- Africa’s venture ecosystem experienced a marked downturn in 2023, mirroring broader declines in venture capital to startups in the global market.
- Both the volume and value of venture capital investment decreased by close to a third in 2023.
- Africa attracted a combined $4.5 billion in venture capital and venture debt investment during the year, across 603 deals.
The high investor flight seeking better returns from markets abroad negatively impacted on Startups in Africa, as venture capital deals dropped in 2023 amid a turbulent time that saw the closure of some key firms.
Africa’s venture ecosystem experienced a marked downturn in 2023, mirroring broader declines in venture capital to startups in the global market.
After a record-breaking year for investor interest in African ventures, with over 1,100 unique investors participating in deals in 2022, there was a dramatic reversal of this trend last year, industry data shows, as the number of active investors dropped by 33 per cent.
Both the volume and value of venture capital investment decreased by close to a third in 2023, the Venture Capital in Africa Report, an industry-leading annual report on venture capital performance in Africa by the African Private Equity and Venture Capital Association(AVCA) indicates.
This marked the first decline the industry has seen in a decade where with the inclusion of venture debt, venture inflows to Africa last year clocked in at $4.5 billion across 603 deals –$2 billion less than 2022.
This came on the back of socio-political and economic disruptions with venture capital in Africa characterised by several strategic shifts and a recalibration in deal activities.
This downturn evidences the broader contraction in deal activity on the continent and a general shift in investor sentiment amidst worsening market conditions.
According to AVCA, the withdrawal of North American investors was responsible for 50 per cent of the overall decline in investor numbers in 2023, significantly overshadowing the retreats of European and Asia-Pacific investors, which accounted for 18 per cent and nine per cent of the decrease, respectively.
Key markets in the continent, among them Kenya, Nigeria, and South Africa reported a notable capital flight, as investors eyed higher returns in key markets led by the US, on the back of a stronger dollar against currencies in the continent.
It also underscores the cyclical nature of foreign investment in Africa which is contingent on global macroeconomic trends; therefore emphasising the need for indigenous capital allocators with a long-term commitment to the continent, experts said.
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Early-stage companies shutting
This funding drought forced several early-stage companies to either significantly downscale operations or shut completely.
For instance, in Nigerian, genomics startup–54gene started winding up in July last year, four years after its launch and having raised at least $45 million in three funding rounds.
South African transit data provider WhereIsMyTransport and Kenyan logistics platform– Sendy were also some of the continent’s better known and well-funded startups in Africa to shut down in 2023.
In total, just shy of 20 African tech startups formally announced their closure in 2023 – erasing a combined $200 million of operational investments.
Major issues that led to the closures included lack of working capital after failing to raise follow-on funding rounds, difficulties establishing sufficient and sustainable market penetration, and allegations of corporate governance misconduct against founders.
Some startups in Africa, however, managed to avoid the fall, though they were forced to scale down operations to survive in the increasingly tough environment.
Examples include Kenyan e-commerce platform Copia Global, which suspended operations in Uganda in April 2023.
Similarly, Nigerian payments processor Paystack announced plans to reduce their operations outside of Africa, cutting its workforce in Europe and Dubai.
These strategic retreats and hard pivots for growth-focused ventures triggered a series of mass job cuts which resulted in over 1,000 layoffs across the continent in 20232 .
Should the lack of liquidity and present market challenges persist, founders may be forced to make more tough, strategic decisions in order to remain afloat and prioritise profit, AVCA noted.
“Despite a challenging macroeconomic environment, Africa remains an important region for venture capital investors, reflected by strong participation in deals across various sectors and geographies,” said Abi Mustapha-Maduakor, Chief Executive Officer, AVCA.
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Growth prospects
Despite the tough business environment, the continent recorded some positive trends with West Africa accounting for the biggest share of deals sealed during the year at 26 per cent.
It was followed by East Africa (21 per cent), Southern Africa (21 per cent), Northern Africa (19) while Central Africa accounted for a mare one per cent of the deals.
