Hello Listeners, Welcome to another episode of the Africa’s Venture Capital and Entrepreneurial Landscape series on Wasabi Africa Podcast.
My name is Lukman Yusuf, I am a financial analyst from Nigeria working at the World Bank Head Quarters in the US, It is my passion to make the known the story of Africa’s economic development to people all over the world.
In the 4th episode of this podcast, we discussed The emergence of African startup ecosystems, in this episode, we will talk about
Article/Episode 5: The State of Venture Capital in Africa Today
In recent years, Africa has experienced a notable shift in perception within the global investment community. Once overlooked and overshadowed, a remarkable transformation has taken place in recent years, forever altering perceptions, the continent is now attracting growing interest due to its thriving startup ecosystem. However, the actual worth of the industry is challenging to pinpoint due to varying sources and data availability, The Africa Report estimates that there were approximately 400 active private equity and venture capital firms operating in Africa and over 200 firms across the world with strong Africa focus as of 2021. These firms are spread across the continent, with notable concentrations in countries like Nigeria, South Africa, Kenya, and Egypt, which have emerged as key hubs for venture capital activity. This newfound attention in the continent has spurred increased venture capital activity, as investors recognize the untapped potential and opportunities that Africa offers.
A pivotal force behind this transformative trend is none other than Africa’s expansive and vibrant population. With a staggering statistic to its name, Africa boasts the world’s youngest population, where over 60% of its inhabitants are under the age of 25. This demographic dividend serves as a compelling catalyst for the surge in entrepreneurial activities across the continent. The sheer size and youthful vitality of Africa’s population present an extraordinary opportunity for startups to tap into a burgeoning consumer base. This digitally connected generation, characterized by their tech-savviness and affinity for innovation, holds immense potential for businesses that can adeptly address their unique needs and preferences.
As Africa’s youthful population becomes increasingly integrated into the digital realm, the demand for innovative solutions and tech-driven products and services skyrockets. Startups catering to sectors such as fintech, e-commerce, healthcare, and education are finding fertile ground to thrive, buoyed by the youthful enthusiasm and eagerness to embrace technology. Furthermore, the rise of affordable smartphones and the steady growth of internet connectivity in Africa have further fueled the entrepreneurial momentum. With increased access to information and online platforms, young African entrepreneurs are harnessing their digital prowess to develop groundbreaking solutions that cater to the demands of their tech-savvy peers. Investors, captivated by the immense potential and abundant market opportunities, are flocking to Africa’s burgeoning startup ecosystem. This surge in interest is evidenced by the remarkable upswing in venture capital activity across the region. According to data from a reputable industry report by Disrupt Africa, African startups raised an impressive $1.3 billion in funding in 2021, showcasing a substantial 74% increase compared to the previous year.
This substantial influx of investment capital is a testament to the growing confidence in Africa’s entrepreneurial landscape. Investors are recognizing the untapped potential that lies within the continent, propelling a wave of funding towards promising startups operating in diverse sectors These changes demonstrate the shifting narrative that Africa is no longer a peripheral player but an attractive investment destination offering significant returns on investment.
Another factor contributing to the growth of venture capital in Africa is the increasing number of success stories coming out of the continent. In recent years, African startups have made headlines for their innovative solutions to pressing social and economic challenges, such as financial inclusion, access to healthcare, and food security. Some of the notable success stories which we have talked about previously on this platform include Paystack, a Nigerian payment processing company that garnered global attention when it was acquired by Stripe, a renowned fintech giant, for an impressive $200 million. This acquisition not only highlighted the caliber of African startups but also demonstrated the immense potential of the African fintech sector. Paystack’s success story served as a turning point, shattering preconceived notions about the African tech landscape and attracting increased interest from investors seeking similar promising opportunities. Another remarkable feat comes from Flutterwave, you can’t really talk about the Nigerian startup ecosystem without mentioning flutterwave and that is why it has somehow made its way to almost every article/episode in these series. Flutterwave is a Nigerian fintech firm that raised a substantial $170 million in Series C funding in 2021. This milestone funding round solidified Flutterwave’s position as a trailblazer in the financial technology space, underscoring the confidence of investors in African startups. Flutterwave’s success story showcases the disruptive power of African innovation and its ability to reshape financial services in the region, driving financial inclusion and empowering businesses and individuals alike.
