Home Finance Why African tech startups are bucking global trends with record investment

Why African tech startups are bucking global trends with record investment

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BY TOM JACKSON
First published – MARCH 2, 2023
The African tech space is bucking global investment trends due to a combination of the fact it is still relatively nascent, and the scale of the opportunity still in evidence on the continent.

According to the eighth edition of the annual African Tech Startups Funding Report released by startup news and research portal Disrupt Africa, which is available free to all as part of an open-sourcing initiative in partnership with Flat6Labs, MarketForce, 4Di Capital, Mercy Corps Ventures, Newtown Partners, and InsiderPR, a total of 633 African tech startups raised a combined US$3,333,071,000 over the course of 2022, a record in both respects.

Amidst a global downturn, one would have been forgiven for expecting some levels of stagnation in 2022. So why has African tech bucked the global trend? Philip Gasaatura from Katapult Africa says it is growing from a lower base, firstly, but also says there are aspects to the sector that are deeply attractive to global investors.

“When you compare it to the rest of the world, yes the growth is there but in terms of volume we are nowhere by comparison. But I think the opportunity Africa presents over the next 10 to 20 years is huge, because you see a shift, in terms of the demographics, in terms of the urbanisation, and tech adoption. So you’ll see more investment into that space, because you aren’t just solving a challenge for today but also for the next five years,” he said.

Gasaatura was speaking as part of episode one of “The month in VC”, a new monthly podcast series focused on all things venture capital launched by Disrupt Africa in partnership with Katapult, Grindstone Ventures and Kalon Venture Partners. In the same episode, Catherine Young, managing director of the South Africa-based Grindstone Accelerator and Grindstone Ventures, also sounded a note of caution with regard to the numbers, but hoped Africa will continue to buck global trends.

“It will continue to grow I’m sure and I’m hopeful that we will buck the same trend as we continue to build our base for the year ahead,” she said.

Gasaatura, does, however, think 2023 will be more challenging.

“The companies that do make it through the next 18-24 months are going to be those that focus on customers and generating cash. But are there going to be opportunities to invest in this period? Absolutely, and the cream does rise to the top,” he said.

There were at least 987 different disclosed investors in African tech startups in 2022, up 28 per cent on the 771 tracked in 2021. These investors vary in shapes and sizes, with the most active being early-stage funds such as Launch Africa Ventures, LoftyInc Capital Management and Future Africa, while major global investors such as Tiger Global, Sequoia Capital and SoftBank are also increasingly active. Young says this is an important development.

“We have been very excited about that and us making the first couple of clips onto the wonderful unicorn list has really started to shine a spotlight on Africa more. We need that global focus to continue to come in. We need to continue to show the robustness of our compliance, the robustness of our governance. It is very incumbent on the whole ecosystem to make sure that is absolutely intact, and I strongly believe the global capital will continue to flow,” she said.

Aside from the overall growth in funding, and the increase in investor numbers, another positive revealed by the report is that there is a continuing trickle down effect as the percentage of funding going into markets other than the “big four” of Nigeria, Kenya, South Africa, and Egypt” slowly increases. In 2022, “big four” startups raised 80.8 per cent of the annual total, down from 92.1 per cent in 2021.

Gasaatura says this is good news.

“I don’t think it is a lack of talent across the continent, it is a lack of opportunity, and the biggest challenge in the startup space is market access. There is still opportunity for the smaller countries if their startups can find a route to market in the large markets,” he said.

More than half the funded African tech startups from 2022 took part in some form of accelerator or incubation programme either prior to raising, or as part of their raise. This marks a sizeable increase from 2021, with growing interest in African startups from international accelerators such as Y Combinator and Techstars accounting for much of the growth. But how helpful is taking part in an accelerator when it comes to securing venture capital?

“It plays a role, but it is not a silver bullet,” said Gasaatura. “It does play a role in providing some education as to how companies can start to think about their growth and start thinking about investment. One of the biggest complaints we hear from investors when they come to Africa is that they can’t find deals, so these programmes play a role.”

A major negative emerging from the data is the clear evidence that African tech’s gender problem is only getting worse. Only 20.2 per cent of the 633 funded African tech startups in 2022 had at least one woman on their founding team, which is up from 121 in 2021 but still represents a percentage decline from 21.5 per cent. Young says there is no real excuse for this.

“There are a couple of reasons that are often cited – there’s not enough pipeline, there’s not enough quality pipeline, the startups are too early stage, or they don’t have the right skill. We have found that pipeline is definitely not the issue in any way, form, or fashion, and the quality of the female founders is not the issue either,” she said.

The lack of gender diversity is especially disappointing when it is clear that it just makes good business sense to have a diverse portfolio of investments.

“Why on earth would be not want to as venture capitalists have a more balanced view on how we go and source for deal pipeline? And how do we not make really robust, balanced decisions, not based on gender only?” Young said.

Grindstone Accelerator last year partnered Naspers Labs to launch GrindstoneX, an all-female accelerator programme designed to make women-led startups more investible, scalable, and exit-ready. Proactive programmes like this can play a part in fixing the problem, Young said.

“Sometimes it is a case of just reverse engineer the composition of the cohorts in things like accelerators. And we just literally just get on with, and we try for the next number of years to get the balance, and go and recruit these female startups. They are there, they are absolutely brilliant across the continent. It is intentional, it needs to be a meaningful intention to do so,” she said.

VCs also need to make investment committees more balanced, and get more female mentors and coaches on board.

“It really would take a meaningful intention over a sustained period of time, five to 10 years, to get the balance right, and then we are all more profitable and make more money. I don’t see the problem with that,” said Young.

Source: disrupt-africa.com