Goodbye 'Goodtimes'?

The Fate Of African Startups In The Unfolding Tech Market Downturn

By  |  May 23, 2022

Nothing screams lean times in tech quite like a message from the renowned startup accelerator, Y Combinator, advising its portfolio founders to “plan for the worst.” The market slump threatening to ravage tech seems to only be looking gloomier.

If YC – a de-facto Silicon Valley kingmaker with a portfolio of startups that includes Airbnb and Coinbase, and are often the most funded and highest-valued – is recommending spending cuts, survival, optimising for “default-alive,” and possible fundraising at less-generous terms, then a big shift is in view.

This shift is expected to affect startups across the globe as they scramble to navigate a sharp reversal in the market; a circumstance that could last for years, interrupting a tech bull run that lasted more than a decade.

What’s happening? Well, in summary, some of the world’s biggest tech companies have taken quite a beating in the public markets lately caused by massive stock sell-offs, perhaps triggered by perceived underperformance, a slump in earnings, rising interest rates, and the general direction of the global economy.

Technology companies enjoyed a boom time when the pandemic snuck up on the world in 2020. However, today, more than two years later, the tech sector is haemorrhaging losses as investors are spooked over concerns that companies that soared due to the impact of the pandemic may be tumbling.

Companies like Amazon, Meta, Netflix, Peloton, and Shopify, to name a few, have had a significant chunk of their valuations slashed over the past few months.

And this bearish trend has seemingly seeped into the private tech markets where investors are backpedalling on making many big bets, spooked by the bloodbath experienced in the public markets of late. Quite simply, investors are rethinking how they invest in startups.

YC has backed 90+ African startups so far (most of them early-stage) and its portfolio is known to command a premium. Notable African startups like the USD 3 B-valued Flutterwave and Paystack (which was acquired by U.S. fintech giant, Stripe, for a reported USD 200 M in 2020), are part of Africa’s YC contingent.

But its recent communication to its portfolio founders suggests it anticipates lean times.

There are indications that the world’s biggest venture capital (VC) firms may be thinking about focusing on making small, shrewd bets in early-stage startups and electing to reserve more capital to prop up only their best-performing companies, rather than the ‘spray-and-pray’ approach that characterised the now-truncated bull run, as some have pointed out. But the potential funding pullback remains a cause for concern among African startups hoping to navigate whatever implications arise due to the unfolding correction.

African startup funding hit a record with over USD 4 B raised last year and more mega-rounds than ever. This year got off to a flying start as well, as investors had poured in over USD 1 B into the tech sector by March.

The continent’s booming tech sector has attracted global investors bullish on the next frontier; funding rounds and valuations attained new heights, with YC-backed African startups particularly known to be the hottest prospects among local and global VCs and thus commanding a premium.

However, it appears the unfolding shift in market dynamics is likely to halt the momentum that has been built up in the last few years, as YC recently pointed out to its founders, who probably have it better than most. 

Generally, a startup funding slowdown is in view and the impact is already manifesting in the form of spending cuts, job cuts, and hiring freezes, while also potentially triggering valuation slashes, down rounds, fewer deals, and even the shuttering of some startups. And it would be somewhat naive to assume Africa’s tech startups would be immune to the impact of the sweeping storm.

Feature Image Courtesy: Raise

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