VC TRENDS | Africa
Trend Indicators for VC in Africa
Part 2 of a blog series looking at the potential turnaround in Venture Capital markets.
In Part 1, we highlighted the turnaround of tech valuations in public markets and the expectation that VC markets will benefit early in 2024. Additionally, we explore the trends of VCs in Africa.
The data in Part 1 suggests that global VC funding and valuations (led by the US market) will start showing a meaningful recovery around Q1 2024 and into Q2 2024. But is Africa on the same timeframe? According to data from “Africa_The Big Deal” on startup equity raising, Africa has not been immune to the slowdown in startup funding. The decline in total funding (equity + debt) started in Q3 2022 to ensure that FY2022 only ended with a higher level of funding than 2021 after having raised around twice as much in the first half of the year. The African VC market, therefore, started its funding decline two quarters later than the global VC markets. At the time, it was easy to build the thesis that the African VC market was not as mature, and the bubble had not been as large so that it would be less affected than global VC markets. However, October 2023 funding data is 23% below October 2022 (60% down if just looking at equity funding), but encouragingly, it is 20% up month-on-month.
Comparison with the long-term history
Using data for both equity and debt, the chart below highlights that the funding bubble only kicked off in Q3 2021, two quarters later than the global bubble, where funding increased sharply from Q1 2021. Interestingly, as in other parts of the world, funding levels have contracted substantially from the heady heights of 2021 and Q1 2022. However, in Africa, Q3 2023 is now tracking a fair amount below a trendline of 20% compound annual growth rate from the beginning of 2019. This exercise illustrates that VC funding in Africa is now back at more sustainable levels, possibly with an overcorrection, albeit still 25% higher than the average quarterly funding level in 2019.
Limited correlation to the African Stock Exchange
Fundraising in African VC (and its closely correlated ally, valuations) doesn’t seem to be tied to the performance of the African stock market. The S&P Africa Top 40 Index has declined 8% since the beginning of 2019 and has not shown the same propensity for robust increase as the VC market. However, a look at the Nasdaq Composite Index over the same period shows much more of the pattern seen in the VC market (see chart below). In part 1 of this blog series, we identified a 9-18 month lag between the performance of the Nasdaq and the global VC fund-raising market. Given that Africa seems to be lagging a further six months, it seems feasible to assume that Africa’s recovery will be six months later, probably around Q3 2024. As a result, considering the chart above, we estimate that African VC funding will likely still track downward towards the pre-pandemic levels before recovering, which means it will likely be a difficult environment for the first part of 2024.
Prospects for South Africa
South Africa makes up roughly 25% of the VC deals in Africa. It is also unlikely to be driven by performance in the public markets, as the market cap of the JSE Alsi 40 Index is only made up of 15% of tech stocks, while around 30% is made up of mining stocks. The good news for business confidence in South Africa is that the inflation rate has fallen back into the Reserve Bank’s 3-6% target range from June to October 2023 (although showing signs of breaching 6% again), meaning that interest rates should at least not increase much more, and may well start declining early in 2024. This will help a crippled economy, but business confidence is unlikely to recover strongly until we resolve the electricity problems. South Africa is also leading up to an election in 2024, which usually creates uncertainty, so one shouldn’t expect much excitement from the South African economy over the next year. The VC funding market should recover, in line with recovery in the rest of Africa, but uncertainty in the overall macroeconomic environment might somewhat slow down the local recovery.
Tech sectors will remain resilient
At Kingson, we like to invest in sectors where entrepreneurs will still find solutions, no matter how well the economy or funding cycles are doing. This includes themes like fintech, especially where startups find solutions for the SME Finance Gap, which could be as large as 12% of global GDP. We are drawn to anything that solves food security issues, which includes agritech, logistics and market access for primary food suppliers. Healthcare will remain a growing challenge as the human race expands; therefore, health-tech solutions will be required for more cost-effective, quality care. The future of work, including how Web 3 applications and solutions will impact how we do business, is another area of long-term growth. These sectors will be more resilient to downturns in the future and will likely recover quicker from the current slump when markets turn. We know that VC is a game of patience and long-term returns. We predict that there will be around six months more difficulty in the VC markets in Africa, and we encourage entrepreneurs to be efficient with the use of their cash and to push through this next growth curve.