Venture capital funding for African startups has declined significantly in 2023, dropping over 60% compared to last year. According to data from Africa: The Big Deal, VCs invested just $300 million in African startups in Q3 2022, marking the third straight quarter of decreasing investment.
Overall, African startups have raised only $1.3 billion in the first nine months of 2023, compared to $3.3 billion and $2.9 billion during the same period in 2022 and 2021.
This funding slowdown is partly driven by the global economic downturn that has impacted tech companies worldwide. Investors have become more risk-averse, demanding proof of profitability and sustainable growth rather than backing rapid expansion. African startups are also seen as riskier investments due to currency fluctuations, high inflation and rising energy costs across the continent.
The funding crunch has already led to casualties, with at least 10 African startups shutting down in 2022 including Hytch, Wabi, Zumi, Dash, Sendy, Lazerpay and 54gene. Companies that raised substantial capital in the past are now struggling to extend their runway.
Early Stage Startups Face the Biggest Funding Challenges
Early-stage African startups trying to prove their concepts and gain traction have been impacted most severely by the VC pullback. Investors now expect more evidence of product-market fit, customer traction, and revenue potential before investing.
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According to Iyinoluwa Aboyeji, CEO of Future Africa, the market no longer rewards unsustainable growth. Investors want to see a clear path to profitability and are scrutinizing metrics like unit economics more closely.
This presents a major hurdle for early stage startups still figuring out their business models. The availability of easy capital that entrepreneurs could access in 2020-2021 has vanished.
Profitability and Efficiency Now Paramount
To raise funds in the current climate, African startups need to demonstrate a focus on profitability and operational efficiency above everything else.
“Now that the markets are valuing profitability and operational efficiency over growth, no one is paying you for growth right now, especially if the growth isn’t accompanied by profits and operational efficiency”, Aboyeji told rest of world.
Successful African startups have implemented cost-cutting measures, directed efforts towards their most profitable products and eliminated unnecessary spending. Setting realistic milestones and showing steady progress towards profitability is key.
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Philani Mzila of Founders Factory Africa notes that investors are spending more time evaluating startups’ customer base, sales team strengths, quality of technology and other fundamentals. Growth at all costs is out; sustainability and long-term viability are in.
African VCs Also Impacted by Global Factors
The funding challenges are not limited to startups alone. African VC firms are also finding it harder to raise fresh capital, especially from international limited partners (LPs).
Macroeconomic instability and rising interest rates have made investors more risk-averse globally. Geographic diversification is less appealing, leading LPs to focus on more mature VC markets.
The lack of profitable African startup exits also makes it difficult for VCs to showcase returns to LPs. This capital crunch at the VC level further restricts the availability of startup funding.
Strategies for African Startups to Raise Capital
Given the current climate, African startups need creative strategies to raise funding. Here are some proven approaches:
- Focus on your unit economics: Investors want to see that your startup has a clear path to profitability. Make sure you have a good understanding of your unit economics and can demonstrate to investors how you will make money.
- Build a strong team: Investors want to invest in startups with experienced and talented teams. Make sure you have a team that is passionate about your business and has the skills and experience to execute on your plan.
- Target the right investors: Not all investors are interested in investing in African startups. Do your research and identify investors who have a track record of investing in Africa and who believe in your business model.
- Leverage alternative financing: Explore revenue-based financing, grants, competitions and non-dilutive capital to extend runway.
- Get creative with deal structuring: Offer convertible notes, SAFEs or deferred equity to align with investors’ preferences.
- Leverage local angel networks: Tap into emerging African angel investor communities for smaller amounts of early stage capital.
- Consider crowdfunding: Platforms like Uprise.Africa allow startups to raise smaller amounts from a wider pool of investors.
- Pitch competitions: Compete in events like DEMO Africa to gain exposure, mentoring and access to the investor community.
- Leverage accelerators: Programs like Founders Factory Africa and EchoVC provide mentorship and support plus access to a network of investors.
- Be patient: It may take longer to raise funding in the current environment. Don’t be discouraged if you don’t get funded right away. Keep networking with investors and building your business.
Conclusion
The African startup funding crisis mirrors the global tech downturn. Profitability and sustainability are now crucial to attract scarce investment dollars. Tougher due diligence and realistic valuations are the new normal. And African VC firms face their own fundraising struggles.
However, with the right combination of capital efficiency, creativity, and relentless focus on sustainability, African startups can navigate the funding crunch. The current climate will separate the resilient from the rest.
