African Startup Ecosystem: Rise, Challenges, and Resilience

January 04 2024 Yassin EL HARDOUZ

Africa,Funding Trends

From Hot Rise to Cold Reality: An In-Depth Look at Africa’s 2023 Startup Funding Freeze

In the vast landscape of global innovation and entrepreneurship, Africa’s startup ecosystem emerged as a beacon of promise and potential. Over the past decade, the African continent witnessed an electrifying surge in entrepreneurial dynamism. This has created a vibrant mix of innovation-driven companies that have captivated investors, markets, and the world’s attention. The future, it seemed, was brighter than ever for African startups.

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An In-Depth Look at Africa’s 2023 Startup Funding Freeze

In the golden years that preceded 2023, the African startup scene experienced what can only be described as a “hot rise.” From bustling tech hubs in Nairobi and Lagos to pioneering ventures in Cairo and Johannesburg, the continent’s economic landscape underwent a transformative shift. Investors from around the world were pouring capital into African startups, fueling their growth and igniting the flames of innovation.

However, as 2023 arrived, a new dawn broke. The African startup ecosystem found itself caught in the midst of a chilling and unexpected reality—a funding freeze that would send shockwaves across the continent.

The Hot Rise of African Startups (2019-2022)

The Rise Begins (2019)

Over the past few years, the African startup ecosystem experienced an impressive and hot rise.

In 2019, African tech startups reached a significant milestone, raising a remarkable $2.02 billion in equity funding. This represents a staggering 74% year-on-year growth.

Resilience Amidst Challenges (2020)

In 2020, despite the impact of COVID-19, there were 359 equity rounds, which is a 44% increase from the previous year. These rounds amassed a total of $1.43 billion in venture capital funding. Although this marked a 29% decrease from the previous year, it’s noteworthy that the context of the pandemic affected the average ticket size, slashing it by 60%.

Extraordinary Surge (2021)

In 2021, African startups secured an impressive $4.3 billion through over 818 deals, averaging $1 million every 2 hours. This is 2.5 times more than the previous year’s total. Additionally, there were 12 ‘mega deals’ of $100 million or more, totaling $1.9 billion. OPay’s $400 million investment was the largest of these deals. As a result, 5 unicorns emerged in a single year.

Sustaining Momentum (2022)

African startups secured $5 billion in funding through over 1,000 deals in 2022, with 1,000 unique investors participating. Africa was the only region to experience positive year-on-year growth in startup funding, with a 5% increase. In contrast, other regions saw a significant decline in funding. Europe experienced a -17% drop, North America -37%, Asia Pacific -39%, and Latin America a sharp -62% decrease.

Global Recognition and Investor Diversity

The African startup ecosystem has established itself as a dynamic and resilient force in the global tech industry. It has displayed consistent growth and attracted a diverse pool of investors. Out of the 1,400+ investors who participated in at least one $100k+ deal on the continent, 36% were based in North America, 27% in Africa, 21% in Europe, 8% in Asia Pacific, and 7% in the Middle East. This geographical distribution remained consistent between 2021 and 2022, with only minor variations when compared to 2020 and 2019.

The Freeze: A Sudden Halt in Funding

The year 2023 witnessed a ‘funding winter,’ casting a shadow over the global startup landscape. This abrupt halt in funding, which originated in the United States and China in Q1 2022, has now permeated every continent.

Startups in Africa received $3.4 billion in funding in 2023, including equity, debt, and grants. This is a 32% decline from the over $5 billion recorded in 2022, with equity funding alone experiencing a 60% reduction. The funding slowdown can be attributed to various factors, including:

Geopolitical Tensions: Ongoing conflicts, such as the Russia-Ukraine war and the Israel-Hamas dispute, have instilled a global atmosphere of uncertainty. Investors are hesitant to commit substantial funds amid these geopolitical risks.
Interest Rate Hikes: The recent implementation of interest rate hikes has elevated the cost of capital for businesses. This heightened financial burden has posed challenges for startups and venture capitalists alike in securing funding.
Tech Stock Decline and Massive Layoffs: The devaluation of technology stocks has significantly impacted overall market sentiment. In response to the downturn, major tech companies such as Meta, Microsoft, and Spotify have resorted to substantial layoffs. This has exacerbated the cautious approach of investors.
Global Recession Fears: Mounting apprehensions about an impending global recession have prompted investors to adopt more conservative financial strategies. This heightened economic uncertainty has led to a reluctance to engage in significant financial commitments.
Risk-Averse Investor Behavior: A prevailing shift in general investor sentiment towards risk aversion is evident. Investors seek stability and proven opportunities, contributing to the funding slowdown across sectors.

