Unpacking The Bizarre Investment Slump Suffered By South African Tech Startups In 2019

In 2019, tech startups in Africa attracted USD 1.340 Bn in VC investments; the highest tally for Africa to date. That figure is quite fitting considering 2019 was a particularly robust year for African startups — the best year yet. 

As usual, fintech was the startup sector that saw the most action while cleantech, logistics/transport-tech, and healthtech were among the other hot spots. 

And as would be expected, the bulk of that deluge of capital went to the usual suspects — Nigeria, Kenya, South Africa, and Egypt; the so-called Big Four.

But while the startup ecosystems in countries like Nigeria, Kenya, and even Egypt can afford to give themselves a pat on the back for what seems like a year well run, the same cannot be said for South Africa where things slowed down somewhat.

In each of the four years between 2015 and 2018, the startup ecosystem in Africa’s most advanced economy, that’s South Africa, led from the front in such areas as the number of startup funding deals and startup funding amounts.

In other words, the startup ecosystem in South Africa — which is argued to be the most advanced in Africa — was pretty much on top. At least, up until last year.

In 2015, African tech startups raised a total of USD 185.7 Mn in funding and 29 percent of that sum (USD 54.6 Mn) was raised by South African companies — no other country posted better numbers.

African startup funding generally plummeted in 2016 due to the economic recession, though only in terms of value as the number of deals recorded actually rose to 146, suggesting that more African startups were funded in 2016 than in 2015.

That year, the total amount raised by startups on the continent fell by 30.5 percent to USD 129 Mn. And even though South Africa saw funding for startups fall 14.6 percent to USD 46.8 Mn, the country still led the way in Africa in terms of funding amount and deal count.

In 2017, African startup funding hit USD 201 Mn and, as a recurring theme, South Africa again topped the charts in terms of funding amount with USD 39.60 Mn infused into its startups. South Africa also bagged the top country title with 74 startups getting funded that year. Nigeria and Kenya settled for the runner-up places as they had done in previous years.

The year 2018 was, however, something of a mixed bag. In WeeTracker’s African Venture Capital Report for 2018, USD 725.6 Mn was invested across 458 deals — a gigantic 300 percent leap in the total funding amount and over 127 percent increase in the number of deals compared to 2017.

While South Africa had to settle for second place on the deal count log, it still occupied the top spot on the funding amount leaderboard. In 2018, South African startups roped in USD 241.1 Mn in 108 deals. Nigeria, which recorded the highest amount of deals with 136, only drew in USD 133.5 Mn.

So, there you have it — South Africa has always been in the thick of things, which makes it all the more baffling why 2019 was such a low for the startup ecosystem in Mzansi. And an unexpected and unprecedented one at that.

For a startup ecosystem that has a reputation for leading from the front, it’s hard not to read meaning into the latest statistics which hints at a rather spectacular slump.

WeeTracker’s African Venture Capital and Tech Startups Report for 2019 showed that venture capital in South Africa nosedived to USD 67.34 Mn after reaching an all-time high of USD 241.1 Mn only a year prior. The number of deals also dropped to 96 from 108. 

In effect, South Africa not only lost its place on the top spot to the buzzing scenes in Nigeria and Kenya in 2019 but was also bested by Egypt in terms of the amount of funding raised.

While unicorns were being made in Nigeria and VC money was flooding Kenya and Egypt, the activity in South Africa was mostly tepid, raising concerns about a perceived slump and apathy.

Such concerns are, however, certainly not shared by seasoned tech investor, Keet Van Zyl, Co-founder and Partner at one of South Africa’s prominent VC firms, Knife Capital.

Van Zyl told WeeTracker that while the South African tech startup ecosystem may be lagging behind in terms of growth and funds deployed, it is hardly indicative of some kind of slump as VC funding is more available than ever for startups operating in the country.

“It depends on which dataset you use and research methodology, I guess. Sure, South Africa is behind other regions in Africa in terms of growth and US$ deployed in startups. But many deals were done, maybe some were more under the radar,” he said. 

“I would definitely not say that SA is in some kind of VC slump/apathy. There is more VC funding available than ever for startups. 

Van Zyl also suggested that startup funding in South Africa is probably harder to come by because the ecosystem is devoid of “hype” and South African investors are wont to make hype-induced decisions.

As he said: “Other regions perhaps have enhanced hype attached to it where investors take a more risk-based approach to investing, while South African investors are slightly more risk-averse focusing on growth and business fundamentals to deploy bigger cheque sizes.”

Van Zyl is, however, optimistic about the outlook for 2020, hinting at better days ahead for the ecosystem and plans by Knife Capital to expand its portfolio with new investments while also backing the growth trajectory of investments already made with follow-on funding.

“Many new funds were raised last year focusing on SA entrepreneurs and the money needs to be deployed,” he said. “International VCs are also increasingly collaborating and investing in SA. There are also a number of local startups that are scaling aggressively internationally that will require follow-on funding/Series-B.”

Knife Capital boasts a vast portfolio that includes the likes of Fundamo, PharmaScout, orderTalk, SkillUp, DataProphet, and Quicket, among others, and according to Van Zyl, the VC firm is looking at new investments.

“We are already in advanced due diligence with a few investments we’ve been working with since last year and also focusing on backing the growth trajectory of the investments we’ve already done with follow-on funding where it makes sense,” said Van Zyl.

In any case, the events of the next 12 months will no doubt have a bearing on determining whether the dismal 2019 recorded by the South African tech startup ecosystem was just a blip or a symptom of something worse.

Well, you know what they say; ‘Once’ is incident, ‘twice’ could be coincidence, but ‘thrice’ is definitely a pattern.

Featured Image Courtesy: VentureBurn