- 2021 was a significant year for venture-backed companies worldwide, investing more than US$ 675B into startups globally, with more than US$5B allocated to African startups
- VCs have been keenly eyeing a spectrum of sectors from fintech, edtech, biotech, health tech, insurtech, mobility, logistics, e-commerce, crypto, connectivity, proptech, software and mobile commerce
- A report from Partech further reveals that more than 600 tech companies in Africa, raised US$5.2B from venture capitalists in 2021.
Striking whilst the iron is hot, is the shrewd move that Venture Capitalists (VC) are making, to seize opportunities presented by the lucrative African Startup ecosystem that is burgeoning by the day; heralded by the massive technology wave sweeping across the continent, a prominent harbinger that the fourth industrial revolution is but within grasp.
Currently, Africa boasts of a myriad of VC-backed startups, with big investors like Jeff Bezos sinking tentacles into this frontier, that has seen the emergence of several unicorns. Venture Capital has proved to be a vital source of funding for the acceleration of early-stage startups, encouraging innovations and empowering entrepreneurs, to bolster economic development and foster poverty eradication, through employment creation.
VCs have been keenly eyeing a spectrum of sectors from fintech, edtech, biotech, health tech, insurtech, mobility, logistics, e-commerce, crypto, connectivity, proptech, software and mobile commerce among others. However, investments in fintechs have been dominating VC charts, attracting substantial funding. 2021 was a significant year for venture-backed companies worldwide, investing more than US$ 675B into startups globally, with more than US$5B allocated to African startups.
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According to the African Tech Startups Funding Report, 2021 was a record-breaking year for African tech startups, with 564 companies securing over USUS$2B worth of investment; with the VC investment growth amounting to 215 per cent. A report from Partech further reveals that more than 600 tech companies in Africa, raised US$5.2B from venture capitalists in 2021.
Moreover, the report indicates that 2022 will mark a notable sharp acceleration, with the African tech sector raking in between US$3.8B and US$4.7B. In addition, there is an estimated upper range of US$6.8B projected in 2023, US$8.8B in 2024 and is bound to exceed US$10B in 2025.
With perspective to a recent report by the African Private Equity and Venture Capital Association (AVCA), the venture capital and entrepreneurial landscape in Africa is experiencing rapid growth, emanating from the continent’s favourable economic environment, instigated by the macroeconomic progress recorded between 2000 and 2016.
This coupled with external inflows of investment, a growing consumer base and entrepreneurial business solutions, have accelerated VC investments in Africa.
In light of this, Microsoft recently announced that it is initiating partnerships and alliances with venture capital investors that will avail access to US$500 million in potential funding for African startups, to accelerate the growth of 10,000 of them; and fast-track investment in the sector over the next five years to scale up and drive economic growth.
Similarly, Google has recently announced the 15 African startups that will be part of Class 7, the Google for Startups Accelerator programme. This is a three-month virtual accelerator programme from high potential Seed, to Series A tech startups based in Africa. The company is at the forefront of supporting African startups, hitherto the company has supported 82 startups from 17 countries that have collectively raised US$112 million and created 2800 direct jobs.
A Glimpse of the African Venture Capitalist landscape
Africa’s venture capital space has been steadily growing in recent years, with Nigeria, Egypt, Kenya and South Africa, being the premier investment destinations on the continent. The Organization for Economic Co-operation and Development (OECD), highlights that there are more than 640 active tech hubs across Africa, accelerating innovation and creating employment, particularly among the youth.
Microsoft, through its recently established Africa Transformation Office (ATO) recently launched a global founders’ hub, which is a self-service platform offering startups an array of resources, such as skill content and access to mentors. Into the bargain, the technology giant is creating new partnerships with incubators and accelerators across the continent, such as Greenhouse, Grindstone, Seedstars and FlapMax to provide technical skills, funding opportunities and access to markets to industry-based start-ups. The company has already established strategic partnerships with several key venture capital investors, such as Global Venture Capital, Banque Misr and Get Funded Africa.
Similarly, Google through the Accelerator programme offers technical project support and mentorship through workshops, focused on product design, leadership development for founders, customer acquisition, specialized training, and access to the company’s network of engineers and experts plus media opportunities.
Launched in 2018, it was designed to bring the best of Google’s programmes, products, people and technology to startups that leverage machine learning and AI or plan to do so in future.
The programme cuts across numerous sectors such as e-commerce, health tech, logistics, mobility, AI, utility, digital identity, data management and mixed reality. The seven participating countries have been Nigeria, South Africa, Kenya, Uganda, Egypt, Tanzania and recently Coté d’Ivoire, which has made a debut in the programme.
Notable alumni startups of the programme include Pezesha, Kudi, Thrive Agric, Curacel, Ndovu, 54gene, OkadaBooks among others.
Read: Africa’s tech startups ecosystem fastest growing with rising investments.