As at the moment Africa of recording this podcast. Africa boasts over 11 unicorns with more than half originating from nigeria
Beyond these headline-making achievements, there is a groundswell of success stories emerging from African startups across various sectors. Entrepreneurs on the continent are devising innovative solutions to address crucial challenges. From mobile banking platforms that bring financial services to the previously unbanked, to telemedicine startups that bridge the healthcare gap in remote areas, African entrepreneurs are driving tangible impact and transforming lives.
The COVID-19 pandemic has also left an indelible mark on venture capital activity in Africa, causing a ripple effect across the startup landscape. However, amidst the challenges, a glimmer of hope persists, as the overall trajectory of venture capital in the continent remains positive. According to the African Private Equity and Venture Capital Association (AVCA), venture capital investment in Africa reached an impressive six-year high of $1.4 billion in 2019. This surge in funding showcased the growing confidence of investors in the African startup ecosystem and its potential for remarkable returns. Fintech and e-commerce companies emerged as particularly attractive investment prospects, capitalizing on the continent’s rapidly advancing digital infrastructure and shifting consumer preferences.
However, the onset of the global pandemic in 2020 brought about a temporary slowdown in investment activity. The total funding raised by African startups declined to $701.5 million during the year. The uncertainty and economic downturn caused by the pandemic led to a cautious approach from investors, impacting the flow of capital into the startup ecosystem. Nevertheless, it is noteworthy that the $701.5 million raised in 2020 still surpasses the $367.5 million raised in 2016, demonstrating the resilience and growth of the African startup ecosystem over time.
The pandemic presented a unique set of challenges for startups across the continent. Many faced disruptions in operations, supply chains, and consumer demand. However, African entrepreneurs exhibited remarkable adaptability and resilience, swiftly pivoting their business models to address the changing market dynamics. Startups in sectors such as healthtech, edtech, and logistics played a crucial role in combating the challenges posed by the pandemic, offering innovative solutions to support healthcare systems, remote learning, and last-mile delivery. For example, LifeBank a Nigerian healthtech startup that operates a digital platform connecting blood banks and hospitals to facilitate the efficient delivery of blood and other medical products expanded its operations to include the delivery of COVID-19 test samples, personal protective equipment (PPE), and essential medical supplies during the pandemic. Their efforts helped ensure the timely availability of critical resources to healthcare facilities, aiding in the fight against the virus. Meanwhile, in Ghana, mPharma a Ghanaian healthtech company that focuses on improving access to quality healthcare and medications launched an initiative called “Mutti” in Ghana, providing a telemedicine platform that allowed individuals to consult with healthcare professionals remotely. This helped reduce the risk of virus transmission, ensured continuity of care, and alleviated the strain on healthcare systems.
The logistics sector wasn’t left out as Kobo360, the Nigerian logistics startup that utilizes technology to optimize and streamline the supply chain and logistics processes responded to the pandemic by expanding its services to include the transportation and delivery of essential goods, including medical supplies and food. Their efficient logistics solutions helped maintain the flow of essential goods, even in the face of supply chain disruptions.
Despite the pandemic-induced obstacles, investors continue to recognize the vast potential that Africa holds. As the world gradually recovers from the pandemic, venture capital activity in Africa is already gaining back its momentum. The disruptions caused by the crisis have created new opportunities and amplified the need for innovative solutions across various sectors. Investors are keenly observing the evolving landscape, seeking startups that can address emerging challenges and capitalize on the shifting consumer behaviors brought about by the pandemic. Beyond the numbers and figures, the stories of resilience, determination, and innovation that emerged during the pandemic are a testament to the human spirit within Africa’s startup ecosystem.
