African start-ups show resilience amid global chaos

Africa’s technology-dominated start-ups will continue to attract investment, even if at a slower pace, following record venture capital funding last year.

The sector has seen inflows of US$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 Havaíc, which makes between four and eight investments in early stage companies across South Africa, Nigeria and Kenya every year.

In 2021, Nigeria and South Africa led the way as investments surged to $5.2-billion, according to Cape Town-based Futuregrowth. 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 sizeable 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, Softbank Group, Andreessen Horowitz, General Atlantic, Social Capital, Quona Capital Management and Dragoneer Investment Group, have invested about $4-billion in African start-ups in recent years, according to Futuregrowth.

Tech focus

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, Chipper Cash, Andela, OPay and Wave.

Africa-focused start-up funds such as Norrsken 22, Novastar Ventures, Partech Africa and TLcom Capital Partners 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 start-up map, according to Futuregrowth research.

“Senegal is growing quite a lot,” said Amrish Fernandes, 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.

Havaíc’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, sizeable collective population and markets, and an ever-growing tech-savvy youth.”

In South Africa, where the Futuregrowth High-Growth Developmental Equity Fund invests in start-ups, the value of venture capital deals has grown nine-fold since 2016.

Naspers Foundry, Knife Capital, Havaíc and Allan Gray’s E Squared are also helping to drive growth.

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 raised. The sector is now expected to “stabilise”, Fernandes said.

South Africa’s market is probably too small to see start-ups 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 JSE.

“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.”  — Antony Sguazzin and Rene Vollgraaff, (c) 2022 Bloomberg LP