Where Did All the Money Go for African Startups in 2023?

African startups may have gained popularity in the last decade that they have used this as a leverage to attract the attention of global investors, but 2023 was different. The year 2023 saw many startups struggle to raise financing and as a result several companies scaled down operations while others shutdown completely.

The story of funding winter – extended period of slowdown in finance – points to the changing times and how investors have moved away from the Covid-driven spikes in new venture funding that Africa saw in 2021 and 2022.

Growth in deal volume in Africa declined 23 per cent to USD4 billion in 2023 despite a 5 per cent increase in deal count to over 1030, according to data extract from Briter Bridges’ upcoming report.

Even the limited amount raised in 2023 went to the usual suspects: Kenya, South Africa, Nigeria, and Egypt. In total, 68 per cent of all funding went to these countries. Kenya received $805 million, Egypt got $675 million, while Nigeria received $575 million, and South Africa raised $565 million.

Tunisia, another key and rising market, raised $460 million. Much of that could have been raised by InstaDeep, a life sciences startup, which early last year was acquired by German biotech company BioNTech at a tune of $680 million.

“Funding was lower [in 2023], several companies shut down, and investors struggled to raise,” Dario Giuliani, Director at Briter Bridges said this week.

There were already early signs that 2023 was going to be a rough year for African startups as investor enthusiasm was winding down. Disrupt Africa had reported that African tech startups raised just shy of USD500 million in Q3, taking the total for the first nine months of the year to just under USD1.5 billion, down 48 per cent on the corresponding period in 2022.

Gentil Ndoba, Co-Founder at HiQ Africa conquers that 2023 was indeed a bumpy year for early-stage startups like his.

“There’s still a funding deficit and even for the little investments that we have a big pie of them go to growth-stage start-ups, leaving the big number of early-stage startups sharing the smallest pie of grants which is not enough considering the amount of work that’s required,” he told me.

HiQ Africa, founded by Ndoba and two other entrepreneurs Gabiro Romain and Joshua Mwamba, is a data-tech company building a smart and sustainable fast-moving consumer goods market in Africa using market intelligence to address daily inefficiencies.

Global Stage

The picture is consistent with the global outlook for funding. Venture capital funding for startups across the globe fell by more than half since 2022, according to Pitchbook data – the annual fundraising figure for 2023 paced towards its lowest level since 2015.

In Q3, according to Crunchbase, it was down 15 per cent on the same quarter the previous year.

I think Coinbase investor and IVP General Partner Tom Loverro was somewhat right when he predicted last year that “mass extinction” – or slow funding periods – was coming for early stage and mid-stage companies. Indeed, that period may have arrived going by data from different research companies.  

Loverro’s prediction was based on the fact that a lot of marginal startups, ones without proven product-market fit, were being funded and even good companies were trying to over-optimize on valuation.

HiQ Africa’s Ndoba agrees, saying investors are now asking for founder-market fit, the strength of the team, the scalability of the solution, and definitely the traction, without which it remains a pain to raise any single dollar.

Perhaps a closer look at companies that closed doors or scaled down operations in 2023 gives a glimpse into the struggle for finance in Africa.

In Kenya, online marketplace Sendy shutdown operations after raising $20 million, and B2B e-commerce startup Zumi closed down after failing to raise necessary funding to continue operations. Others such as Twiga Foods, Copia, and MarketForce are struggling to keep up with operations and have either scaled down operations in key markets they operate in or pulled out completely in some markets.

In Nigeria, fintech startup Pivo, publishing company Okada Books, logistics firm Hytch, healthtech startup 54gene, and crypto firm Lazerpay all shutdown operations in a period of one year.

Ghanaian payments startup Dash closed its doors in October last year after raising $86 million, while South African mobility startup WhereIsMyTransport announced its closure in the same month after failing to secure more investment.

What most of these startups share in common is the inability to raise more financing to keep operations afloat. It may be true that the global investment landscape has complicated the flow of capital owing to the rise of interest rates which has elevated the cost of capital for business.

However, startup investors have started questioning the sustainability of startups, raising concerns over inflated valuations, and more than ever startups are facing increased due diligence and scrutiny from investors.

Promising Signs

Having said that, however, great companies will continue to raise good amounts. That is the case for Egypt’s MNT Halan, which raised $400 million, the single largest deal last year. The company has been Egypt’s fastest growing startup, providing financial services to the country’s unbanked population.

All is not lost. There are promising signs ahead going by the trend we have seen in the last decade. Investors announced USD22 billion into African startups between 2014 and 2023, according to Briter Bridges.

This funding was directed to companies that are spearheading innovations in sectors that have potential to bring about change and reward investors - in fields such as fintech, clean energy, healthcare, education, commerce, agriculture, as well as logistics and supply chain.

“Deal activity remained high, strongly driven by large cohorts of companies funded by accelerators and early-stage funds. As late-stage investment was lacking, a greater push happened at early-stage,” Dario Giuliani said.

Giuliani argues that consolidation in the form of mergers and acquisitions, even though often a matter of saving dying companies, may be an exit pathway that is here to stay. “Mega deals do remain, but they are now mixed with debt and blended finance and are moving from fintech towards cleantech and commerce.”

For now, the hope is that early-stage startups will strive to join the league of great companies by emulating practices set by those that have been able to win the trust of not just global investors but also local investors.