32 Days to the End of 2022: Can African Tech Startups Attain the $7B Projected Funding Mark in ’22?
The African tech startup ecosystem is witnessing its best year yet, with the first half of 2022 ending at $3.5 billion, a 133% increase from the first half of 2021. According to a report from the African Venture Capital and Private Equity Association (AVCA), a pan-African organization that promotes and enables private investment in Africa, if this growth rate continues until the end of this year, it could end up closing 2022 with a new record year of $7 billion for the amount of venture capital investment raised by African startups, shattering last year’s $5.2 billion record.
Africa received $5.2 billion in funding in 650 transactions last year. To reach the projected $7 billion, AVCA expects deal volume to reach 900 by year’s end, which is more than a third higher than last year. Given the continent’s current harsh macroeconomic environment, which caught up with it in the third quarter and resulted in a 53% drop in funding, the prediction may appear to be a tall order.
Africa receives only 1% of total VC investment globally, but unlike any other ecosystem; its resilience highlights the “depth of opportunity and its growth potential,” according to the AVCA report.
Some Factors Driving African Venture Capital Funding
Worldwide, VC funding fell by 3% in the first half of this year compared to the same period last year, with the biggest drops occurring in the second quarter, resulting in what some have dubbed a “silent crash.” In the meantime, Africa’s has increased by 133%.
Apart from the perception that investment opportunities abound in Africa, African governments can be credited with efforts aimed at “enabling entrepreneurship and investment to thrive,” according to AVCA.
In Zanzibar, for example, the government is establishing ‘Silicon Zanzibar,’ with tax breaks and easier work visa requirements to attract tech companies. A similar low-tax initiative is underway in Zambia, to make it the “Estonia or Singapore of Africa,” as one participant described it in April. Flutterwave, Chipper Cash, and Kuda Bank are just a few of the startups looking to capitalize.
Another factor ostensibly attracting VC to Africa in the face of global macroeconomic external shocks is that the 3.7% growth forecast for Sub-Saharan Africa in the second half of this year outpaces that of Latin America, Europe, and the global average (2.9%). Taken as a whole, it would not reach a significant milestone in the process.
When these funds begin to deploy, AVCA expects their activity to “ensure the industry’s moderate short-term health.” The group predicts that VC deal volume will reach 900 by the end of the year, up from 650 in 2021.
However, according to The Big Deal, a newsletter that tracks fundraising in Africa, VC funding for African startups decreased by 53% in the third quarter of this year compared to the same period last year. It marked the end of six quarters of year-on-year quarterly growth and the first quarter since Q3 2021 in which Africa failed to raise $1 billion.
The (Un)likelihood of AVCA’s Projections Materializing
The latest data from The Big Deal show that investor interest in the continent’s rapidly growing tech market is not waning, despite some hiccups.
“As things stand now, the ecosystem is on track to match or exceed the total amount of funding raised in 2021 ($4.5 billion), which is quite an achievement given global trend,” it says.
This is despite a subpar performance in Q3 when startup funding fell by more than half, the worst quarter of the year.
“Q3 saw a -53% YoY drop in the amount raised and a -25% YoY drop in several deals ($100k+, excluding grants).” This relative underperformance has many causes, including the global context – which we’ll investigate once the CB Insights numbers are released -, but it is also the result of a slowdown in ‘mega deals’ ($100m+) announced, according to the Deal.
“Only one such deal was made public in Q3 – Bboxx’s acquisition of PEG Africa for $200 million – compared to four last quarter (worth $620 million) and five last year in Q3 2021 (totaling more than $1 billion!)”
The $7B Dream Might Not be a Mere Dream After All
However, despite pandemic-induced shocks and now the ongoing war in Ukraine, the Deal notes that the continent’s startup market has been on a growth trajectory giving hope to the ADVA projection.
“The ecosystem is still very much alive and well.” Indeed, African startups have already raised more than $4 billion by 2022. “They’ve done so faster than any other year before, just like the $1 billion, $2 billion, and $3 billion milestones,” the Deal states in part, noting that the market was quieter in July and August months, resulting in the disappointing Q3 numbers in relative terms.
“In absolute terms, African start-ups have raised more than $850 million through 150+ deals worth more than $100,000.” (Excluding grants). It would have been a stellar performance in 2019 or 2020, but given what the ecosystem has delivered in the last year, it feels below par.”
Although the overall trajectory of doing twice as much as last year is now unlikely, given the impact of rising interest rates on the startup ecosystem globally, the resilience of Africa’s startup ecosystem has surprised many analysts and may again pull up another surprise.
Remarkably, African startups raised $605 million across 49 deals in November 2021 alone, nearly half the total amount of funds raised by African startups in all of 2020 – around $1.3 billion. So, for the $7 billion dream to come true, the ecosystem must outperform the $1.3 billion invested in the fourth quarter of 2021. Reaching $7B would require the fourth quarter of 2022 to be three times this amount, which is not impossible but difficult.