Africa expected to see a sustained slowdown in financing in 2023

by MMC
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Image credits: Bryce Durbin/TechCrunch

Africa appeared to defy the global decline in venture capital funding in the first half of 2022 after its startups raised $3 billion, double the amount raised over a similar period the previous year. However, the correction in the venture capital market caught up with the continent in the second half of last year, when ticket sizes fell and fewer deals were closed as investors tightened the strings of capital. sotck exchange.

Venture capitalists are now predicting that Africa’s funding slowdown will continue into 2023, as investors continue to pull out, making it harder for new and existing startups to raise capital.

“My prediction for 2023 is that things will get worse before they get better: price cuts, layoffs, closures and bridges will continue to increase in the African startup ecosystem. » Abel Boreto, Novastar Ventures

“With the global economic slowdown extending into 2023 due to inflationary pressures and tightening monetary policy, investors on the continent will maintain a judicious approach to investing and African startups will continue to find fundraising difficult of funds,” said Bruce Nsereko-Lule, general partner at Seedstars Afrique Ventures.

As a knock-on effect, the operating environment for startups is expected to deteriorate this year, leading to increased layoffs, reduced operations, slowdown and transition cycles, and business closures, continuing the trend is accelerated to the end of 2022.

Mega-rounds are also expected to be rare, as was the case in the last half of 2022, where no deals above $100 million were signed, according to The big deal, a database of publicly disclosed transactions. A total of six mega-rounds closed last year (all in the first six months), half the number of such deals closed in 2021, when venture capital firms invested. record the amounts.

A drop in the number of mega-rounds will lead to a drop in overall funding raised, according to Abel Boreto, associate director of investments at the Africa-focused venture capital firm. Novastar Ventures.

“My prediction for 2023 is that things will get worse before they get better: price cuts, layoffs, closures and bridges will continue to increase in the African startup ecosystem for much of 2023,” he said. he declared. “As such, we will see a significant decline in the amount raised by African startups compared to 2021 and 2022, mainly due to a significant reduction in mega-deals as global investors slow down investment in startups in growth phase. »

Including disclosed deals, Africa raised more than $4.8 billion last year, according to data from The big deal and market intelligence firm Briter Bridges. The latter, adding the undisclosed deals of which they are aware, brings the total funding raised to $5.4 billion. Reports show that compared to 2021, Africa saw a 4% growth in venture capital funding. This means that globally, only Africa saw an increase in venture capital deal activity in 2022, although funding still remains meager compared to the rest of the world. Nigeria, Kenya, Egypt and South Africa took more than 75% of total financing and transactions.

Fintechs attracted a third of the total funding raised, but despite accounting for the bulk of funding won, the vertical saw a decline in investor interest – it had, as of 2021, attracted two-thirds of funding. The cleantech and logistics sectors were among the top three in accumulated venture capital funding, according to data from Briter Bridges.

An eventful year

The past year has proven that the African tech finance ecosystem is not immune to the challenges facing private capital markets globally. From global reallocations of LP assets to contagion effects due to FTX StatusAlmost all of the problems affecting global venture capital have occurred at a certain level in Africa.

With the sector unable to cope with macroeconomic difficulties, thousands of jobs have been lost following the closure of startups, while others have opted for reduced workforces to counter the lack of liquidity.

Among the startups that closed their doors was Kune Food, a food delivery company that disappeared less than a year after its launch; WeFarm, an agricultural technology connecting farmers with agricultural products and advice; and EV taxi service No. Sky.Garden, an e-commerce startup, almost suffered the same fate before it was founded. acquired by BNPL provider Lipa Later.

Valuation reductions, a global theme during last year’s funding crisis, have made their way onto the African tech scene as several startups saw their value decline. Brimore valuation reduced by half, 54genes $170 million valuation dropped to $50 million and is backed by FTX Cash Shredderone of Africa’s unicorns, saw its internal valuation reduced by 37.5%, from $2 billion to $1.25 billion. As valuations fell, no unicorns emerged during the year, compared to five in 2021.

There have been reported cases of mismanagement and poor governance, ranging from small startups like Bento to larger companies such as Capite And Flutter Wave. For Capiter, a B2B e-commerce startup, these problems proved fatal: after raising $33 million in 2021, Capite has capitulated to today’s fundraising market and a collision between the company’s founders and board over management and responsibility for paying employee salaries and outstanding debts to creditors. Its investors are currently looking for a buyer.

“I keep reminding founders and investors that we are ultimately still a relatively immature ecosystem, not only on the funding side but also in terms of experience,” said Eloho Omamegeneral partner of a start-up fund FirstCheck Africa and partner in an Africa-focused growth fund TLcom Capital.

“I would like to see more collaboration in good faith and mutual respect on both sides of the aisle. Discipline, strategy and strong business results will be critical to survival in 2023,” Omame said.

As stakeholders anticipate a tough year for startups, they are confident that only startups building sustainable businesses will attract funding, as venture capital firms rely less on hype and more on viability and profitability companies. This is because venture capital firms are paying more attention to fundamentals such as due diligence and growth timing.

Lexi Novitskethe managing partner of the pan-African fund Norrsken22said African startups staying afloat should focus on increasing margins with a goal of near-term profitability, accretive consolidation strategies and a “narrow problem set” supported by a lean staff.

“Good companies in Africa, solving the problems of a large addressable market, will always have global investors willing to partner with them, but the valuations, round sizes and speed of investment will not return (at least not to short term) to what they were. we have experienced it in recent years,” she added.

Amid slowing venture capital deal activity, local investors are expected to take advantage of the favorable valuations and terms on offer, which will boost investment activity at the pre-seed, seed and seed stages. pre-series A, predicts Boreto. He added that agtech and climate technology startups will continue to attract increased funding and support as investors focus on climate adaptation, resilience and food security solutions.

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