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Peaks and Valleys: The Year in View for African Deals by Dr. Kure

The African entrepreneurial landscape continuously whets the appetite of international investors who follow investment activities in the region, and supports the development of local investors who finance deals within the geographies of interest. Ventureburn have published an article which predicts doom for African tech firms, given that venture capital (VC) investment activities are expected to fall by nearly 40 percent. This prediction is driven by the assumption that VCs would focus on supporting their existing portfolios and refinancing. Unsurprisingly, entrepreneurs across the world have developed shock resistance in the face of the 2020 pandemic. Empirical evidence shows that companies which were deeply affected by the pandemic were showing signs of declining growth prior to the pandemic. However, the crisis increased the rate at which companies went into administration and liquidation. The result has been millions of jobs lost, several companies going bust and 130 million more people projected to be living in extreme poverty (UNCTAD, 2020).

Several industries have been impacted heavily by the pandemic. A McKinsey report discloses that retail and fashion have been severely hit. While the impact is evident in western countries, the venture landscape in Africa has not escaped the crisis, but the degree of impact has been lower that Asia, Europe or America. Unsurprisingly, a 2020 Africa Tech VC report by Partech shows a 29 percent decline in year-on-year growth for equity funding raised by African Tech startups. However, there was 44 percent growth in deal count compared to the previous year. It is necessary to unpack the growth drivers of this deal count, but we have not been able to narrow it down. However, we are confident that it can be attributed to several factors beyond the obvious growth opportunity presented on the continent.

The Partech Report reveals the top five African nations that attracted VC financing in 2020, including the usual suspects, Nigeria ranking first with 307USD million, Egypt with 269USD million, Kenya with 304USD million, South Africa with 259USD million, and Ghana with 111USD million. The report reveals that the total equity funding of African deals in 2020 was 1.429USD billion. This article offers insight into the VC investment activities that take place in the African ecosystem.

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McKinsey emphasizes the agricultural sector’s massive economic and social footprint in Africa. It makes up 23 percent of GDP in sub-Saharan Africa, and nearly 15 percent of the continent’s GDP; yet it is considered an underserved market. The sector comprises 90 percent small scale farmers, who make up more than 60 percent of the population in sub-Saharan Africa. There is further growth potential in the industry, to meet the increasing demand for farm produce, as the World Bank Group estimate that global food demand will rise by 102 percent between 2017 and 2050.

Given that there has been increased investment in healthcare, medical technology and financial technology, the agricultural sector also requires a significant cash injection in order to meet future demand. The provision of capital is central to venture growth and survival, and it is important to offer access to markets so that African startup companies can participate and compete in the global market.

Venture firms and investors backing deals on the continent are encouraged to adopt a cross-border investment approach, which should be positioned at the core of their investment structure to ensure that the companies backed enjoy a level plain field with their American, European and Asian counterparts. Investment firms such as Go Africa Capital have shown their commitment by taking African startups to the global marketplace. In the midst of the 2020 pandemic, African startups have shown themselves to be fertile ground for early-stage investors. The acquisition of Paystack by Stripe has boosted investors’ confidence to participate in deals in the region.

In an attempt to forecast the venture investment climate, we take the standpoint that the entrepreneurial sector will continue to see increased cross-border investment, with more engagement from Asian venture funds co-investing in African deals. European early-stage investors may continue to monitor deals across the continent, but there may be barely any noticeable change from American venture funds given their huge interest in cross-border investment activities. We are confident that agriculture and education will continue to present attractive deals to investors in Africa. Communication tech solutions will bridge the gap in various sectors, while financial technology will continue to break the ceiling.

Contributors Dr. Babangida Y. Kure

Disclaimer

This article offers some insight into VC backed deals in Africa. However, we do not cover the entire region. It is important to know that the industry has its own language, practices and peculiarities.