Africa’s technology-dominated startups will continue to attract investment, even if at a slower pace, following record venture capital funding last year.
The sector has seen inflows of $2.7 billion since January, more than double the $1.2 billion in the first five months of last year, according to data collated by Futuregrowth Asset Management.
“We still see that African venture capital will be up year-on-year, albeit at a more subdued growth rate,” said Ian Lessem, managing partner at Cape Town-based HAVAIC, which makes between four and eight investments in early stage companies across South Africa, Nigeria and Kenya every year.
The charts and map below show how funding surged last year and the markets that will continue attracting the most inflows in future.
In 2021 Nigeria and South Africa led the way as investments surged to $5.2 billion, according to Cape Town-based Futuregrowth, which oversees about $12 billion across a number of asset classes. The financing will likely slow in the months ahead as US investors, who brought in most of the money last year, retreat amid a global market downturn.
“The fundamentals for a lot of the businesses in Africa remain very very strong,” Lessem said. “Good businesses will always raise capital. They may have to work a little bit harder.”
Nigeria, with a population of over 200 million, is a sizable market in and of itself, while Kenyan companies have usually operated across a regional trade bloc of more than 170 million people before expanding further.
International funds, including Tiger Global LP, Softbank Group, Andreessen Horowitz, General Atlantic LP, Social Capital, Quona Capital Management Ltd. and Dragoneer Investment Group LLC, have invested about $4 billion in African startups in recent years, according to Futuregrowth.
The money has mostly gone to technology companies providing services in finance, trade, energy, agriculture and health. Some have seen their valuations grow to more than $1 billion, including Flutterwave Inc., Chipper Cash, Andela, OPay and Wave.
Africa-focused startup funds such as Norrsken 22, Novastar Ventures, Partech Africa and TLcom Capital Partners Ltd. are currently raising about $700 million to expand their investment on the continent, according to Futuregrowth.
Nigeria and South Africa attracted the most funds last year, followed by Egypt and Kenya. Senegal and Ghana are also putting themselves on the startup map, according to Futuregrowth research.
“Senegal is growing quite a lot,” said Amrish Narrandes, head of private equity and venture capital at Futuregrowth. Still, “you’ve got the players in those geographies, those three or four will dominate” into the future, he said.
HAVAIC’s Lessem agrees that West Africa is an area to watch.
“You have an interesting new venture region that is bubbling, which is francophone Africa,” he said. “It’s quite a well functioning trade bloc, common currency, similar cultures, sizable collective population and markets and an ever growing tech savvy youth.”
In South Africa, where the Futuregrowth High-Growth Developmental Equity Fund invests in startups, the value of venture capital deals has grown nine-fold since 2016.
The relative depth of South Africa’s capital markets compared to other African nations will help shield it from a downturn in interest from foreign funders, Lessem said.
“With deep local capital markets that in recent years have started to allocate to venture, South Africa is not as reliant on foreign funding compared to other African markets,” he said. “Their local markets have far less depth.”
There were 122 deals in the country last year, with $832 million (R13.3 billion) raised. The sector is now expected to “stabilize,” Narrandes said.
South Africa’s market is probably too small to see startups get big enough to raise money through initial public offerings, he said. Instead they are more likely to be bought out by companies listed on the Johannesburg Stock Exchange.
“The size of the businesses don’t get large enough to justify an IPO locally,” he said. “Given the size of our economy, it makes more sense to be gobbled up by a JSE-listed company.”