It remains uncertain how long this economic downturn lasts or which tech startup and investors will remain standing when it ends, but the African digital ecosystem will remain relatively unscathed.
- The impacts of the global economic downturn began to seep in May 2022.
- The global venture capital (VC) industry for startup funding is stagnating.
- The African tech startup industry offers the funds tremendous possibilities to invest at a low cost, amidst the global economic downturn.
A flurry of lay-offs
After more than a year of the bull-run tech stock market and record billion-dollar investments for startups throughout the world, the impacts of the global economic downturn began to seep in May 2022. According to lay-off aggregators, tech businesses globally laid off more than 15,000 workers in May, with the firms laying off over 65,000 tech employees so far this year.
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In May, IT investors encouraged portfolio businesses to brace themselves for adversity and prepare for the worst. African firms began terminating employees in response to the advice.
Swvl, an Egypt-born mobility firm, became the first African startup to go public through a special purpose acquisition company (SPAC). Only months later, the firm revealed intentions to lay off a third of its workers towards the end of May.
Kune Food, a Kenya-based online kitchen, closed its doors in June, laying off 90 staff members immediately, barely one year after obtaining $1 million in pre-seed funding. Sendy, a Kenyan logistics business, laid off 10% of its 300 employees earlier this month.
All of the startups blamed the retrenchments on the global economic crisis. These statements are likely only the first of many announcements. The question then begs how African innovators and investors will react to the economic downturn.
Slowing venture capital market for startups
The global venture capital (VC) industry for startup funding is stagnating. Data reveal that overall venture investment keeps declining. The second quarter adds to the decreases seen in the first quarter of this year. Startups are seeing private-market-focused wallets close somewhat after hitting a high in late 2021, even as cash continues to flow.
Richmond Bassey, co-founder and CEO of investment platform Bamboo, finds that raising money for startups has become more challenging in the year’s second quarter. Various investors and entrepreneurs have shared stories of firms raising down rounds and investors backing out of agreements. However, not all businesses are affected in the same manner.
According to investment insights, by the end of the first half of 2022, African tech firms had collected a remarkable $2.78 billion. The revenue indicates that Africa is bucking the global startup financing trend.
Read: World Bank ranks Kenya fourth in Africa on Human Capital outcomes
Innovative fundraising strategies are critical
African digital firms secured a record U$5 billion in venture capital financing in 2021, spawning new unicorns, including Wave, Opay, and Flutterwave. As fundraising has stalled and values have fallen, the African ecosystem has failed to reveal a new unicorn this year.
Some businesses anticipated the economic slump choosing to accelerate their fundraising effort by opting for an unpriced round at the start of the year. The firms decided to proceed with an unpriced bridge extension round. As a result, they were rapidly oversubscribed and exploited the momentum to concentrate on finishing the deal rather than extending the fundraising process in quest of better terms.
An unpriced investment round occurs when investors infuse funds into a firm, often at an early stage, with the commitment to issue shares in the following priced round at a discount to the value of the “priced round.”
By taking this cautious strategy, the corporations have gathered enough income to finance their long-term expansion plans.
Growth remains crucial
Growth remains critical in overcoming major setbacks. To maintain flexibility when they go out and get money, startup owners must look ahead and not just ratchet up expenditures without seeing an increase in traction.
While admitting the apparent difficulties in getting financing, Ife Durosinmi-Etti, CEO of Herconomy, views this era as a chance for entrepreneurs to be innovative in raising cash by reaching out to a wider variety of investors.
Rather than focusing only on venture capital companies, Durosinmi thinks that many early-stage enterprises should include high-net-worth individuals (HNIs) as angel investors.
Many venture capitalists and partners are familiar with prior market downturns such as the “dot-com” boom, the 2008 global financial crisis, and the recent stock market downturn.
Although the unstable public markets experience immediate effects of rising inflation and geopolitical tensions, the effects become more evident when funds cannot obtain sufficient capital to deploy.
Back to basics
According to several African tech ecosystem stakeholders, there was a capital rush in the startup field last year. The capital rush meant that not only were high prices investors were willing to pay not to miss investing in firms, but durations for performing due diligence were substantially cut.
All of that is changing in the aftermath of the economic collapse. Investors are more patient, and companies must have a proven track record of profitability while altering their plans as required.
Malick Diouf, CEO of LafricaMobile, an African digital marketing platform in Senegal, feels that frugality is essential for survival, even for firms with hyper-growth goals. It is not necessary to reduce or restrict objectives but to rebalance priorities for a limited time.
VCs must advise entrepreneurs to invest in growth and stability. Investments must focus on attaining a runway to at least stay in the market. Typically, funds put aside cash for their winners. The winners represent select firms in the green tier exhibiting consistent growth and value to repay the fund’s capital. Regardless, the single objective of all fund managers is to ensure that their portfolio firms have cash.
African firms well adapted
Africa confronts volatile macroeconomic realities, such as inflation and an uncertain political atmosphere. As such, most enterprises and business models are designed with frugality. Therefore, Diouf thinks that African companies would perform better in the current economic environment since
Frugality also remains a crucial litmus test for the strength of modern businesses and business strategies. Nothing else can happen to enterprises that withstood COVID-19 and the economic slump.
Jetstream’s Omusi believes that success this season depends on how entrepreneurs manage their internal and external environments. The macro-environment has reduced the amount of capital available.
Within the internal context, however, employees might place a more significant emphasis on unit economics, sales, client acquisition, and retention. Startups must work on improving these key performance indicators (KPIs). The KPIs currently remain under more scrutiny than they were this time last year.
It remains uncertain how long this economic downturn lasts or which businesses and investors will remain standing when it ends. Nevertheless, many tech startup players believe that the African digital ecosystem will remain relatively unscathed.
This moment provides a chance for Africa-focused funds to flourish. The African tech startup industry offers the funds tremendous possibilities to invest at a low cost. The best businesses find footing at times like these.