The Impact on African Startups: Startup Cemetery

Many African startups struggled to survive due to reduced demand and a lack of funding. Entrepreneurs faced a difficult landscape similar to the dot-com bubble era. Funding streams dwindled, operating costs skyrocketed, and customer acquisition became increasingly difficult as large corporations streamlined their software inventories and consumers reevaluated their spending.

These challenges have led to a number of closures in Africa, including some of its most promising startups:

Dash: Dash, a Ghanaian financial technology startup established in 2019 with the goal of linking mobile money wallets and bank accounts throughout Africa, unfortunately had to cease its operations. Despite securing $86.1 million in funding over a period of five years, the startup faced closure due to an elevated burn rate and insufficient revenue.
WhereIsMyTransport: WhereIsMyTransport is a data platform that focuses on sustainable mobility in emerging markets. The company was established in 2016 and has raised $27 million in funding since its inception. However, founder Devin de Vries characterizes the company as having reached the end of its journey, unable to secure additional capital.
Sendy: Despite raising $26.5 million, Kenyan logistics startup Sendy faced challenges in securing additional investments. Sendy fell short of its $100 million fundraising goal, leading to cost-cutting measures and significant layoffs. Unfortunately, these efforts were not enough, and Sendy eventually ran out of funds as investors backed down.
Other notable African startups that unfortunately went bankrupt after raising capital from investors: 54gene, LazerPay, Zumi, Kune, and Pivo.

Weathering the storm: How African entrepreneurs are adapting

In 2023, some African startups have demonstrated remarkable resilience amid a challenging business landscape. Confronted by economic uncertainties, these innovative ventures have showcased remarkable agility and adaptability, redefining conventional models to ensure sustained growth.

Many startups have shown resourcefulness by forming local partnerships, diversifying revenue streams, and reducing costs to decrease reliance on external funding. The current objective is to attain positive cash flow to navigate through this period successfully. Entrepreneurs and investors are now prioritizing resilience and survival over growth, as evidenced by the shift from unicorns to camels/cockroaches.

In addition, collaboration within the African startup ecosystem has increased, creating a supportive environment for knowledge-sharing and mentorship initiatives to flourish. Such as the launch of a mentor-led angel community and investment syndicate by Startupbootcamp. This initiative is designed to link startups with mentors who can provide operational assistance and capital.

Recognizing the role of the entrepreneurial ecosystem, governments and international organizations have been introducing policies and incentives to help startups during these tough times. For example, FMO, Endeavor, and AfricaGrow have partnered to help African Agritech startups become investment-ready. Additionally, the Nigerian government has launched the Startup Portal.

Despite facing adversities, African startups are debunking the myth that growth is the sole metric of success. They are proving that creativity, community, and strategic decision-making are indispensable elements not only for survival but also for thriving in the face of challenging economic circumstances.

The Road Ahead: What Lies Beyond the Freeze

The resilience of startups in the face of economic challenges has been a recurring theme throughout history. The dot-com bubble took two to three years to stabilize, and the 2008 recession lasted about a year or two. The key takeaway is that recessions are temporary. What truly matters is the ability of startups to weather the storm and emerge stronger in the subsequent phases. Notably, some of the biggest tech companies today were founded during recessions, proving that adversity can breed innovation.

As for the African Startup Ecosystem, it is currently in its nascent stages and still poised to grow significantly in the coming years. Africa can learn from the experiences of successful tech companies in the US, China, Europe, and India without having to start from scratch. Although the projections for 2024 are uncertain, there is optimism that African startups will not only overcome the challenges but also thrive in the coming years, contributing to the continent’s technological advancement and economic development.

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