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Africa’s Burgeoning Tech Start-Up Sector In The Face Of A Global Economic Slowdown

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Africa’s Burgeoning Tech Start-Up Sector In The Face Of A Global Economic Slowdown

The African tech sector recorded exponential growth in the past five years, with start-ups raising almost $5 billion in 2021. According to a Techcrunch report, this is nine times more than the amounts raised five years ago.

The Fintech sector accounted for 60% of total funds raised. Notable amongst these are companies such as Opay, which raised $400million in Series C funding; Flutterwave, which raised $170m in a Series C round; and TymeBank, which raised $180million in a Series B. The funding is positioning these Fintech companies to effectively play alongside global companies such as Stripe, Visa and Mastercard; accelerating transaction volumes, revenue growth and geographical expansion.

Other sectors also benefitted from the fundraise including HR-Tech company Andela which raised $200million; Mobility company Moove which raised $23milion, Auto financing company Autocheck which raised $13million, Edtech company uLesson which raised $15million amongst many others.

The first quarter of 2022 followed the same trajectory with total VC Funding in Africa standing at $1.8Bn. This represents a 150% increase compared to Q1 2021, which stood at $730M. The largest transaction by value are Fintech company, Flutterwave raising $250M, Logistics company, Moove raising $105 Million, Wasoko $125M, and InstaDeep $100 million.

The second quarter of 2022 saw a slowdown on the global front, as the Russian invasion of Ukraine triggered energy, food and commodity crises. This resulted in global supply chain issues and higher inflation; spurring a global economic slowdown, a downturn in capital and cryptocurrency markets and concerns around a recession.

Global VC funding fell under $40 billion for the first time in May 2022 according to a report by Crunchbase. This is down 20% from $49 billion a year earlier in May 2021 and far below the $70 billion peak of November 2021.

This seemingly raises concerns for the future of African start-up ecosystem and funding.

Africa’s Burgeoning Tech Start-Up Sector In The Face Of A Global Economic Slowdown

Some stakeholders are speculating a possible funding crunch for African startups. These speculations are not out of place given that Africa is not isolated from the rest of the world. Typically, as capital markets downturn, company valuations take a hit; and this trickles to start-up valuations and possibly future funding prospects.

In spite of these, it is largely envisaged that the African start-up ecosystem is expected to remain resilient in the face of the global downturn.

This resilience can be attributed to the premise that most African start-ups are fundamentally solving big local problems in their environment. These include access to banking, the provision of more effective health, mobility and energy tech solutions to meet the needs of the growing large African populace. With deepening mobile and internet penetration and a large youth populace, these businesses are expected to continue to generate more revenues and record stronger growths.

Furthermore, notwithstanding the exciting growth in funding flowing into African start-ups in the past years, the size of the investment is interestingly minuscule compared to the rest of the world. According to CB Insights State of the Venture Report, total VC funding to Africa represented about 1% of global venture funding in the first quarter of 2022. To some extent, this gives a protective shield against global shocks such as economic slowdowns and market downturns.

Regardless of the above postulations, going forward, it will no longer be business as usual when it comes to African start-up funding. Global investors are expected to be more focused on verifying business quality; against investing based on sentiments including FOMO which has formerly driven some VC investments in African start-ups. We expect to see more focus on due diligence and scrutiny before investing. Consequently, only quality start-ups with strong fundamentals may end up getting the cheque.

On the part of the start-ups, it is time to start focusing on building a quality business. The best brands will no longer be measured on the hype of “How much funding was raised” but instead on fundamental metrics such as revenue growth, quality of earnings, market share, customer satisfaction and retention. Also, more attention would be drawn to corporate governance and overall business integrity.

Also, while the African start-up ecosystem continues to grapple with challenges around brain drain, strategies need to be deployed to attract and retain quality talents.

Going forward, we expect resultant shifts in the dynamics of the start-up landscape in Africa and this is already playing out. More companies will embrace inorganic growth as a strategy for survival and scale.

More start-ups are envisaged to expand geographically into other African and Middle Eastern countries; in pursuit of new markets, new clients and new revenue streams. In the Fintech space, companies such as Opay, Flutterwave and Kobo have led the way with strong expansions in 2021 and early 2022. We saw Helium health acquire Meddy, a Qatar-based telemedicine start-up. Auto-tech Autocheck acquired Cheki in Kenya and Uganda, and KIFAL in Morocco. Moove is expanding beyond Nigeria to other countries such as South Africa, Ghana and Kenya.

To drive scale, we expect to see more in-market consolidation amongst industry players. This may include M&A amongst start-ups offering complementary or competing services; and other vertical integrations across value chains. In Q4 2021, Flutterwave acquired Disha, a global content creation platform with strong growth and revenue prospects. MFS Africa also acquired Capricon, in the second largest fintech acquisition deal after Paystack. MaxAB acquired Morocco’s WaystoCap, and Piggyvest acquired Savi amongst others. In Q1 of 2022, Casablanca-based Chari, a B2B e-commerce startup, announced it was acquiring Axa Credit, the loans division of Axa Assurance for a record $22 million.

Whilst the opportunities in the African Fintech space is still huge, investors may give increased focus to non-fintech businesses such as logistics, mobility, blockchain, health-tech, education, agric-tech and green energy.

Finally, there are growing conversations around crypto/blockchain/web3/DeFi. More of these projects are being deployed across different sectors in the African tech ecosystems. Start-ups such as Nigeria’s Nestcoin and Canza Finance, and Democratic Republic of Congo’s Jambo are setting the pace in these markets whilst raising pre-seed/seed funding. In Q1 of 2022 Blockchain startups in Africa raised $91 million, representing eleven times growth compared to the first quarter of 2021 according to a report by blockchain investment firm Crypto Valley Venture Capital (CV VC) and Standard Bank.

Looking ahead, it is safe to say that there are very exciting times ahead for the African start-up ecosystem and we are here for it.