Shina Arogundade has struggled to secure funding for an early-stage startup that is part of his Lagos-based venture studio, Techbeaver. “A lot of the investors we spoke to in the past three months have requested that we show more traction before returning,” Arogundade, Techbeaver’s CEO, told Rest of World. He has raised funds for two other startups this year, and said there has been a shift in investors’ perspective: They now prioritize business traction over entrepreneurs’ pedigree.
Venture capital funding in the African tech startup ecosystem has steadily declined in 2023, causing entrepreneurs and local investors to worry about the future. Some believe the sector will stagnate if young companies don’t get the money they need to navigate a harsh and competitive market.
VCs invested $300 million into African startups between July and September, making it the third consecutive quarter with a funding decline, according to startup funding tracker Africa: The Big Deal. In the first nine months of 2023, African startups raised only $1.3 billion, compared to $3.3 billion and $2.9 billion during the same period in 2022 and 2021, respectively.
The funding crunch in Africa is a ripple effect of a global tech downturn characterized by mass layoffs, decreased investment levels, hiring freezes, and slashed valuations worldwide.
In 2021 and 2022, “there was a lot of low-risk capital available, people were making wild bets and spraying money because there was more to gain and less to lose,” tech analyst and journalist Benjamin Dada told Rest of World. “But now, what’s happening is that people are returning to the pre-2020 and 2021 phase where they did things right.”
Previously, startups could raise money at a $5 million valuation before even building a product or acquiring customers, but that has now changed, Dada said. “Now, it is not that people no longer invest, but the strictness is about halving these valuations and about putting in some clauses that would not have been there in 2021, just to safeguard the investment properly and to make the due diligence a bit stricter.”
“The market is also no longer rewarding growth at all costs by startups.”
The funding crunch has already caused several casualties. Since the beginning of the year, at least 10 African startups — including Hytch, Wabi, Zumi, Dash, Sendy, Lazerpay, and 54gene — have shut down, according to data from tech media platform, Bendada. “Founders that had raised before can’t find enough capital to extend their runway,” Yewande Odumosu, partner at HoaQ Ventures Fund, a community of angel investors, told Rest of World. “For growth-stage startups, while they’ve done very well, there’s just not enough growth-stage investors because those investors are also raising, and the funding crunch is also affecting them.”
Historically, Africa is viewed as a riskier investment destination due to the weakening currencies of several countries in the region, soaring inflation levels, and rising energy costs, Yunus Ibrahim, venture builder at early-stage investment firm Founders Factory Africa, told Rest of World.
The funding decline has hit early-stage startups particularly hard, Odumosu said. “At the early stage, there’s not free-flowing cash to be able to experiment as early as founders may want to experiment. I think investors are demanding more traction, more credibility, more than they would have done two years ago,” she said.
Global macroeconomic challenges and rising interest rates have contributed to the funding environment in Africa, Philani Mzila, investment manager at Founders Factory Africa, told Rest of World. “The aftereffects of the pandemic on the global economy, coupled with geopolitical strains such as the conflict in Ukraine, have dampened investor confidence, extending to the African VC space,” he said. “The significant rise in interest rates has translated into a higher cost of capital for venture capital investors. As the cost to borrow or acquire capital escalates, the pool of available funds for investment contracts.” He added that higher interest rates also turn investors away from high-risk prospects.
“The aftereffects of the pandemic on the global economy, coupled with geopolitical strains … have dampened investor confidence, extending to the African VC space.”
According to Iyinoluwa Aboyeji, CEO of VC firm Future Africa, startups need to prioritize profitability to raise funds in the current environment. “Now that the markets are valuing profitability and operational efficiency over growth, no one is paying you for growth right now, especially if the growth isn’t accompanied by profits and operational efficiency,” he told Rest of World.
Aboyeji said Future Africa’s portfolio companies are trimming unnecessary expenses, implementing stricter budgetary controls, and directing their attention towards their most lucrative product-line to tide over the funding crunch. One entrepreneur even returned investors’ funds and shut his business down after realizing the bleak prospects for profitability, he said.
“The market is also no longer rewarding growth at all costs by startups. The current style of investment by most VCs favors sustainability and long-term viability over rapid, often unsustainable growth,” Mzila said. “So a lot of emphasis on strong unit economics and a clear path to profitability. More time is being spent in the market with the startups evaluating their customer base, business models, sales team, the strength of their technology.”
African VC firms are struggling to raise funds, said Aboyeji. “It’s very difficult because a lot of investors are asking us a very simple question: ‘Where are the exits?’ Sadly, because of the market timing, we can’t demonstrate that. Even those who have a track record are struggling to raise because the market has cooled off a bit. A lot of people are putting their money in the public market.”
Eghosa Omoigui, managing general partner of EchoVC, a Pan-African early-stage firm, believes founders are not attuning themselves to the funding climate as they are still seeking to raise rounds that don’t reflect the current market reality. “We are in a present [where] raising $1 million requires that you may have raised $200,000 and $500,000 prior and shown that you have hit appropriate milestones,” he told Rest of World. “The days of raising series A rounds while still trying to figure out [product-market fit] are over.”
