Techcabal has released its new report “The State of Tech in Africa Q1/2023” with interesting insights on the investor landscape in and for Africa. Here are some excerpts from the report:
Technology in itself is not a magic wand. It relies on business models and capital to impact lives and societies. In previous years, Africa’s tech ecosystem was awash with venture capital but that has changed in the last six months. Owing to the funding downturn, founders are beginning to embrace debt financing as an asset class to keep the business lights on.
The funding downturn continues
In Q1 2023, Startups in Africa raised $856.9mn in funding. Though it represents a 42.8% decline from the corresponding quarter in 2022, it has been the best quarter since after Q2 2022.
Nigeria and Kenya received $61.1 million and $44.2 million in investment which is a sharp decline from the over $540 million and $387 million raised in both countries respectively within the same period last year. For Nigeria, political uncertainty due to the election in 2023 could be a factor. However, considering that Nigeria had about the highest number of deals, it becomes harder to conclude that political uncertainty was a sole factor for the low total value of funding in Nigeria.
Fintech remains attractive to Venture Capitalists
Despite the slowdown in Funding, African fintechs received $590 million in VC funding from investors, that is 69% of the total amount raised by startups in Q1 2023. It is 130% higher than the total funding raised in the sector within the same period in 2022.
Startups operating within the health and energy sectors made up the top three sectors this quarter with $64.2 million and $47.4 million raised respectively. With the most funding going to fintech, health, energy and logistics/transport, it is easy to see that funds are targeted at improving social infrastructures in Africa.
Debt deals show no sign of stopping
In 2022, debt deals rose to prominence as the preferred asset class for startup founders. As of end of March, 2023, there were 11 debt deals – a 175% increase from the same quarter in 2022, showing a steady rise from 6 debt deals in Q3 2022 and a slight drop from 12 deals in Q2 2022’s figure. With the current economic downturn across the continent, equity investments will become expensive in the long run for startups to scale sustainably while limiting dilution from equity rounds.
Yet, debt financing comes with its own stringent requirements as investors tend to look for steady cash flows or transferable assets (such as real estate) to secure their exposures. A requirement most early stage startups are unlikely to meet. According to a report from Partech, as Africa’s tech ecosystem matures, more growth stage startups may choose to stay private longer sparking a growing use of debt financing.
Excerpt of: The State of Tech in Africa (techcabal 2023)