Venture Capitals Invested $3.9m per day into African startups in 2020
Wednesday,
September 22, 2021 / 06:15 PM / by Africa Arena / Header Image
Credit: Africa Arena
2020
was bound to be a different story: for economies, industries, businesses, and
communities around the world. World Bank findings show a 4.3% contraction in
the global economy, and Foreign Direct Investment
into Africa declined by an estimated 18% in 2020. In parallel to this, the VC
market in Africa saw a decline in the total value of deals by 29% according to
Partech Research.
Paradoxically,
despite the total equity value and overall ticket sizes being diminished in
2020, Africa’s startup ecosystem recorded the highest number of deals – an increase
of 44% according to Partech. Though, reports
on startup funding in the continent differ in methodology, hence the
disparities in the numbers. We aim to understand the innovation and investment
developments seen in the ecosystem. Data collection is a difficult process for
an array of reasons. Undisclosed deals in the continent range from $114 million
to $400 million. Some investors choose to be discreet about their deals in
order to focus more on returns; other
investors announce their deals in order to be known to founders.
In
comparison to other global regions, Africa underperforms in VC activity.
Africa’s top-performing market, Nigeria, is an interesting case as it does not
appear in the top five countries on the ranking of startups
by country of incorporation – many startups that raise capital in Nigeria are
not incorporated in the country. As Africa’s top ecosystem, Nigeria ranks
considerably low in “Ease of doing business”. Africa’s second-largest ecosystem, Kenya, had a $5.80
per capita in VC investment in 2020 – the highest in the continent. Kenya is
also a top destination for expats.
Startups
in Africa approach investors in two main ways: the “Nigerian way” -
incorporating outside of the country, and the “Kenyan way” – whereby they seek
capital within their country of incorporation. Markets in Southern Africa are
attracting more investments because of lower valuations. The Egyptian market
has gained investor traction because of considerable demographic size. There is
an increasing need for countries to enact legislation, i.e. “Startup Acts”, to
make it easier for businesses to incorporate locally, making it easier to start
a business as an entrepreneur, but also to start a local investment fund and invest
in seed-stage businesses from the country.
Early-stage
investors much prefer doing due diligence in-person, but struggled to do so in
2020 because of travel restrictions. Nevertheless, investments in early-stage
startups were very bullish in 2020, as shown by the numbers of deals which were
on the rise, even though their size was smaller. There is still a need for
investors to improve their due diligence process – perhaps through a
standardized process – so as to streamline it and make it more “online-friendly”.
Fundraising
for GPs during 2020 was largely supported by more flexible LPs, as
institutional investors grappled with the changing macroeconomic environment
and the lack of ability to do in-person due diligence on GPs. As travel
restrictions are lifted and LPs become more at ease with performing due
diligence remotely, capital will start flowing to GPs and then entrepreneurs.
The
degree to which Africa’s tech innovation and investment landscape has been
impacted by the COVID-19 pandemic is a mixed bag of results. On one side, the
number of deals have increased; while at the same time, the total value of the
equity deals decreased, by the estimates of a few reports. This shows that even
though ticket sizes diminished, investment appetite in tech innovation in
Africa is high. From a global point of view, Afrca’s tech ecosystem is still
miniscule – VCs invested $3.9 Million per day into African startups in 2020;
while in the US, startups received VC investment of
$428 Million per day.
The
main story of 2020 is the sharp increase in the number of deals in the
early-stage. Seed stage startups secured 7.5% of the total deal value in 2019,
and 22% in 2020. In order to continue this trend of bridging the funding gap, a
lot more support is needed. Tech hubs across the continent play an important
role in incubating and accelerating innovation – aiming to make early-stage
startups investor-ready.
However, tech hubs themselves are in need of support, whether from the government
or private sector, in order to have the financial and operational muscle needed
to help startups.
