in 2022 for the first time and more deals were signed than in 2021. What does this say about the current state of the African investment landscape?
This shows that Africa’s investment landscape continues to hold promise as it continues to grow and there is increasing interest in multiple startup ecosystems (including nascent ecosystems).
There has also been an increase in syndicates and investment groups made up of domestic and diaspora Africans, as well as an increase in founders of later companies who are now investing in other founders.
These are all indications of a growing ecosystem.
Which sectors will you keep an eye on and which trends do you expect to take off? Why?
We have seven key areas of interest that we remain committed to: financial services and insurance, life sciences and health technology, edtech and digital talent accelerators, enterprise SaaS, digital infrastructure, agtech and food security.
That said, we closely follow innovations and are open to exploring new industries. Currently, we are excited about AI and climate technologies as they represent an unprecedented opportunity to create a better, more sustainable future for all and ensure that Africa is not left behind.
How do you prefer to receive pitches? What is the most important thing a founder should know before talking to you?
Warm acquaintances are very nice, but not always accessible to every founder; that’s why we have a channel for receiving decks through the application link on our website.
The investment team assesses decks and arranges meetings with founders of construction companies that align with our position.
Our dissertation is the most important thing founders should be aware of because that is our first criteria for screening. We are an early-stage fund that invests in market-creating innovations to find solutions non-consumption in Africa.
In 2023, we want to invest in more companies in French-speaking West Africa and East and North Africa. We also look forward to supporting more female-led businesses, and we’re usually very excited to invest in pre-seed businesses.
Zachariah George, managing partner, starts Africa Ventures
Last year, your company was among the African investors who wrote the most checks to early-stage startups. How do you balance writing so many checks and funding the best companies?
We have strong relationships with most of the continent’s leading incubators, accelerators and venture-building studios. We are able to select the best companies that graduate from these programs before their demo days, which is a win-win situation for both the programs and us.
Similarly, our solid relationships with Series A and Series B VC funds on the continent (and globally) create an environment where they refer great companies to us that they really like but are just a little too early for them.
The most active African investors were involved in 15-20 deals, according to one report on African VC activity in 2022. How was that volume of deals possible in a year of sharp investor pullback? Will we see similar figures in 2023 or will something change?
Africa accounts for about 17% of the world’s population, about 4% of global GDP, but only about 1% of global venture capital.
This opportunity for market arbitrage based on capital financing, economic value and purpose is obvious and constantly being tapped (and rightly so) by investors who have done their homework.
They understand that African technology-driven enterprises will continue to grow and scale from:
- increased consumer purchasing power.
- higher smartphone penetration.
- better digital connectivity through both e-commerce and social commerce.
- greater collaboration between companies and startups from a channel distribution and customer acquisition perspective.
I expect similar numbers in 2023, and hopefully even better.
What differences did you notice in the investment landscape in 2022 compared to 2021? Were deals less or more competitive? Have your investment strategies changed with the current market conditions?
Last year was certainly a more cautious and cautious investment landscape compared to the bull run in African VC in 2021. Deals were a lot more competitive in 2021 as some founders were able to raise at often unrealistic valuations.
