What is the impact of "the great market reset" on African startups?

The past six quarters have been the scariest for Africa's tech ecosystem as it ushered in what is referred to as the massive correction in venture capital activity. This correction began in the US and across Europe, where we saw a crunch in fundraising and massive layoffs at major global tech companies.

The correction has had a significant impact on Africa’s tech ecosystem. Funding for African startups has fallen sharply, and there have been a number of high-profile layoffs. However, there is great hope that the correction has run its course and the market is stable, leading to an upward green shoot.

In this piece, we explore the negative impact of this correction on the ecosystem and we will also seek out the brighter side of things by identifying certain positive data points.

The Great Reset

According to Victor Asemota, Africa is very much part of the US and European market because most of the funding comes from outside Africa. “The reset was triggered by US recession fears which I kept saying were unfounded. Everyone reacted to prevent being caught unawares and it became a self-inflicted problem. The reset was also required as many had lost their way and we had a true bubble,” he said.

“The recession fear excuse was a way to deflate the bubble that was deliberately created by those who wanted to make money and it worked. They are also the same people now investing at sensible valuations in anticipation of a future bubble. Things are now more practical and realistic but we should understand how bubbles are created. It is through hype. We are entering another hype cycle again with AI.”

He believes Africa is typically late to enter hype cycles but that we had our own Africa Rising hype cycle once and it led to our e-commerce and fintech bubble.

“We are not correlated with the rest of the world when it comes to hype cycles but when funding stops or slows down outside, it hits us harder and it is a good thing. We get back to reality and know our differences. Nobody is building stuff now because their investors want those things. We are now back to what the market wants,” he said.

Venture funding is declining in Africa

Per BD Funding Tracker, VC funding to African startups Q1 2023 dropped by 57.2%, compared to what was raised in same quarter of 2022 and this is a big sign of the current proof of things as Q1 2022 made up over 50% of what was raised in 2022 by African startups, with 2022 being celebrated as a great year for African startups.

In 2022, 633 African startups raise a combined $3.6 billion in 2022, this is a true representation of incredible growth but 2023 looks regressive; only 148 deals have occurred showing 47.69% decline from what was already raised by April 2022.

It appears that 2023 is that year the chickens come home to roost for the African tech ecosystem.

The "Big Four" countries of Nigeria, Kenya, South Africa, and Egypt continued to be major drivers of capital in Africa, accounting for over 90% of the funding and almost 80% of the total number of deals. However, they were not immune to the continent's economic challenges. Nigeria and Kenya saw a nearly 90% decline in funding year-over-year (YoY), due to a lack of major funding rounds this year.

Egypt also suffered a significant decline, but South Africa saw a 22% increase in funding, albeit with fewer deals than last year. Despite the challenges, these four countries remain important markets for tech investors. They have large populations with growing internet access, and they are home to some of the most innovative startups on the continent.

Funding from global accelerators in Africa is declining

This year, Y Combinator's African investment in African plummeted 81% YoY. This year, only six African startups were selected for its biannual accelerator, the lowest record since 2018. Similarly, Google Black Founders Fund recorded a 58% decline in the number of startups the Fund invested in this year on the continent, compared to the previous cohorts.

Experts say that with the launch of new African-focused accelerators including ARM Labs Lagos Techstars Accelerator which invested in 12 startups for its inaugural cohort and has since opened applications for another cohort, more early stage startups solving important problems will still get funding.

With the tight-fisted approach of investors, Oo Nwoye, the founder of Tech Circle says: "The purpose of building a business is not to raise money, money is just required to achieve some of the objectives like when you want to get to a particular scale and your revenue is not sufficient."

"Although you should raise before you need money, you need to have a clear picture of what you are building and where you are going," he added.

Related Article: Six fintech accelerators for African startups

Would valuations recover?

Asemota responded that all valuations in bubbles are overstated but there was always an African discount. “Nobody gave us worthy valuations anyway. The people that are hardest hit are those pre revenue ventures. They deserved to be marked down anyway. Those making revenue were hardly overvalued,” he said.

Last year, Chipper Cash valuation was reportedly slashed by 37.5%—from $2 billion to $1.25 billion before FTX's bankruptcy. The fintech company conducted at least three layoffs which has affected about 150 employees including its chief operating officer and the Kenyan country director.

In 2022, 54gene valuation was slashed by over $100 million, just like Chipper Cash, the healthtech startup also laid off staff—about 95 of them—and its co-founder Abasi Ene-Obong also stepped down from his role as CEO within the period. Earlier this year, the company appointed a new CEO and also disclosed plans to raise additional funding.

Aside from the aforementioned, Brimore, an Egyptian social commerce startup also had valuation cut of at least 50% in August 2022.

These recent valuation slashes serve as a compelling indicator that the African tech ecosystem, as described by Asemota, has emerged from the "bubble".

This shift necessitates a more pragmatic approach, emphasising the growth of revenue rather than pursuing lofty valuations, for the ecosystem to sustainably progress and flourish. The industry must recognize the importance of practicality and profitability, aligning their strategies with a focus on tangible financial outcomes. This transition marks a crucial turning point, signifying the maturation and evolution of the African tech landscape.

To underscore the importance of these approach, Y Combinator recently released the inaugural list of its top companies by revenue, only one African company—Senegalese fintech Wave—made the list. This is low compared to the accelerators top companies by valuation which has about eight African startups with a valuation of at least $150 million.  

Victor Asemota says this is the second major rodeo; European investors like Kinnevik and others were bitten badly but were replaced by others in the second cycle which was more successful with significant exits for the likes of Tunis-born AI startup Instadeep and Paystack. “I doubt people will learn much but exits will determine the future of our market. We are as good as the next exit. Exits bring investor confidence and motivate founders,” he added.

Is AI a fad or the future?

Asemota also believes that Artificial intelligence is an area that African entrepreneurs will need to explore: “I think people don’t know how big it is yet. If they did, they would have been chasing datasets the way they are all chasing fintech today,” he said. “Fintech has had a good run but many don’t know this yet. What we do with African data will determine the future products that will be built and AI will be an important part of that. AI is not a fad, it is the future.”

In January, German-based biotech company, BioNTech acquired Tunis AI startup InstaDeep for $680 million. However, the funding decline has not spared the sector despite its hype. VC funding in the AI sector plummeted 98% in the first six months of this year compared to H1 2022, according to BD Funding Tracker. Globally, AI funding has plunged 43% in Q1 2023, compared to the same period in the previous year, CB Insights says its the lowest quarterly total since Q1 2018.

Although the current VC funding in the sector reflects a lag, AI could expand Africa's economy by $1.5 trillion by 2030—about 50% of its current GDP—if its able to take over 10% of the global AI market, says a report by Africa Regional Science, Technology and Innovation Forum.

Closing thoughts

Africa's tech ecosystem has faced a challenging period with a significant correction in venture capital activity. The market reset brought reduced funding and layoffs, forcing a practical and realistic approach. VC funding to African startups dropped by 57.2% in Q1 2023, impacting the continent's tech landscape.

Despite this, the "Big Four" countries remained dominant, while accelerators experienced declines but new opportunities emerged. Valuations have been reassessed, with a focus on successful exits to inspire confidence. Looking ahead, AI holds promise for African tech, with data utilization crucial. By learning from past cycles, the ecosystem can achieve sustainable growth and innovation.