Africa’s VC investments reached an all-time high in 2019 when 234 technology companies raised US$2.02B in 250 equity rounds. According to the American University in Cairo, venture capital investments in Egypt stood at US$445M in 2021 and are expected to cross US$1B in 2022. The African Tech Startups Funding Report indicates, that Egyptian startups raised US$85M in 2019 and US$141 in 2020.
VC funding to MENA startups registered a surge to US$2.6B in 2021; with Egypt’s startup Halan securing the largest amount recorded in the country at US$125M.
Between 2015 and 2021, the Egyptian VC ecosystem grew at a compound annual growth rate of 109 per cent, accounting for 15 per cent of transactions and 11 per cent of allocated capital in the MENA region. Egypt’s market has been gaining investor traction because of its population size of almost 100 million.
Rwanda being one of the VC hubs in East Africa was adversely affected by the pandemic, which retrogressed by 91 per cent to US$11.6 million having raised US$126M raised in 2019.
According to the Partech report, in 2020 Nigerian startups received the most investment at a total value of US$307M in 71 deals and an average deal size of US$ 4.3M. This was 59 per cent lower than the US$747M invested in 38 deals, at an average of US$19.7M in 2019. Kenya came in second place in 2020, receiving US$305M in 52 deals, averaging US$5.9M per deal. The report also highlights that venture capital investment in Kenya as a proportion of GDP, is the highest in Africa at 0.32 per cent of GDP.
The country’s ranking in the 56th position in the ease of doing the business score, somewhat influences the amount of capital invested, in proportion to its GDP. Markets in Southern Africa are attracting more investments because of lower valuations; with South Africa garnering VC investments worth US$259 in 2020.
This steady annual growth in the sector has appealed to U.S-based firms, who have recently entered the market, with Andreessen Horowitz investing in South African gaming platform Carryist in January; whilst in February a US$40 million round was injected into Reliance Health, a Nigerian health insurance company.
Hitherto, the US firm Tiger global renowned for its aggression has already closed three deals in one and a half months, signalling that 2022 could surpass 2021’s record.
The allure of African Startups to Venture Capitalists
Why are African tech startups so appealing to VCs? The continent wields massive potential to become a startup superpower in the tech sector; which has resulted in the all-time high investment appetite in technology innovation in the continent. No surprise that VCs are eager to make hay while the sun shines upon this profitable sector.
A report by the Tony Blair Institute for Global Change, titled ’Supercharging Africa’s Startups: The Continent’s Path to Tech Excellence,’ indicates that Africa’s digital economy will contribute an estimated US$300 billion to the continent’s GDP by 2025, creating the much –needed employment, especially among the youthful populace.
For instance, the technology sector in Nigeria contributed more to the country’s GDP, than the oil and gas sector between 2010 and 2019. Kenya’s ICT sector was on course to contribute up to 8 per cent of the country’s GDP, through IT-enabled services, also generating up to 250,000 jobs at the close of 2021.
The fourth edition of the Africa Tech Summit was held in Nairobi recently under three tracks; the Africa Money and Decentralized Finance (DeFi), Africa Startup and Africa Mobile Summit; which convened stakeholders in the tech space across the continent to explore opportunities and challenges within the ecosystem; whilst showcasing investment opportunities, narrowing on five key areas B2B market ecosystem, regulatory systems, scalability, collaboration and talent acquisition.
Challenges and prospects
A report by World Bank reveals that Africa underperforms in Venture Capital activity, in comparison to the global view. In reiteration, in 2020 VCs invested US$3.9 M per day into African startups while in the US, startups received VC investment of US$428M in the same period.
An unfavourable investor climate marked by the existence of cumbersome regulations and policies or lack thereof, coupled with low ease of doing business in some African countries, presents an enormous challenge for VC investors.
For instance, most VCs have complained of the difficulties encountered in trying to start a business in Nigeria; which ranks 131st out of 190 countries globally in the ‘ease of doing business ranking’.
This deters some VCs, forcing them to domicile elsewhere. Most Nigerian startups are incorporated in other countries, albeit working on solutions for Nigeria.
However, the enactment of favourable Startup Acts and VC-friendly legislation will greatly appeal to more investors; a number of countries are pursuing policies that will facilitate a conducive business environment for startups.
For instance, Tunisia and Senegal have accomplished this task whereas Ghana, Mali and Rwanda are en route pursuing similar policies. More financial and operational support should be rendered to Tech hubs, both from the government and the private sector, as they play a paramount role in incubating and accelerating innovation, to make early-stage startups investor-ready.
Gender inequality also presents a setback in the sector and needs urgent redress. Research by Briter Bridges reveals that only 3 per cent of the total funding raised by startups in Africa since 2013, has gone to all-women co-founded teams. In 2021 less than 2 per cent of VC funding went to all women-founded teams, according to data from PitchBook.
Despite the increase in the number of women in venture capital, their representation remains minuscule, against a faster-growing percentage of startups run by men.