VC activity in Africa: 2023 H1 in review
This article is an excerpt from AVCA’s 2023 Q1-Q2 Venture Capital Activity in Africa report
The first half of 2023 saw 263 VC deals take place in Africa’s venture ecosystem, allocating a cumulative US$2.1 billion of capital to 258 unique companies. This corresponds to a 40% decrease by both volume and value compared to the US$3.5 billion raised in 2022 H1. At slightly over US$1 billion raised each quarter, this contraction in startup funding is being referred to by some as a “funding winter” for African venture capital. Sensationalist headlines aside, channels of capital to African startups have undoubtedly tapered off since Q3’22, in a belated but anticipated knock-on effect of the global macroeconomic downturn.
However, rather than a funding winter, the funding dips of Q1’23 and Q2’23 are better described as a funding plateau. When evaluated against the historical average for the period between 2017-2022, industry activity in Africa’s venture capital ecosystem in 2023 compares favourably.
A long-term lens is therefore necessary to temper overly pessimistic concerns of what may appear at first glance to be a nosedive in deal activity, particularly as the ecosystem comes down from a two-year trend of triple digit acceleration.
In contrast to the capital free-for-all of 2021 H2 into 2022 H1, VC investors are applying a more judicious approach to investment – but are still actively allocating capital to startups with strong fundamentals.
Investors retreat from super-sized deals
VC investors shied away from big-ticket funding rounds in the first six months of 2023. Five super-sized deals raising just over US$1 billion took place in 2023 H1, falling from nine such deals that brought US$1.3 billion to the industry in the same period in 2022. Although the number of startups concluding deals with a value of US$100 million or more fell in 2023 H1, the proportion of overall funding assumed by these large, high profile funding rounds in each quarter remained largely consistent with the historical average.
Of note, while super-sized deals routinely comprise both equity and debt, venture debt is assuming a larger component and consequently playing a more prominent role in these funding rounds. Three of the continent’s five megadeals in 2023 H1 raised a substantial amount of debt financing as part of the investment round.
Over US$200 million of Kenyan asset financing platform M-Kopa’s fundraise was sustainability-linked debt financing, South African car subscription startup Planet 42’s fundraise included a US$75 million credit facility, while Egyptian FinTech unicorn MNT-Halan raised US$140 million through two securitised bond issuances to complement their US$260 million equity raise.
Double digit YoY and QoQ declines at every investment stage
Although most acute at the late stage, every investment stage saw significant contractions by both volume and value in 2023 H1. On the early stages of the venture capital continuum, seed-stage deals assumed the largest proportion of venture capital deal activity in Africa in both Q1’23 and Q2’23.
While this is a recurrent trend in Africa’s venture ecosystem, seed-stage deals accounted for a colossal 71% and 72% of venture deal flow to startups on the continent in the first two quarters of 2023, respectively. Nevertheless, deal counts in this category fell by 55% from 2022 H1, debunking to some extent early predictions that seed rounds would remain unaffected in 2023. These initial predictions were based on the premise that the smaller ticket sizes characteristic of seed-stage deals would lend this investment stage a higher degree of insulation from global macroeconomic headwinds.
The anomalous dominance of seed-stage deals is in part due to the virtual absence of late-stage deals on the continent in 2023 H1. Just two late-stage deals took place in Q1’23 while three occurred in Q2’23, accounting for a cumulative US$0.5 billion of venture capital. Given the significant market uncertainty in developed markets, the fall of the later stages comes as no surprise as global VC investors (which disproportionately lead the charge for these large, late-stage deals) continued to pull back from mega rounds. Nevertheless, even with this slowdown in late-stage funding, a number of high-profile deals took place in 2023 H1. Examples include the US$77.8 million pre-Series C round in South African digital bank TymeBank and the US$330 million Series F in drone designer and manufacturer Zipline.
West Africa leads by volume; multi-region leads by value
West Africa attracted the highest overall volume of VC deals in Africa in 2023 H1, closing out Q1’23 with 35 deals and Q2’23 with 33 deals executed (equivalent to 22% and 31%, respectively). West Africa only narrowly assumes the top spot in 2023 H1, with East Africa vying for close second after particularly strong dealmaking activity in Q1’23. Additionally, while both regions dominated in terms of the number of deals taking place, the value of funding raised by these bi-coastal entrepreneurs in 2023 H1 lagged slightly behind other regions, namely Southern (19%) and North Africa (18%).
While startups with a multi-region geographic footprint typically account for a small proportion of VC deal volume each year, they routinely comprise the largest share of deal value, and 2023 H1 was no exception. This trend is particularly visible in Q2’23, which saw multi-region deals command just 7% of VC deal volume in Africa, but a significant 60% of deal value between April and June 2023. These include the US$14 million Series B for solar energy and digital devices asset financier Yellow Africa, as well as the two megadeal rounds in Zipline and M-Kopa, respectively.
Fintech and neo-banks bolster financials, whilst cleantech shines a light on utilities
Fintech continued to drive deal activity on the continent in 2023 H1, standing once again as the most dominant vertical amongst tech-enabled startups that successfully received funding. By extension, the Financials sector showed resilience, largely maintaining historical averages in terms of the proportion of funding the sector attracted by both volume and value across both quarters.
Several of the largest deals for the period can also be attributed to the Financials sector, including a US$35 million Series B round in South African digital lender Lulalend, a US$30 million pre-Series B funding round for Nigerian payment service provider Nomba, as well as three of the five super-sized deals the period saw, which account for a combined US$615 million.
CleanTech is making waves in the global venture capital landscape, tying with Fintech as the most popular vertical amongst the top 10 highest-funded startups internationally in Q1’2311. CleanTech, Renewable Energy and Energy Storage have have garnered increasing interest and investment from European VC investors specifically, amidst the extended Russia-Ukraine war and concerns regarding both the availability and cost of energy in the last 18 months. The rising tide of CleanTech globally was also visible in Africa’s early-stage ecosystem, where CleanTech was the second most active vertical amongst African VC-backed technology or tech-enabled companies in 2023 H1. Whilst CleanTech is largely a sector-agnostic vertical, it is responsible for the modest increases in deal activity channelled to the Utilities sector in recent years. Although still considered an emerging area of investment, funding recipients leveraging technology to improve environmental sustainability include €19 million to Madagascar clean energy provider WeLight, as well as US$8 million Series A for Qotto, a solar kits provider with operations in Burkina Faso and Benin.
Business as usual for venture debt
Venture debt remained relatively unaffected in 2023 H1, with deals in both Q1’23 and Q2’23 equalling or coming close to the volumes and values recorded in the same periods the preceding year. Overall, 25 venture debt deals totalling just over US$0.4 billion took place in the first half of 2023, making use of a variety of instruments including direct lending, convertible loan notes, lines of credit (in both local and hard currency) and bond issuances.
While venture debt is being used with increasing frequency in Africa’s early-stage ecosystem, it remains an emerging trend on the periphery rather than a key component of the African investment ecosystem at present. However, increased uptake of venture debt strategies is highly likely in the short-medium term, as founders seek to maintain growth through the present macroeconomic downturn. As access to liquidity becomes more challenging, growth stage startups may turn to venture debt as a financing alternative or cash cushion for business development and market expansion.
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