All
in all, four sectors, collectively, secured more than 60% of all deals in 2020;
and five countries, collectively, secured 87% of all deals in 2020 (Partech
findings). Nevertheless, in 2020 we saw a better spread than before in the
number of sectors and markets receiving funding. Fintech, once again, captured
a quarter of the equity funding – with multiple big deals conducted, including
Flutterwave’s astronomical raise and acquisition deals such as DPO and
Paystack. Nigerian startups continue to dominate the fintech sector, largely
due to fair regulations being put in place by major banks and the large population
that remains unbanked and unconnected. Agritech sector grew phenomenally in
2020, with Kenya leading the way, mainly because of massive deals such as the
$85 Million raised by GRO Intelligence, and other big deals in Twiga Foods and
Apollo Agriculture. Healthtech saw a huge uptake in the number of deals, by
115%, across multiple markets. The biggest deal in this secor was a Series D
raise of $40 million by Vezeeta. We can expect this sector to continue to grow
because of the digital opportunities presented by the pandemic.
The
energy/ off-grid tech sector retained its importance in Africa’s economy by
securing deals close to $150 million in multiple markets. Africa’s energy
sector speaks more to impact investors than traditional VCs, and that is a
trend we can expect to continue. When it comes to startup support in Africa, a
key player that has the tendency to be missing is the corporate sector. Big
deals we have seen between startups and corporates in 2020 show the relevance and
importance of corporates in the innovation ecosystem – a practice in which not
enough corporates are engaged in.
In
the first months of the COVID-19 crisis, corporations tended to dramatically
reduce their budget in innovation and R&D projects.
There
is definitely a need for more corporations to be involved in the startup
ecosystem. They can engage with early stage startups through POCs,
partnerships, via a tech hub (accelerator or incubator) or
equity investment. The preferred way for corporates to engage with early stage startups
remains POCs followed “…secured more than 60% of all deals in 2020; and five
countries, collectively, secured 87% of all deals in 2020…” by partnerships.
From our observations through running open innovation challenges, frank
discussions and objectives must be set by both sides.
Corporate
venture capital has the wind in its sails and sees a growing interest in
Africa. Interestingly, the link between the corporate open innovation
department and the corporate venture capital is not always clear
within the corporate. Corporate VC tends to be more medium to long term in its
objectives than traditional VCs. Based on the AfricArena observations and
working with investors across the world, our views are that 2021 will see a
substantial surge in deals, accelerating throughout the year. We estimate that
investment into tech startups will be between $2.25 and $2.8 billion, making it
the best year in the history of tech investment on the continent.
Download
Full PDF Report Here
Related News
- The
Social-Media Stars Moving Markets - Insights
from Happenings in the Fintech Landscape – 200921 - Funding for
Fintech Start-ups in Africa Increased by 49% to US$160m in 2020 - Insights
from Happenings in the Fintech Landscape – 130921 - 3rd Annual
Digital Banking Summit to Discuss Digitization of Banking Sector - Why You
Need to be Part of Nigeria Fintech Week 2021 - Fintech
Group, Capitalsage Raises Debt Financing to Fulfil Expansion Agenda - Techstars
London Accelerator Program Accepts Pension Digital Platform AWABAH - What to
Know About the New Regime for the Licensing and Regulation of PSHCs in
Nigeria - An
Introduction to Gift Cards As An Alternative Payment Method - Synergy
amongst Operators and Regulation Key to Growing Digital Payments in Africa - Teamapt
Welcomes 5 Female Engineers to its Women in Tech Internship Program - How
Technology Advancement Revolutionalised Fintech: Big Data - Huawei,
Mastercard, Oracle, and More to Lead the World Financial Innovation Series
(WFIS) in Africa - Ecobank
Group Launches 2021 edition of its Fintech Challenge - Fintech H1
2021 Review – Recent Regulatory and Legal Developments in Nigeria - DLM Capital
Group Announces Winner For its 2021 Pegasus Fintech Challenge - Ecobank
Remains Payment Gateway in Africa” – Akinwuntan - Synopsis of
the New CBN Regulatory Regime for Payment Services Banks - Insights
from Happenings in the Fintech Landscape – 230721
Credit: Source link
Comments are closed.