OP-ED: Insights on Africa's fintech landscape amidst global 'funding winter' feat. Nicole Dunn

Meet Nicole Dunn

This week's TechTides Africa column gets a shake-up courtesy of Nicole Dunn. Dunn, who serves as co-founder and chief operating officer at South African fintech startup Revio, spearheads go-to-market strategies, corporate planning, and operational tactics.

Prior to joining Revio, Dunn honed her skills over several years at Elixirr, a global challenger consultancy, and at Founders Factory Africa, where we crossed paths as colleagues.

These days, I've found the most insightful way to track Dunn's instructive career moves is by tuning into her updates on LinkedIn. There, she shares a wealth of firsthand insights drawn from her unique background as a consultant-turned-investor-turned-startup operator. Also noteworthy is her collaboration on the Next Frontier Podcast with American startup advocate Brian Kearney, offering listeners a handy deep dive into the intricacies of African startup ecosystem realities.

Amid ongoing discussions about whether Africa's current venture capital landscape is experiencing a "winter," a "plateau," or a necessary "reset," Revio has made headlines with the announcement of their $5.2 million seed round. The fundraise, led by QED Investors and supported by Partech Partners along with existing investors Speedinvest, RaliCap, and Everywhere VC, underscores the opportune moment to tap into Dunn's operational acumen. Let the hijack commence.

Dunn’s insights. In her words:

Africa, like the rest of the world, has felt the impact of the global “funding winter”, with venture capital inflows declining ~28% in 2023. Global investors pulled back investment activity on the continent, causing many startups to shut down or significantly restructure their operations. Combined with macroeconomic headwinds such as persistent inflation and currency devaluation, some investors have questioned the ability of African startups to generate venture-scale returns. 

African fintech beast mode potential

Last week, I was fortunate to attend FT Partners’ Fintech in Africa event in New York, which brought together some of Africa’s most promising startups and investors across the venture lifecycle. Poetically, it coincided with the global north’s Spring Equinox, which marks the end of the brutal winter. 

Much has been written about the continent’s population growth and how the region will be home to the world’s largest, youngest working population by 2050. But let’s face it – global investors aren’t going to invest in Africa because the population is growing. They’re going to invest if they can make compelling returns. 

At Fintech in Africa, the opportunity was made clear. The companies presenting included multiple businesses with more than $100 million in annual revenue, and many are growing profitably.

If these case studies exist, why is there doubt about the potential of local ventures? From speaking to global investors, there are three primary concerns: market size, currency risk, and liquidity. 

Straight-forward complexities

Africa is a continent made up of 54 fragmented markets and consumers with low, unpredictable incomes. These dynamics create scepticism about market size – is there enough purchasing power to support billion-dollar businesses? 

Often, the problems that African startups are solving centre around access, inclusion and infrastructure. Through combining new technologies and business models, these solutions can both create markets and unlock purchasing power. 

For example, M-KOPA, a smartphone financing platform, has enabled more than 4 million customers to increase their productivity and purchasing power. M-KOPA does this by offering alternative credit scoring models and flexible payment options for devices with embedded financial services. Fairmoney, a digital lender, is now the third largest lender in Nigeria (including commercial banks), disbursing ~300,000 loans per month. 

These businesses have disintermediated incumbents that are unable to serve most African consumers, because of the very challenges that are cited as objections to market size. Similarly, businesses such as Onafrique have created opportunities from market fragmentation. Startups building in the cross-border commerce and payments sectors will likely experience tailwinds resulting from the African Continental Free Trade Area (AfCFTA). 

But even if significant market opportunities exist, do they outweigh the risks? To show real growth in dollar terms is extremely difficult in markets such as Nigeria, where the Naira has depreciated 78% in the past two years. When speaking to global funds, the optimists argue that currency volatility isn’t as meaningful when considering the 7 to 10-year venture returns time horizon used as a hedge. Others pointed out that the risk is concentrated in specific markets, while other economies offer more stability with pegged currencies, as in the CFA Franc zone. Broadly, the sentiment seems to be that while the risk exists, it is known and quantifiable and is (over-) priced into company valuations.  

Lastly, there is the question of liquidity. Risk-adjusted returns may be possible on paper, but can they be realised in a real-world exit? It is important to qualify that most funds have only been investing in Africa for the past 8 to 10 years. So, the question of exit track record is premature. However, there are promising trends to suggest liquidity is increasing on the continent. 

The first is the increase in M&A activity, both by global companies and local consolidation. There have been over 100 exits in Africa in the past 5 years – 75 of these in FinTech, representing $1.4 billion in announced transaction value. These exits, while smaller than the global venture capital benchmarks, need to be considered relative to the capital invested. Moreover, because of the lack of growth capital on the continent, companies have often had to accept local acquisitions as a substitute for Series B+ rounds, which may have led to more significant outcomes.  

Secondly, GCC countries represent new sources of wealth that may offer increased liquidity in Africa – both through private markets (including secondaries) and potentially through alternative stock exchanges. It is too early to judge the role that public markets will play in Africa. Still, it was interesting to see both the NYSE and LSE represented in a panel on African exits – a topic unthinkable just 5 years ago. 

While the landscape continues to evolve, there is compelling evidence to suggest that seasons are changing for African ventures. The words of American writer and journalist Hal Borland ring true, “No winter lasts forever; no spring skips its turn."

Editorial Note: This opinion editorial was first published by Business Report on 26 March 2024.