Can Africa’s startup sector keep up its record funding run amidst global turmoil?

By Thabiso Foto, Chief Financial Officer at Founders Factory Africa

Startups have become vital engines of change that can have an outsized impact on an economy. They are crucial in fueling innovation and enhancing economic and digital competitiveness. They improve access to products and solutions while significantly contributing to employment.

In recent years, amid global economic volatility and uncertainty, Africa’s startup ecosystem has shown continued growth, attracting record amounts of funding.

According to the African Private Equity and Venture Capital Association (AVCA), funding for African startups is on track to hit record levels, with venture capital deals reaching $3.5 billion in the first half of 2022 alone – more than double the amount raised in H1 2021. AVCA notes that, if the current trend continues, fundraising is likely to reach $7 billion this year.

However, there are rising concerns that this substantial growth in investment will slow down over the next 12 months as geopolitical tensions, economic turmoil, and a surge in inflation create liquidity challenges in the competitive global fundraising ecosystem. Typically, as perceived risk rises, investors pivot to investments with a lower risk profile.

This pivot is not surprising. Investors and financial markets typically look for the “smart money” – places where their capital can grow while being insulated from the turbulence of the market. Venture capitalists, by design, are not as risk-averse, but they do not ignore the forces of market entropy forever.

Yet, there is a reason many investors continue to invest in the continent’s startup ecosystem. The COVID pandemic accelerated the global demand for innovative products and digital services, making investments in startups attractive for both traditional and non-traditional funds looking for new investment opportunities. According to CB Insights, investments in technology startups can provide much-needed diversification against traditional businesses and declining sectors which tend to be impacted by global and technological disruptions.

The challenges and complexities experienced by the continent at large present an unparalleled business opportunity and the chance for growth, which doesn’t necessarily exist in developed markets.

Understanding Africa’s vibrant startup market

Africa boasts a booming startup ecosystem currently valued at approximately $6.6 billion. Startups on the continent are extremely resilient as they operate in complex business environments with limited resources.

African startups’ investment attractiveness is also driven by the continent’s burgeoning consumer and business market, supported by its rapidly growing youth population, internet penetration, and improved digital maturity. Africa’s population is already the fastest growing in the world. It will likely remain so until 2100, when the population is expected to reach 4.3 billion with a median age of 35, while Nigeria’s population is also projected to overtake that of the United States in 2050.

The challenges experienced on the continent also present an opportunity for new business models and investment opportunities to emerge. Most African entrepreneurs behind the innovation witnessed to date are driven by the challenges they and their communities continue to face, such as lack of access to basic services, including financial products; decent healthcare; and a lack of infrastructure; among other issues.

The likes of Mukuru, Flutterwave, and Chippercash were born out of frustrations such as hyperinflation in the founders’ home countries, as well as cash shortages, difficulty in transferring money from Africa, high costs of transacting, and limited payment infrastructure in general. Now, these companies have become billion-dollar enterprises that have not only created jobs but have produced outsized returns for investors who backed them along their journey. While fintech has led in terms of innovation and funding, there are many other sectors that are also fertile for innovation and require financial backing to move from an idea to a business.