As startup funding into the African ecosystem worsens in 2023, TEMITAYO JAIYEOLA writes about how this may present an opportunity for new funds to flow into the space

The African startup space has been grappling with a funding drought that has resulted in a 37 per cent year-on-year funding decline to $4.1bn as of June 2023. As of June 2022, startups in Africa had raised $6.5bn according to Africa: The Big Deal.

The data paints a grimmer picture when zoomed in. African startups were only able to raise $2.1bn through equity funding, a huge decline from the $5.6bn they raised through the same channel in the corresponding period of 2022. This means that startups are relying more on debt financing than before. Also, fewer startups are getting funding, and the number of unique investors fell to 800 from 1,100 in the prior period.

The weather is harsher in Nigeria as startup funding into the country’s startups has declined by 77 per cent. Nigerian startups were only able to raise $470m between July 2022 and June 2023, a far cry from the $2bn they raised between July 2021 and June 2022.

Nigeria was not the only ecosystem to experience a slowdown in funding; 2022 was a humbling year for startups. Global venture funding fell to $415bn in 2022 from $638bn in 2023.

The global tech space, Nigeria included, had to lay off 153,160 in 2022, a 59.57 per cent increase from the 95,991 of 2021 due to reduced funding, a global record high inflation rate, and dwindling investments. The global tech industry has lost $7.4tn of its total value since it peaked during the COVID-19 pandemic.

However, 2022 wasn’t all darkness in the African startup space, as total funding rose by eight per cent to reach $6.5bn, according to data from Partech Africa. While the rest of the world was in a funding rut, African startups ate well for the first two quarters of the year. The global reality did not reach Africa’s until the third quarter of 2022.

Paratech noted, “Despite this, African start-ups still closed record funding in the first half of the year. In Q3, the slowdown really kicked in, with a year-on-year decrease in the number of deals and funding raised.”

Since then, funding into the space has slowed to a trickle. The funding ecosystem in Nigeria and Africa is at the mercy of Western investors, with local funding just gathering momentum.

According to a Briter Bridges report, 62.5 per cent of investors involved in the top 20 deals on the continent in 2021 were from the United States, 7.5 per cent were from the United Kingdom, six per cent from South Africa, and four per cent from Canada.

This dynamic has ensured that whatever shock occurs in the Western world ultimately ripples across the continent.

In its 2022 report, Briter Bridges said, “However, the over-reliance on a few overseas funders can alter the perception of capital availability within the continent…”

Western funding has been crucial to the development of the African startup ecosystem so far. This might change as the continued downturn in funding volume may tilt startups to explore new funding locations to sustain growth, especially with the Middle East emerging as a new investment hub.

Recently, the Financial Times reported that Silicon Valley investors were touring the Middle East, to try to build long-term ties with sovereign wealth funds. It stated that top VCs like Andreessen Horowitz, Tigert Global, and IVP had sent teams to Saudi Arabia, the United Arab Emirates, and Qatar.

It noted that those visits were happening in the wake of traditional North American and European backers having to contend with an economic downturn that had forced them to rein in private investments. These VCs are positioning themselves to benefit from the Middle East’s diversification strategy from oil.

Currently, the Middle East appears to be the most liquid region in the world. This is evident in the region’s recent foray into football. The Public Investment Fund, Saudi Arabia’s sovereign wealth fund, has thrown more cash around than anyone in recent times to tempt established European stars to the region’s shores.

Africa, in particular Nigeria, has been touted as the next big thing for decades because of its youth population and many solvable problems. This has ensured that the continent is always attractive to investors, and the Middle East has been paying attention. Over the last couple of years, the Middle East has curated events aimed at deepening relationships between both regions. LEAP and GITEX are just a few to mention.

According to the Founding Partner at Ajim Capital, Eunice Ajim, African startups may present the Middle East with the opportunity to diversify their portfolios and gain exposure to high-potential ventures in a rapidly expanding market.

She noted that that would benefit the startups that were trying to gain access to capital, expertise, and networks. She said looking beyond the traditional funding sources in the US and Europe could significantly increase the chances for more African startups to secure funding.

Ajim stated, “Lately, there has been a noticeable trend of corporates and prominent private companies from the Middle East venturing into North Africa and investing in startups.

