What's behind Africa's fundraising growth?

We’ve all seen the numbers. $4.9 billion. $1 million raised every two hours. 250% growth. Africa’s venture ecosystem is accelerating faster than the global market – but is the boom just hype? What’s behind this ‘sudden’ increase in startup funding on the continent?

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The inflection point

Like all overnight successes, momentum has been building for years. And, much like startups themselves, ecosystem growth tends to be exponential. Looking at global startup ecosystem trajectories, there is good reason to believe that 2021’s numbers are not an isolated performance.

India had eight unicorns in 2018, nine in 2019, and 11 in 2020. Last year, the country celebrated 42. Similarly, it took China five years to reach five unicorns between 2010 and 2015, but then saw 21 unicorns in 2016 – and 91 unicorns in 2019. Latin America has followed a similar trajectory, raising $14.8 billion in 2021 – more than it had raised between 2014-2020 combined – and minting nine of the region's 17 unicorns.

The pattern is clear: raising unicorns is not a linear process. After a critical mass of scaled startups, there is an inflection point that marks the beginning of exponential startup ecosystem growth and success.

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Ecosystem multiplier effects

What creates this compounding momentum? Essentially, early successes breed future success by de-risking the ecosystem and establishing startups as a viable option for investors, corporate clients, and talent.

For a long time, investors were hesitant to put money into early-stage startups in Africa. Political and macroeconomic concerns acknowledged, there was no assurance that Africa could produce billion-dollar businesses, and that investors taking on early-stage risk would get their money out. To believe in unicorns, most investors need to see unicorns. By the end of 2020, there were enough mega-deals to instill confidence that the venture capital model could work on the continent.

It’s not only investors who believe it. Founders, who might have opted for the safety of a job, instead choose to pursue their game-changing idea. The accepted narrative around entrepreneurship and failure shifts, and new founders benefit from a network of experienced predecessors, who act as advisors and often first investors.

Corporate decision-makers start to take startups seriously. Previously, spending time on a partnership or enterprise sale with a business that might not be around in a few years didn't make sense. Now, it’s critical to maintain a competitive advantage.

Lastly, equity compensation becomes meaningful. Top talent, who wouldn’t have looked at an early-stage business before, see the wealth creation potential in joining a startup team. Attracting better talent makes startups more successful, securing corporate partnerships unlocks scale, and capital is there to fuel growth. The positive cycle continues.

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International capital seeking new growth frontiers

African startups have also benefited from increasingly saturated venture ecosystems (and low yield environments) in the US and Europe. According to Briter Bridges’ Africa Investment Report, the top 20 deals in 2021 (which made up 65% of funding volume into the continent) were funded by international investors, primarily in the US (62.5%) and the UK (7.5%). The Big Deal Africa deal database indicates a growing number of international investors participating in Seed and pre-Series A rounds, and anecdotally at Founders Factory Africa, we're seeing African startups attract global accelerators, angels, and investors at early stages of traction.

Venture capitalists in these markets face growing competition from institutional investors and nimble family offices, driving up seed stage valuations and due diligence timelines. Africa presents an opportunity for a relatively cheap portfolio of bets, with significant potential upside.

In parallel, M&A activity has increased on the continent, with several high profile global exits (including Stripe acquiring Paystack, World Remit acquiring Sendwave, and Network International acquiring DPO Group) and Africa-Africa startup acquisitions. M&A deals grew to 33 transactions in 2021 (up from 17 in 2020), and have started to define Africa's exit multiples, helping global and institutional investors cover the continent with more interest.

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What does this mean for Africa going forward?

Global patterns suggest the momentum will continue. We should expect to see more follow-on rounds and mega-deals in 2022, with increased investor attention from local and international markets. The growing participation of global investors may create price inflation that crowds out local venture capitalists, who will need to emphasise their in-market networks and operator expertise to win deals. However, it also presents a significant opportunity for those willing to participate at the earliest funding rounds.

We should also expect to see more ‘enabler’-type companies – startups building for startups (further contributing to the ecosystem multiplier effect). We are already seeing 'Plaid for Africa' ventures (Mono and Stitch) and embedded finance offerings (Root and OnePipe). Encouragingly, we’re starting to see these ecosystem infrastructure propositions emerge in other verticals, including healthcare (Pneumacare) and AgTech (Fieldy), which should catalyse a more robust pipeline of startups outside of FinTech.

Lastly, the war for talent will intensify. Any founder in Africa will tell you that talent is hard to find. With demand for technical skills currently exceeding supply, many early-stage startups cannot afford to hire the people they need, or team leads are quickly poached by multinationals and well-funded scale-ups. To avoid stunting growth, public and private sector actors must focus on building a robust talent pipeline, and platforms are needed to make cross-country hiring more feasible (a Deel for Africa, please!). Investors must develop the networks and capabilities to support portfolio talent acquisition and retention, and help founders nurture junior talent into senior leadership. Without this, momentum will slow, and wealth will continue to exit the continent to global experts and development houses.

Growing pains are inevitable. The year ahead will reveal fault lines in the ecosystem, and there may be a correction in valuations down the line. However, the opportunity for value creation on the continent is immense. As long as founders remain focused on solving real problems and creating real value, they will continue to push the boundaries of what is possible for startup investment and scale in Africa. Onwards.

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