Africa’s growth stage startups are reeling from departure of big tech investors
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Africa’s most mature startups felt the toughest end of the tech funding crunch of 2023, a new report by venture capital firm Partech said. The average investment into African growth stage startups last year was $34.7 million for equity deals, 31% lower than in 2022.
Except for 2020, it was the lowest average since 2018 and part of a trend that saw fundraising fall by 46% to $3.5 billion last year, Partech said.
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Growth stage startups typically attain stability on product and customer focus after a few rounds of fundraising. A number of them — Flutterwave, OPay, Andela, and M-Kopa — are Africa’s most funded startups.
But “growth stage tickets are mostly driven by large global VC players,” Tidjane Deme, general partner at Partech, told Semafor Africa. The withdrawal of those big-ticket firms like Tiger Global, Softbank, and affiliates of Sequoia Capital resulted in a hit on African growth startups, he said.
Alexander’s view
Africa’s reliance on foreign investors for large tech deals is due to the fact that few African private equity funds or venture capitalists are able to lead rounds of $100 million or more, a deal category sometimes called mega rounds.
Partech, for example, is one of the largest growth stage tech investors in Africa thanks to its $265 million fund, but it invests a maximum of $15 million per deal. A rare sighting of an African firm-led mega round was AfricInvest’s lead of a $100 million investment into payments company Onafriq (previously MFS Africa) in 2021, though nearly a third of that was raised as debt.
Beyond funding capacity however, African startups have also sought out top global VCs to signal ambition and validate aspirations of global reach, while tapping into the VCs’ network of other companies and investors for sales and future exit plans. While the VCs have shown interest in recent years — Softbank’s first Africa investments raised OPay and Andela into billion-dollar valuations in 2021, for example — the ongoing crunch reveals the dynamics of engagement.
“Most of these global investors retrenched and focused only on their existing portfolio, driving reduction in the pricing and volume of growth-stage deals,” Lexi Novitske, a partner at Africa-focused firm Norrsken22, told me. It is unlikely that Tiger Global or Softbank will invest in Africa in the next 12 months because those firms are now conservative, investing in “sub sectors and geographies they have an expertise in and where there is a more liquid market for big $1billion-plus exits,” said Novitske.
Room for Disagreement
The drop in growth stage funding reflects a global trend that isn’t unique to Africa and is “an expected market correction after the unusual highs of recent years,” says Eloho Omame, partner at Lagos and Nairobi-based firm TLcom Capital.
As part of this correction, startups — many of whom raised money at huge valuations — could need more time to grow from early to growth stage, as investors raise the bar on diligence and outcomes. “Fostering solid fundamentals and scalability is good for company-building and value creation in venture,” she told Semafor Africa.
Notable
African growth startups that resorted to steep cost-cutting measures, like multiple layoffs and branch closures, to stay afloat in 2023 include Chipper Cash, Cellulant, Copia Global, mPharma, Marketforce, and Twiga Foods.
Marketforce, a Kenyan business-to-business ecommerce startup, opted for a crowdfunding campaign to raise $1 million from its “community” last August, underscoring a tough fundraising year for a company that had raised $40 million in 2022.
