International appetite for African startups hits new record

Despite the setbacks endured as a result of the global health crisis, Africa’s venture capital (VC) ecosystem was – and still is – brimming with potential, with a record high of 319 deals reported last year, compared to the 140 deals reported in 2019. 

Although South Africa provided an initial base of interest a decade ago, Series A and Series B stage funding have seen an explosion of interest in the VC space in Africa from funds, corporations, and family offices around the world over the past five years – with South Africa, Nigeria, Kenya and Egypt being the main attractions.

The past year may have exacerbated Africa’s structural challenges; however, the second and latest Venture Capital in Africa report from the African Private Equity and Venture Capital Association (AVCA) reveals that entrepreneurs and investors weathered the storm of the pandemic with remarkable strength and fortitude. 

This success is demonstrated by the near-daily headlines about African entrepreneurs and startups raising funding from international investors to grow, scale and continue innovating. 

The most recent example of startup success in Africa is OPay’s Series C fundraise of $400m in a round led by Softbank at a valuation of $2bn. Following Nigeria-based Flutterwave’s $170m Series C funding round earlier in 2021, OPay now joins the exclusive cohort of African unicorns which includes Fawry, Interswitch and Jumia.

Shortage of seed-stage investment

Although Africa’s venture capital industry had a record-breaking year in 2020, the continent still paled in comparison to VC deals made in other emerging markets such as India, Latin America, and Southeast Asia.

One of the greatest challenges facing the African startup market is the shortage of seed-stage investment on the continent. While seed funding makes up a large portion of total VC deal volume in Africa, it only accounted for 6% of the total value of reported deals between 2014 and 2020. 

This imbalance demonstrates how inaccessible small-scale capital raising opportunities can be for African startups. More companies are looking to grow their businesses, but their pathway to scale and development is impeded by the highly competitive market for limited early-stage funding.

This also highlights the nascent nature of the continent’s VC industry.

There is no question that VC and PE investors are well-positioned to play a critical role in addressing the early-stage funding gap. However, regulatory and political risks remain a top concern for investors. 

Opportunities outweigh challenges

With that said, opportunities in the African VC space outweigh the challenges.

The AVCA report concludes that more global VC investors are compelled to make allocations to Africa based on the magnitude of the opportunity, the quality of entrepreneurs, and the growing evidence of high return up-rounds and exits.

It is the capital allocators that are truly aiding early-stage entrepreneurs in overcoming the various challenges and risks (even those unique to the African market). These opportunities for risk management consist of initiatives like fund manager training and support programmes to build more Venture Capital funds.

In Egypt, the state provides infrastructure investment, a state-run incubator and accelerator programmes, as well as numerous tax incentives for startups in the country. 

Private equity and venture capital (PE/VC) fund managers, PE/VC investment firms and corporate venture firms were the three most prominent investor types funding VC deals on the continent between 2014 and 2020.   

Africa is seeing a wide breadth and diversity of VC investors from all over the world. Although 40% of investment in African entrepreneurs is through private equity and venture capital, we have seen a lot of interest from large multinationals like Visa, Google and other big international players.

Other funders on the rise include the usual suspects such as incubators, accelerators, family offices, angel investors and foundations. 

If global interest in Africa was ever put into question, it is worth noting that international interest has never been higher. If we look at where the capital is flowing from, almost 80% of VC investment came from international investors, with 40% coming from North America.

Does the Silicon Valley model work for Africa?

At the AVCA Conference in April, Founder and Managing Partner of TLcom Capital, Maurizio Caio, made a powerful statement about relevance of applying Silicon Valley investment models in the African market.

Caio said: “The Silicon Valley model is all about capturing the market opportunity with a team that goes beyond the limits and creates a gigantic amount of value. In Africa, what comes with it, is the opportunity of having an impact. Whatever you do in a market that is underserved, it is all about inclusion.”

He defined this inclusion as more than simple downloads, but rather access to tech-enabled healthcare, education, mobility, energy, and other critical sectors.

“When these companies grow, it means more people have access to these things. So, the Silicon Valley model is fine for Africa. We should be open to encouraging great work, as long as Africa is at the centre and venture capital is at the service of the entrepreneur and their success.”

The African VC ecosystem is maturing fast, and a growing cohort of high-quality companies are progressively qualifying for trade sales and IPOs, to follow the first evidence of unicorns seen in the last 12 to 18 months.

The importance of the African entrepreneurial community cannot be overstated. With the right funding (and funder), we can create new and innovative ways to overcome longstanding challenges with a community that more than ready to scale and do it for Africa’s sake.

Yet, we cannot ignore the fact that there is still much work to be done and still many challenges to overcome.