The sustained growth of the venture capital industry in Africa has been fueled by several factors that have contributed to the development of a vibrant startup ecosystem on the continent. These factors include the increasing availability of funding, supportive government policies, and the establishment of a robust network of incubators and accelerators.
Government policies have played a crucial role in creating an enabling environment for venture capital investment. Several African governments have implemented measures to attract investment and promote entrepreneurship. For example, Rwanda introduced a Startup Act in 2019, which offers tax incentives, streamlined business registration processes, and access to funding for startups. In addition, countries like Kenya and Nigeria have launched dedicated funds to support startups and provide early-stage financing. The Kenyan government launched the Silicon Savannah initiative in 2010, which aimed to position Kenya as a hub for technology and innovation in Africa. The initiative has helped to create a thriving startup ecosystem in Kenya, with successful startups such as M-Pesa, the mobile money transfer service, and Twiga Foods, a digital platform that connects farmers to retailers.
The development of a robust network of incubators and accelerators as discussed in previous article/episodes has also contributed to the growth of venture capital in Africa. These institutions provide startups with mentorship, resources, and networking opportunities, helping them refine their business models and access funding. A crucial example of such initiatives include the Tony Elumelu Foundation Entrepreneurship Programme which has supported thousands of African startups through its mentorship and funding initiatives. Additionally, organizations like the African Leadership Academy and MEST Africa have established incubator programs that offer tailored support to startups across the continent.
Regional development institutions such as The African Development Bank (AfDB) have also played a pivotal role in the growth of venture capital in Africa. The AfDB launched the African Investment Forum in 2018, which serves as a platform for connecting investors with African startups and facilitating investment. The forum has attracted participation from various stakeholders, including governments, development finance institutions, and private investors. Through initiatives like these, the AfDB aims to mobilize capital and drive investment in key sectors such as agriculture, energy, and technology.
Notably, investors have also played a significant role in the growth of the African venture capital industry, providing capital and expertise to support the development and expansion of startups on the continent. One prominent investor in the African startup ecosystem is Helios Investment Partners. With a focus on Africa, Helios has made strategic investments in successful African startups, demonstrating their confidence in the region’s potential. A good example of one noteworthy investment by Helios is their backing of Interswitch, a leading Nigerian payment processing company. In 2019, Helios acquired a significant minority stake in Interswitch, valuing the company at $1 billion. This investment provided Interswitch with the necessary capital to further expand its operations and solidify its position as a key player in Nigeria’s fintech industry. The partnership with Helios also brought valuable expertise and networks, enabling Interswitch to leverage new opportunities and drive innovation in the payment processing space.
Another key example is their involvement with Fawry, an Egyptian electronic payment platform. Helios invested $100 million in Fawry in 2015, providing the company with the resources to enhance its technological infrastructure and expand its reach across Egypt. With Helios’ support, Fawry has grown rapidly and become a leading fintech player in Egypt, offering a wide range of electronic payment services that cater to the country’s evolving digital economy. These investments by Helios highlight the importance of strategic partnerships in the African venture capital landscape. Beyond capital infusion, startups in Africa are in need of expertise in scaling businesses, accessing new markets, and navigating regulatory environments. They also need to build valuable networks and connections in order to facilitate collaborations and partnerships that further accelerate their growth.
Despite the significant progress witnessed in Africa’s startup scene, one major hurdle continues to impede the industry’s full potential—the lack of a developed exit market. This critical challenge poses obstacles for venture capital firms operating in Africa, hindering their ability to realize returns on their investments and hampering the industry’s overall growth.
This is a result of the scarcity of viable buyers for their investments. Unlike more established markets, where robust exit options such as strategic buyers, IPOs, and M&A activities are readily available, Africa’s exit landscape remains relatively underdeveloped. The limited number of buyers severely restricts venture capital firms’ ability to exit their investments and hampers their ability to attract further capital.
