‘Companies will go under’: Global tech rout to set back fundraising in Africa

Despite raising a record $4.65bn in 2021, African startups are facing a much tougher fundraising environment this year.

Image : Who is Danny / Adobe Stock

Since the beginning of the year, blue chip stocks in the S&P 500 have lost more than $7 trillion in value. Tech stocks have been hit the hardest, with investors pulling billions of dollars out of companies that were attractive due to future growth prospects but have now become less so in a bear market fuelled by rising interest rates and fears of a recession.

As investors scramble to find less risky assets, the knock-on effect in emerging markets and Africa will be huge. Despite raising a record $4.65bn in 2021, according to data collected by Briter Bridges, African startups are facing a much tougher fundraising environment this year.

The party is over

“You can’t run a company like it’s 2021 anymore,” says Daniel Yu, founder and CEO of Wasoko, an e-commerce platform for informal retailers in Africa. “It’s very important that people realise this: the party is over. It is a really challenging situation as we all work to survive over this period.”

Yu says that the biggest slowdown will be in late stage funding for companies that are looking to raise big ticket sizes. Investors are no longer keen to pump large amounts of late-stage capital into startups when there is no clear exit plan, as listing on public markets is less attractive in the current environment.

The issue is compounded by the fact there are very few late-stage funds in Africa, creating a particularly bleak outlook for companies that need the next injection of cash to reach profitability. In contrast to five African startups becoming unicorns last year, many companies will be forced to scale back operations and shelve pan-African expansion plans in order to stay afloat.

“It’s possible that a lot of these companies that people have championed and looked up to don’t come out of this in good shape, and maybe don’t even come out of this at all,” says Yu.

Which areas will be hardest hit?

Low-margin high-volume tech companies will likely be hardest hit, with areas like e-commerce that require huge investments before profitability suffering the most. Yu predicts that there will be a lot of market consolidation in the short term as investors look to M&As to try and salvage some return on equity investments in tech companies.

However, early-stage funding will not see the same pullback, Yu says. This is because there are plenty of early-stage venture capital funds that are dedicated to Africa and will continue to invest in local startups.

“In some sense it’s a fantastic time to be an early-stage African venture fund because whereas six months ago you were competing to make early-stage investments in African companies with US firms. For the most part those US firms are now staying away”.

Companies will look to secure extension rounds

Mathias Léopoldie, CEO of Julaya, a payment service for small businesses, says that many companies will look to secure extension rounds with current investors to finance operations.

Based in Côte d’Ivoire, Léopoldie adds that Francophone Africa will not be as severely impacted as large Anglophone markets like Nigeria which attract a lot of US funding.

Startups challenge tech giants

Telcos have led the huge growth of mobile money services across Africa with monolithic players like Kenya’s Safaricom and South Africa’s MTN. But no longer – startups are increasingly entering the space and finding that they are quickly able to outcompete legacy companies.

Nowhere has this been more evident than in Senegal with the meteoric rise of Wave, a mobile money startup. Coura Sene, the firm’s general manager, told Tech54 last year that the company was able to wrestle more than 50% of market share from competitor Orange in just three years of operations.

The company, which was founded in 2018, raised $200m from four big Silicon Valley venture capital firms, pushing its valuation to $1.7bn – making Wave Africa’s first Francophone unicorn. And it has just become the first non-telco and non-bank company to have been awarded a mobile money licence by the Central Bank of West African States (BCEAO).

This is huge and will likely mean that Wave can expand at an even faster pace as it no longer needs to be attached to a bank, for regulation purposes. The move by the regulators opens up a whole new avenue that will allow startups to aggressively enter the space. Telcos… the game is on.

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The article on this page first appeared in Tech54, the African Business newsletter that takes an incisive look at the continent’s tech scene. Subscribe to the newsletter here.

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