As the global venture capital market slows, Africa is charting its own course

by MMC
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Image credits: Bryce Durbin/TechCrunch

Although Africa’s venture capital totals stayed afloat In the first quarter, some investors and tech players believe there is still a good chance the continent will join the rest of the world in a slowdown.

Experts told TechCrunch that the most recently announced deals were finalized months before macroeconomic challenges — high interest rates, war, inflation — hit the global venture capital landscape. This means that there is a disconnect from what is considered the current state of venture capital on the African continent. So, as funding for startups dwindles in the United States and Europe, the consensus is that the economic slowdown will soon begin to affect developing markets, particularly Africa.

“The moment of truth will be the end of summer”, Max Cuvellier, co-founder of The big deal, told TechCrunch. “August (and) September in particular because that’s when we had a boom last year.”

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Last year, African startups received over $1 billion in funding in those two months. Anything less than that contributes to a year-over-year decline, Cuvellier noted.

Stephen Deng, co-founder and partner at DFS Laboratoryadded to this, claiming that the same investors who have inflated the valuations of US development-stage companies are also the same investors who value African companies.

“I wouldn’t understand why in the African context this trend wouldn’t also affect the continent and we would see a slowdown,” Deng told TechCrunch. “One of the best-case scenarios is that we still see an increase in funding, but not the same kind of percentage growth year over year. »

“If these global funds pull out and do less, that also means more room for local funds to participate in expansions or their pre-Series A.” Aaron Fu, co-founder of Sherpa Ventures

Large companies like World Tiger And SoftBank have already been hit hard in developed markets. Similarly, large companies that have earmarked some of their funds for African startups could reduce the pace at which they invest in the continent, local investors told TechCrunch.

Funding data shows that the African ecosystem has already seen inflows of around $2.7 billion. in the first half of this year. This is more than double what the continent had collected at the same time last year. In 2021, Africa produced five unicorns while raising $5 billion in total venture capital: Flutterwave, Chipper Cash, OPay, Wave and Andela.

No unicorns have been created so far in the first half of 2022. It is true that stakeholders can perhaps overlook this given that four unicorns have been announced in the second half of 2021, but it would be naive to project the same thing for the rest of the year; we are in a completely different market.

But some experts say Africa may not see a massive decline if big Africa-focused companies continue to reduce controls.

Aaron Fu, the co-founder of Sherpa Enterprises, told TechCrunch that there are still many funds raised specifically for the continent and with a defined deployment period that will allow them to continue investing in startups. He believes this capital allocation will continue throughout the year, even if a slowdown occurs over the next three to four months.

“They still have two to four years to deploy,” Fu said. “They’ll probably keep up the pace, so I don’t see it slowing down.”

These funds include TLcom Capital, Partech, Norrsken22 And Novastar. With up to $800 million in capital available to deploy, these funds invest from seed through Series B. Although they have advanced growth-stage investments in Africa, they can only have limited effect if left to invest in isolation later. stages, where foreign capital became predominant.

However, Cuvellier said much of what happens in the coming months will depend on four countries in particular: Nigeria, Egypt, Kenya and South Africa. Depending on the period, these countries represent between 80 and 90% of all funding on the continent, he said.

“If any of these countries slow down, it will likely lead to lower numbers for the entire continent,” he continued, adding that so far Nigeria, Kenya and Egypt are showing signs of growth, while South Africa began to show a decline. January.

“Maybe (South Africa) is suffering from what Europe is already suffering from and it’s just a sign of a slowdown that maybe will come later in other countries,” Cuveiller said. “Maybe it never speaks to other countries because they have dynamics – in terms of population, economic structure, etc. – that could still make them a very attractive target for venture capital financing .”

Either way, what will certainly happen is that global funds will implement stricter due diligence on the companies they invest in – for example, a transaction that once took days or months weeks to conclude could now take months under current market conditions. Furthermore, taking additional risks by entering new geographies may not be as exciting as it once was, not least because the ability to do so has been tempered.

Founders looking to raise capital should expect their post-money valuations to fall 20% to 30% from their expectations, investors said. Deng added that those who raised funds with less hype or without investors hungry for valuation on their cap tables will likely fare better in their next funding round.

“They will have more room to invest at lower valuations, what I would probably call more reasonable valuations,” he continued. “Those who have exceeded their valuations in the past will experience stagnation.”

Currently, the priority for many investors who have invested in Africa – most of whom are overseas – is to focus on current portfolio companies and provide them with financial and operational support. Last year, these funds fueled the rise in valuations of African startups (startups fresh from YC’s Demo Day, for example, command valuations between $15 million and $30 million) to the detriment of local investors.

But as they step back and African startups turn to local funds for capital, stable and bear funding cycles will become the norm as these founders accept this market adjustment. Deng said he believes these market conditions present an opportunity for angel networks, grassroots syndicates and small Africa-focused funds to step up their game.

“Hopefully, more funds dedicated just to Africa will start to keep more reserves for this kind of situation, because things like this will continue to happen,” Fu also noted. “That’s a lesson there. If these global funds pull out and do less, that also means more room for local funds to participate in expansions or their pre-Series A.”

Zach George, Managing Partner at Launch Africa, shared a similar sentiment. “Where possible, we try to provide, where we can, follow-on capital to our existing portfolio companies,” George told TechCrunch. “This is a severe global economic recession and our portfolio companies need to preserve their liquidity. We are aware of this and we will try where we can help them.

Another advantage on the continent is that so far there has been no significant news of layoffs, with the exception of Egypt-born and Dubai-based companies. SWVL And Vézeeta. Unlike a valuation crisis, African startups seem to be more sheltered from the layoffs hitting the United States. Whatever happens, this is still just the beginning of what is emerging as one of the world’s most popular technology markets, brimming with opportunities to reshape the global landscape. .

In fact, Jasiel Martin-Odoom, a newbie impact investor based in Ghana, said it was time to redouble efforts on Africa. Its goal is to continue to seek out new businesses and founders – regardless of global economic trends – as the continent continues its journey towards financial independence.

“I’m going all-in,” he told TechCrunch. “I’m moving to Lagos and I’m going to invest on the continent.”

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