Statistics paint a stark picture of this issue. According to the African Private Equity and Venture Capital Association (AVCA), between 2010 and 2020, only 36% of venture capital-backed companies in Africa successfully exited their investments. This figure falls significantly below exit rates in more mature markets, where the success rate often exceeds 50%. The relatively low exit rate in Africa highlights the urgent need for the establishment of a thriving exit market capable of unlocking the full potential of the continent’s venture capital industry.
The lack of a developed exit market can be attributed to several factors. One key factor is the limited number of strategic buyers in Africa. Many local companies may lack the financial capacity or strategic intent to acquire startups, inhibiting potential exit opportunities. Moreover, cultural factors may also come into play, as the African business landscape traditionally favors organic growth over acquisitions.
Another significant obstacle is the absence of a liquid secondary market for venture capital investments. Unlike public markets where investors can easily buy and sell shares, the illiquid nature of venture capital investments in Africa makes it challenging for investors to exit their positions. The lack of liquidity prevents investors from readily accessing returns on their investments, thus undermining the appeal of the venture capital asset class.
Furthermore, regulatory complexities and bureaucratic hurdles often discourage potential exit routes such as IPOs. The lengthy and costly IPO processes in many African countries, coupled with uncertain market conditions, dissuade venture capital-backed startups from pursuing this exit avenue. These challenges make it difficult for venture capital firms to exit their investments in a timely manner, thereby stifling the growth of the industry. The lack of seasoned managers and investors is another issue. Many African venture capital firms are very new, and they lack the knowledge and connections needed to find and support successful startups. This is especially difficult in nations with developing startup ecosystems because there aren’t enough seasoned managers and investors available.
There are however numerous strategies that can be employed in solving these issues. Strengthening capital markets is crucial, as it provides a viable exit option for venture capital firms. Governments can take steps to enhance stock exchanges, streamline IPO processes, and incentivize companies to go public. Creating an enabling environment for strategic acquisitions by established companies can also foster a thriving exit market. Governments and industry players can offer regulatory frameworks and tax incentives to encourage acquisitions, thus providing an exit avenue for venture capital-backed startups.
Another important factor to take into account while enhancing exit possibilities is regional cooperation. African nations may increase the influence of the venture capital sector by aligning legislation, allowing cross-border investments, and building networks that link firms with potential customers across multiple markets. The African Continental Free Trade Area (AfCFTA) offers a special chance to encourage interregional cooperation and develop a single market that makes cross-border departures easier.
To overcome the lack of a developed exit market, a comprehensive effort involving various actors is required, including governments, venture capital firms, entrepreneurs, and regulatory authorities. By tackling the issues head-on, Africa can establish a healthy exit environment that fosters the growth of the venture capital industry, attracts new funding, and fosters innovation and continental economic development.
Despite these clear hurdles, the continent’s venture capital and startup ecosystem continues to push the envelope. According to the African Tech Startups Funding Report, published by Disrupt Africa in 2022, tech startups in the country crossed the $3 billion mark for the first time, raising over $3.3 billion in total fundraising. It was also stated that 633 startups accounted for these amounts, which were 55.1% more than the $2.15 billion raised by 564 African startups in 2021. These statistics prove nothing but the viability of ideas eking out of the continent, the efforts of the Venture capital firms, incubators, accelerators and startup initiatives, coupled with the increasing support of the African Government.
In a nutshell, there is still a long way to go before venture capital in Africa reaches its full potential. Investors have a large opportunity due to the rising interest in African startups and the continent’s sizable and youthful population. However, for the venture capital business in Africa to reach the heights of its potential, it must solve the difficulties it now faces, such as the absence of a well-developed exit market and the scarcity of knowledgeable investors and managers. With the right backing and funding, the future of the venture capital industry in Africa seems promising.