OP-ED: Africa's early-stage startup market offers sweet deals for local and foreign investors

Amidst global uncertainty, recent events have highlighted a critical juncture of opportunity in the dynamic landscape of African tech venture capital (VC).

Frigid VC climate

In a handy Medium article entitled, Five ways startups can impress investors during due diligence, Founders Factory Africa investment manager Philani Mzila reflects on the fact that in 2023, African VC experienced a notable decline, with $3.5 billion raised from 547 deals. Compared to the previous year, that represented a 46% decrease in total funding and a 28% decline in deal count. 

This year, things are off to a tenuous start. According to Africa: The Big Deal, the total funding raised by African startups in Q1 2024 was almost half what was raised during the same period last year (-47% YoY).

Mzila points to a handful of significant factors, including the impacts of the COVID-19 pandemic and the upheaval at Silicon Valley Bank, alongside positive occurrences like the 2021 VC bull run, which have shaped the African VC psyche and investor responses to the current state of play.

These dynamics are prompting pivots to more cautious investment strategies characterised by increasingly rigorous due diligence processes that Mzila and many of his VC peers advise founders to navigate, well, diligently.

Drinks and deals

A couple of weeks ago, Mzila roped me and the broader Founders Factory Africa (FFA) team into hosting an exclusive investor mixer in collaboration with Dream VC, a global VC training facilitator, and the Johannesburg angel investor network, Jozi Angels, of which Mzila is a member. 

The gathering delivered excellent networking and sparked insightful discussions about, among other matters, the impact of currency volatility on valuations in various African markets. 

One of the highlights of the evening was a lively interactive panel conversation moderated by our FFA colleague Takondwa Mwendera, which illuminated critical insights into the challenges and strategies surrounding investment dynamics across the continent. Reflections from the audience, including candid insights shared by senior investment specialists at Catalyst Fund and Launch Africa Ventures, provided valuable in-trench perspectives.

Pulling together

Chartered accountant cum angel investor Sanjay Soni of Jozi Angels underscored the vital role of investors supporting tech entrepreneurs comprehensively with innovative problem-solving and practical venture-building support. 

Soni highlighted the intricate interplay between valuation dynamics, investor motivations, and regulatory frameworks like South Africa's proposed Startup Act. His insights highlighted the holistic approach needed to build a sustainable startup ecosystem on the continent.

Back to fundamentals

Thandeka Xaba, managing partner of Digital Africa Ventures, shared macroeconomic dashboard perspectives, emphasising the importance of focusing on fundamental venture growth metrics amidst economic downturns. 

Xaba unpacked strategic challenges and advantages faced by tech companies focused on surviving brutal currency devaluations. She underscored the need for founding teams to possess street smarts and a nuanced grasp of market dynamics to drive sustainable growth and innovation that can weather even the most severe macroeconomic and geopolitical pressures.

Ripe opportunity

Mark Kleyner, co-founder and program director of Dream VC, explored how downward pressure on valuations could benefit new investors and attract corporate interest amid currency risks. 

Kleyner illuminated the fact that as currency risks are factored into valuations, foreign VCs especially - particularly fresh faces who might have previously been put off by flashy valuations - can capitalise on discounted deals and potentially high(er) returns over time as economies stabilise and maturing tech ventures prove their mettle. Also, highlighting the importance of considering diverse perspectives when navigating market trends and not just the 'expert' musings of foreign tastemakers who think they 'get Africa', he demonstrated the adaptive mindset required to navigate the complexities of African markets effectively, especially when engaging from the outside in.

Local is lekker

Meanwhile, Mzila expressed excitement about how well-placed home-grown African funds and venture builders are to leverage local experience, expertise, networks, and in-market presence to build a more robust startup pipeline for Africa-focused investors.

He is bullish on Africa's tech ecosystem emerging as an oasis of opportunity for foreign VCs seeking well-priced deals and sustainable returns, even as global economic challenges swirl. Mzila holds that currency volatility and market fluctuations have led to the undervaluation of promising ventures in most African markets, creating attractive opportunities for astute investors. 

Furthermore, as liquidity events in African markets have historically been limited, signs of increasing M&A activity and investor interest are emerging. Mzila is keenly observing more global corporations eye African startups for strategic acquisitions, even as local players (founders and investors alike) enthusiastically seek consolidation opportunities to survive, scale or expand market share.

So, as the world grapples with uncertainty, it does seem sensible for Africa's tech ecosystem to position itself as a beacon of resilience and opportunity, beckoning investors (at home and abroad) to join its transformative journey.

Editorial Note: This opinion editorial was first published by Business Report on 16 April 2024.