Why African Venture Capital is still a good bet

The global financial markets had a rough ride in 2022. The year started off with war in Ukraine, the fear of an energy crisis in Europe and rising inflation. The US and European central banks responded to rising inflation with a series of interest rate hikes. As a result, global equities and bonds experienced a significant decline. The index of global equities, as measured by the MSCI ACWI index, was down 18% in 2022. The Bloomberg Multiverse global bond index declined by 16%. In 2022, for the first time in more than 50 years, both global equities and bonds declined in the same calendar year.

Given the turmoil in global financial markets, global VC experienced a downturn with valuations coming down and reduced capital flows into the asset class. The decline in global technology stocks was particularly severe, with the tech-heavy Nasdaq 100 index giving up a third of its value. Some tech darlings such as Shopify, Meta and Tesla were down more than 50%. Investors incorrectly assumed that the change in consumer habits after the COVID pandemic will last permanently, and unreasonable expectations of extraordinary growth were priced into the valuations. With the recent decline across global equity markets, valuation multiples are more reasonable, perhaps setting the stage for more attractive returns in the future.

While the impact of these developments on African venture capital is complex and varied, some clear long-term trends are emerging. Despite the global slowdown, African venture capital continues to experience significant growth driven by a large and growing market, and the ongoing adoption of digital technologies following the global pandemic.

According to research published by Partech, the African Tech ecosystem continued to grow in 2022. Funding for the African start-ups grew +8% to US$6.5B, with debt funding doubling in the year (+102% to US$1.5B) while in equity rounds began to decline (-6% to US$4.9B).

Let’s take a look at some of the fundamentals and trends that support this. Africa is home to a fast-growing and increasingly affluent population of over 1.2 billion people, with a rising middle class that is driving demand for a range of goods and services. The continent is also experiencing rapid urbanization, which is creating new opportunities for businesses to provide essential services and infrastructure. Digital technology thus has the ability to cross multiple markets and scale faster than traditional brick and mortar industries given its portability.

Africa has a young and rapidly growing population, which is driving demand for a range of goods and services, including technology, education, and healthcare. This demographic trend is expected to continue in the coming years, creating significant growth opportunities for businesses and investors.

Across the continent we have witnessed a surge of interest and investment in fintech companies, which provide innovative solutions for financial services in Africa. These are addressing the significant gap in access to financial services on the continent, with only around 40% of the population having access to formal financial services. We can expect to see a continued focus on technology-enabled solutions, particularly in sectors such as fintech, healthtech, and edtech. These sectors have been in high demand during the pandemic, as they have provided solutions for remote working, learning, and access to essential services.

In the short term, we may see a shift towards more conservative investment strategies, as investors look to a due a rise in interest rates and slowdown in global VC. This could result in a focus on more established companies with a proven track record, rather than early-stage startups. However, we may see an increased focus on local investment such as angels, as investors seek to support the development of local ecosystems and businesses. This could lead to the creation of more localized investment funds, which can provide tailored support to African startups and entrepreneurs.

Another trend in regional venture capital is the increasing focus on impact investing, with investors seeking to fund startups that have a positive social or environmental impact. This trend is being driven by a growing awareness of the potential for business to address social and environmental challenges, as well as by the demands of a new generation of investors who are looking for more than just financial returns. The pandemic has highlighted the importance of addressing social and environmental challenges, and investors are increasingly aware of the potential for business to contribute to this.

Additionally, there is a trend towards greater collaboration between African venture capital firms and international investors, with many international investors looking to tap into the growth potential of the African market. This collaboration is leading to the creation of larger investment funds, which can provide more substantial support for African startups and help them scale more quickly.

East Africa is rapidly emerging as a leading hub for tech innovation, with a growing ecosystem of startups and entrepreneurs developing cutting-edge solutions for local and global markets. The region has seen significant growth in fintech, healthtech, and edtech sectors, among others, and is attracting increasing interest from global investors.

Overall, East Africa recorded a robust economic recovery in 2021–2022, but most countries are yet to achieve their pre-Covid growth levels. A report conducted by African Development Bank projects that the region’s GDP growth will moderate at 4% in 2022 before recovering to 4.7% in 2023, buoyed by the reopening of the economies and this therefore presents opportunities for investors to participate in the growth of high-potential startups and businesses.

Finally, investing in the African venture capital industry can offer attractive opportunities for investors looking to tap into a large and growing market, participate in the growth of high-potential startups, and make a positive social or environmental impact and therefore offer several compelling reasons for investors looking to diversify their portfolio and tap into new growth opportunities. These trends are creating exciting opportunities for African startups, entrepreneurs and are helping to drive innovation and growth across the continent.

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