“I was recently in Saudi Arabia for the LEAP conference and in Morocco for GITEX Africa; it is very apparent that many funds are launching with a MENA strategy. It is still a bit early to tell if this money will eventually expand into the Sub-Saharan part of Africa. This trend reflects a growing interest in exploring investment opportunities in emerging markets like Africa as investors seek to diversify their portfolios and tap into the continent’s vast potential.”

She explained that diversifying funding sources could be a positive strategy, as it is unlikely to completely replace fundraising efforts from the West.

She noted that the United States, Europe, and other Western regions still possess robust venture capital ecosystems and established networks that attract startups worldwide.

While the Co-founder of Dream VC, Mark Kleyner, agreed that there was an increasing interest from the Middle East towards the region, he stated that it was particularly skewed towards North Africa for now.

He affirmed that the global downturn was affecting the ability of many startups to raise funds and the Middle East was presenting itself as a strong partner for African-focused funds.

Stating the barrier startups might face, Kleyner said, “The challenge is that breaking into the Middle East for fund managers who are looking to raise money in their circles is still going to be a completely novel dynamic in the same way that fundraising is largely a derivative of who you know and how well you can capitalise on those connections.

“Many African founders, especially sub-Saharan African ones, have not had any direct relationship with Middle Eastern investors. Whereas they have relationships, colleagues, and networks they can tap into in North America and Europe. So, it will take a couple of years before we see a stronger relationship between the Middle East investor base and startups in Africa.”

He further noted that there were promising signals for collaboration between the two regions, with the Dubai World Trade Centre collaborating with the Moroccan government in delivering GITEX Africa, recently.

He restated that Middle Eastern funding might be predominantly concentrated in North Africa but would eventually trickle down into the rest of the ecosystem.

He added, “Even as we speak today, many Egyptian funds have Middle Eastern co-investors or limited partners, unlike their sub-Saharan African counterparts. I think it would be interesting to see how these moves will change the power dynamics of where startups seek to raise funding. Perhaps, in the next five years, we might begin to see Dubai emerge as a competitive location for African Startups to explore a holding structure in.”

However, not all investors are optimistic about Middle Eastern Funding in the space. An investor, who did not want her name in print, stated that African founders need investors and partners who can see and understand the value of what they are building and the space they are building in.

She stated that going to regions where VCs do not see regional value or do not understand the market is not necessarily good.

She said, “They will undervalue you and your company, and founders will get overly diluted too soon. I think the strategy of drumming up more global interest in investing in African startups is going to come from more African investors and LPs stepping up to the table and doing more equitable deals where African founders are slower to go off the continent for capital. This will drive FOMO within capital allocators looking to engage on the continent.”

Oswald Guobadia, who served as the senior special assistant (Digital Transformation) to former President Muhammadu Buhari and Lead, Nigeria Startup Bill, noted that there was a need to develop the local investor channel in the country since there was an abundance of locally available funding too.

He said, “We need policies that incentivise local investors to invest at this critical point. I think Africa is a deep market. The question is, do we go and look for the money? Or because we are the next big market, do we position ourselves to attract money?

“The money will always come in. It is just a question of the terms that the money comes. We have always attracted the funds. We are the big market. We are the next market that needs to grow. So, we need to ensure that we have the policy in place that will make investing in Nigeria make sense. The money will come.”

Guobadia told The PUNCH that those investors were making overtures, but the startup space needed to position itself properly.

During LEAP 2022, which was held in Riyadh, Saudi Arabia, the Digital Cooperation Organisation, a multinational organisation, announced the launch of a Start-up Passport initiative to be rolled out initially in Saudi Arabia and Nigeria.

The idea was to make startups in either country easily access the other. Saudi Deputy Minister for Future Jobs and Capabilities, Faris AlSaqabi, said, “Nigeria is one of the key players in the digital economy. We have noticed that you cannot do it alone. So, we have to partner with other countries.”

The Middle East is paying attention to Nigeria and by extension, Africa’s startup space. It remains to be seen what this will mean and if local startups will get the rain they need to survive this funding drought in the region. Whatever the case may be, it is good to note that this is not the first-time investors from a different clime will invest in the country’s startup space. Two of the most successful fintechs in Nigeria, OPay and PalmPay, are strongly affiliated with China.

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