CHASING CHEQUES

African Startups Feel The Pinch As Funding Crunch Hits

By  |  April 14, 2023

As tech investors take the more cautious route in a subdued market environment, Africa’s startup scene is feeling the pinch of a funding slowdown after years of consistent growth.

The capital crunch has forced tough calls in some cases, triggering strategy tweaks and spending cuts (most commonly in the form of layoffs and pay cuts), as well as the shuttering of some companies and divisions. 

Africa’s tech landscape—an attractive spot for investment from global funders keen to bet on untapped markets in recent years—had proved somewhat resilient in the face of the downturn observed in tech globally over the past year; raising USD 3.6 B in 2022, per WT Data Labs, to keep pace with previous years. However, recent numbers reflect a cool-off.

Funding data drawn from WT Data Labs show a significant dip in investments in the first quarter of the year as African startups raised ~USD 767 M; a 53 percent drop from Q1 2022, which recorded USD 1.63 B.

Deal count also took a hit compared to the same period last year as investors tighten purse strings due to unfavourable economic conditions, exacerbated by last month’s banking industry turmoil that culminated in the collapse of the go-to startup bank SVB and two other banks within days.

“Rising interest rates in the U.S. mean that capital for VCs is being allocated into other investment instruments. Historically, VCs from America have been the largest backers of African startups so we’ve seen fund deployment and investing slow down generally and into African startups as well,” Olabinjo Adeniran, a co-founder and former Growth Partner at local VC Future Africa, told WT.

Globally, some USD 58.6 B flowed to startups in the first quarter of this year; the lowest quarterly funding total since Q4 2019, CB Insights data show, and the number of unicorns minted in Q1 2023 crashed to a six-year low.

This is the result of a contraction in venture capital (VC) markets and a stricter approach to dealmaking that has spread from large investment centres in the West to rest-of-world markets heavily funded by foreign capital. Africa’s tech ecosystem has been impacted by the shocks to an extent, reckons Andrea  Böhmert, a Partner at Knife Capital; a South African VC firm with an extensive portfolio.

“The ecosystem is currently swinging between enthusiasm for the kind of technology Africa is developing and cautiousness when it comes to valuation and over-hyped deals with little substance,” Böhmert told WT.

With investors asking tougher questions and taking a harder look, fundraising difficulties and uncertainties around capital and earnings have caused upheavals at several companies. Since last year, over 1,000 people have been laid off at African startups, including fintech unicorns Wave and Chipper Cash, in addition to compensation reductions.

Cost-cutting measures in the form of budget cuts and market exits have also come into play; Ugandan super app SafeBoda and South African online cleaning platform SweepSouth are notable examples having backed out of multiple countries in the last few months.

“There’s simply not much money anymore to enable longer-term experiments,” said the former Future Africa Partner, Adeniran, who’s worked as a consultant for several African startups, including unicorns Flutterwave and Andela.

Valuations have also been impacted. Cairo-based business-facing e-commerce startup Brimore took a significant cut, as WT earlier covered. And Nigerian genomics startup 54gene reportedly saw its valuation fall by two-thirds in a down round (a phenomenon where startups raise at a valuation lower than it achieved in the previous round), which some say could become common.

“Crazy valuations without real business substance have thankfully slowed down. Down rounds are normal and nothing to be ashamed of. Cash flow management is critical. Mature entrepreneurs are proactively managing these expectations,” Böhmert emphasised.

While there has been at least one indication of a firesale (crypto startup Fluidcoins was snapped up by Blockfinex after the former found funding hard to come by in a spooked market), others have been less lucky.

At least three startups—Kenyan apparel marketplace Zumi, Ghanaian healthtech Redbird, and Nigerian crypto payments startup Lazerpay—have closed shop due to the funding drought. A Bloomberg scoop suggests Chipper Cash, one of Africa’s leading fintech startups, is exploring several options including a sale after a torrid period.

Lazerpay announced on Thursday, April 13, that is shutting down following unsuccessful fundraising efforts.

This has come to the fore as bigger global investors, such as Tiger Global, Sequoia, a16z, SoftBank, etc. which led mega-rounds in African startups in the previous boom cycle, as well as smaller local funders making earlier bets, seem to be adopting a tempered approach.

“Deal flow is good, but quantity has never been the issue. For us it is currently about portfolio balancing, ensuring that we balance riskier investments with less risky ones,” Böhmert explained.

Some deal terms are still unreasonable for many investors, Adeniran argues citing knowledge of high-level conversations, because there’s a mismatch between growth, revenue and valuation.

“A lot of startups got a high valuation at the seed stage and are struggling to grow revenues to match those valuations. This means there’s a large gulf in Africa between seed startups and Series A startups,” he opined.

“Many founders are unfortunately facing a down-round but think they can hold on to their high valuations for much longer. Keeping in mind that most funds deploy within a four-year period and some deploy for longer, investors are now more patient to look for deals that match what they want,” Adeniran added.

While it’s uncertain how long the current bearish market sentiments and macroeconomic conditions will last, there are encouraging signs that dry powder is on the other side as there has been an uptick in Africa-focused fund allocations lately. Partech’s first close of the Partech Africa II at ~USD 262 M and Ventures Platform’s USD 46 M early-stage fund are notable examples among others in recent months, as are capital infusions from government-backed financing institutions.

“Interestingly, in the midst of the slowdown, we’ve seen the largest capital allocation to African funds – there have been more double-digit million and triple-digit million funds recently than earlier. So we’ll watch how these impact the market,” Adeniran noted.

In the meantime, the reset is re-energising much-needed focus on good corporate governance, clean cap tables and capital efficiency, according to Böhmert.

“Those are sometimes the deciding factors when comparing one potential investment with another. But the investment fundamentals stay the same: Great team, large market, good traction, clear path to exit,” she told WT.

Recommendations drawn from industry chatter on how founders can navigate the torrid period have revolved around managing runway, exploring debt and crowdfunding options, focusing on core features, and prioritising high-margin products and customer segments in a bid to grow revenue, albeit profitability, which is also getting soundbites, might be tricky, as Adeniran pointed out.

“There’s been so much said about profitability, but not all founders need to optimise for profitability at this moment – they mostly need to find growth channels and levers that work, tweak business models and find where high revenues are,” he recommended while advocating for better communication between African founders and funders which Adeniran says he’s observed to be less than satisfactory from experience.

Industry stakeholders have suggested that the turbulence currently ravaging Africa’s tech market might set the tone for a more sustainable ecosystem going forward. “I foresee a future where startups raise much smaller cheques to build companies with revenues between USD 1 M and USD 20 M ARR. The era of blitzscaling poor models and poor unit economics to unicorn status is over for now,” Adeniran said.

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