Africa attracted a combined $4.5 billion in venture capital and venture debt investment during the year, across 603 deals.
West Africa’s dominance was mainly driven by Nigeria which retained its position at the forefront for the third consecutive year, accounting for 19 per cent of venture capital deal volume.
This reflects the oil-rich country’s strong economy as it continues to attract multi-billion investments in the oil and gas industry, real estate, agriculture, crypto-currency, manufacturing and mutual funds.
This enduring prominence underscores Nigeria’s vital role in Africa’s silicon savannah, alongside South Africa which was second with an 18 per cent share, Kenya (14 per cent) and Egypt (11 per cent)– Africa’s “Big 4” as far as venture capital deals are concerned.
The battle for supremacy among the Big 4 was visible last year with South Africa and Kenya making notable ascensions by deal volume in 2023 to land second and third place, respectively.
“The margins delineating their standings were notably narrow, reflecting the competitive and dynamic nature of venture capital allocations within these four leading economies,” AVCA noted in its report released on Wednesday.
This was driven by startups headquartered in Kenya in the East, while startups headquartered in Nigeria and Ghana led the charge of venture debt deal activity in the West.
Multi-region deals once again comprised the largest share of venture debt deal value, taking home more than half of debt funding allocated to the continent in 2023.
Coming in fifth place, Morocco has also emerged as a significant player in the venture capital ecosystem.
A total of 24 deals with a collective value of $17 million took place in Morocco, which constituted four per cent of the annual deal volume for 2023.
This development positions Morocco as an increasingly favoured destination for venture investments, buoyed by its recognition by Limited Partners (LPs) as the second most attractive country for private capital investment in Africa in AVCA’s 2023 Private Capital Industry Survey.
LPs commit capital to a venture fund and generally hold few obligations outside of funding their commitments. Depending on the fund, LPs might gain valuable exposure to startups in Africa in the fund’s portfolio.
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Where venture capital investors are putting their money
During the year, financials (23 per cent), Information Technology (20 per cent) and Consumer Discretionary (17 per cent) were once again the three most active sectors for venture capital investment.
FinTech held its position as the leading vertical in the African tech ecosystem, and investors continued to coalesce around Clean and ClimateTech (second most active vertical).
“As digital transformation decentralises systems, boosts efficiency, and helps provide new talent, Africa’s Fintech and IT sectors have attracted the most investment,” Mustapha-Maduakor said.
Gender diverse and female funded startups still lag behind their male counterparts as they accrued 27 per cent of deal volume, but just 13 per cent of deal value for the year.
Despite the reduced presence of (particularly global) investors, Fund Managers, Investment Firms and Corporate Venture Capital remained the three most prominent investor types.
“While climate action evolves as a critical focus driving capital towards the energy transition, food systems and beyond – investors crowd around opportunities in Clean and ClimateTech. As these trends persist, Africa’s investment community maintains a profound commitment to the region’s growth despite the uncertainty in the global economy,” Maduakor added.
The AVCA report is a comprehensive overview of Africa’s innovative ecosystem, providing critical insights into the sub-regions, countries, and sectors that have cemented Africa’s rising position as a region for venture capital activity.
It provides an analysis of the latest trends and development of Africa’s start-up investment landscape and the profile of the investors active on the continent.
Globally, the VC ecosystem has seen a steady global decline since 2022, falling to $285 billion in deal value last year, compared to $690 billion in 2021.
The cumulative effect is a market size that represents 41 per cent of capital invested in 2021, signifying a contraction of venture funding around the globe in 2023.
In response to these market headwinds, some trends in Africa’s VC ecosystem – which have remained relatively consistent year-on-year – have been disrupted while other trends remained the same.
For the first time in almost a decade of consistently strong growth, the number of venture capital deals in Africa decreased by 31 per cent year-on-year to 545 last year from the record-setting 787 deals struck in 2022.
Added to the global downward trend of venture capital, investors faced currency volatility and continued high inflation in Africa, prompting investors to back prospects in portfolio companies with an established track record rather than new ventures.
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