[Column] Morris Macharia Musyoka: Africa needs to improve infrastructure to attract VCs beyond Silicon Valley
Africa’s "big four" countries – Kenya, Egypt, South Africa, and Nigeria – continue to lead as markets that have long captured attention from global investors, securing 87% of all startup funding in Africa in 2023. However, there is a need for venture capitalists to redirect and explore untapped potential in other parts of Africa’s techpreneurial landscape.
While Africa recorded a slight dip in funding and deal count in 2023, the tech industry activity in Africa’s venture capital ecosystem is still very strong and promising. In contrast to other developing nations, Africa's resilience is distinctive, and success doesn't necessarily hinge on capital-rich environments.
Amidst the well-known challenges associated with the global macroeconomic environment such as high interest rates, currency devaluation, inflation, and layoffs, the Partech Africa Report attributed the funding contraction to two key factors. Firstly, startups adopted conservative capital raising strategies, prioritizing cash efficiency over fundraising due to a significant decline in valuations and heightened economic requirements. Secondly, there was a notable withdrawal of investors from the market, with a 50% decrease in the number of investors participating in funding rounds in Africa in 2023 compared to the previous year. This decline was particularly pronounced among major institutional funds, which typically play a significant role in driving larger funding rounds.
Furthermore, the decline in global IPO volumes and proceeds is reported to have shifted the focus towards outright acquisitions as the primary avenue for investment. Despite the ongoing challenges faced by global venture capital, a broader perspective quickly nullifies concerns of suboptimal growth in 2024. Africa remains one of the fastest-growing VC markets globally, proving bullish amid an unfavourable macroeconomic climate.
While West Africa continues to attract the highest volume of VC deals, North and East Africa follow closely in deal signings, overshadowing Southern, Central, and other multi-regional areas. The increased number of entrepreneurs and startups in Africa, coupled with the development of unique and innovative mass-market solutions by start-ups, contributes to the growing interest from global investors in African startups. The expansion of players investing and operating in the industry is driven by a combination of factors, highlighting the dynamic and promising nature of the African venture capital landscape.
On the other hand, foreign investors outnumbered local investors, with Africa-based investors accounting for slightly less than a quarter of the total number of investors active in Africa. However, in an industry-first accomplishment, the number of investors that took part in VC deals on the continent topped a thousand across both venture capital and venture debt deals. Despite these statistics, the emphasis on this reliance is diminishing in conversations, as attention pivots toward the benefits accrued by tech entrepreneurs and the broader economy.
It's an indisputable fact that investment revolves around calculated risk and the probability of returns. Meanwhile, Africa continues to exhibit the characteristics of a fertile ground for innovation. Unfortunately, non-"Big Four" countries continue to receive smaller percentages of funding.
This then calls for key stakeholders, such as investors, founders, incubators, accelerators, governments, and regulators, not solely within Africa but globally, to scrutinize vulnerabilities in the tech-funding sector. It is imperative to safeguard more investors who are exposed to remarkable start-ups across the continent. Unquestionably, providing fiscal and non-fiscal incentives for venture capitalists to invest in the financial and tech sectors will propel investments in the continent.
Essentially, there is an urgent need for an increased number of proficient data scientists, software developers, data engineers, analysts, and other data professionals to meet the growing demand on the continent. Africa needs to establish initiatives and revitalize the education system to align with this demand. While acknowledging that the realization of this need may require time, the government must invest in benchmarking. By learning from developed countries, Africans can acquire valuable insights and skills, subsequently applying them to benefit the continent.
The need to transform non-"Big Four" countries into appealing destinations for startup investments, transcends to serve as a benefit to Africans. Countries can leverage the African Continental Free Trade Area (AfCFTA) as a tool to attract investments. Through the AfCFTA, African governments, including those in non-"Big Four" countries, can draw increased start-up funding by reducing investment barriers and enhancing investment governance within their respective countries.
However, before venture capitalists can venture into the space, it is essential to acknowledge that Africa is not a uniform market. African markets are unique, and the constraints also differ. Issues to do with infrastructure limitations, regulatory requirements, and socio-economic factors, therefore necessitate a tailored approach for each region. The aim is to extend investments beyond the "big four." This in return calls on African governments to enhance their legal and institutional environments to foster a hospitable investment ecosystem for both investors and startups.
Morris Macharia Musyoka is a Software Engineer and Techpreneur