VC in Africa: outlook for 2023

Africa’s venture capital (VC) industry has seen notable growth in recent years. According to the African Private Equity and Venture Capital Association, the number of VC transactions recorded on the continent expanded at a compound annual rate of 32% between 2014 and 2021. In the first half of 2022, the cumulative value of VC deals in Africa reached $3.5 billion, an increase of 133% from the same period in 2021.

However, given the current global economic slowdown, VC-backed start-ups in Africa may have to contend with a more challenging funding environment. Novastar’s investment team offered some insights on what the year ahead holds for VC in Africa:

What do you think are the biggest challenges and opportunities for African VC in 2023?

Steve Beck: The challenge of a much tighter fundraising environment is also the opportunity. Start-ups are finding it difficult to simply buy growth with investor capital.

Successful entrepreneurs are charting lean paths to growth and paying more attention to unit economics. Crises are normal for entrepreneurs in Africa.

We remain bullish.

Businesses addressing latent demand in vast, informal markets are continuing to grow and attract capital. And we’re seeing growing opportunities in climate-smart, green businesses that leverage the continent’s natural assets, and its young, growing and urbanizing population to leapfrog the industrial North across many sectors ranging from agriculture, to transportation. The best businesses in these areas will grow and continue to attract capital, creating wider social and economic benefits while doing so.

What will be the Novastar focus for 2023?

Andrew Carruthers: Reflecting on the global shocks in the nine years since Novastar began investing in Africa, any attempt to forecast specific events would be foolish crystal-ball gazing. Fortunately, in venture capital, we have the privilege to view long arc trends, in addition to systemic dislocations, to place our chips appropriately.

Whether it is wars or pandemics, migration or climate change, the rise of connected people power or the fall of decaying political certainties — most of them have an underlying trend line that can be anticipated in general, if not with specific accuracy. So far, Novastar’s focus on businesses that serve the many, not just the few, with essential goods, services and economic opportunity — on a continent where everything is growing — has been well supported by the fundamentals. Another record year for venture investing in the continent has also provided welcome flow to the rising tide.

So, what is new for 2023? It seems likely that climate change is only going to produce increasing systemic shocks in the year ahead, particularly for Africa, and we will be telling our fellow investors about the unique assets and opportunities the continent has to offer in the battle for people and planet.

What should company leadership teams focus on in order to remain resilient in a challenging global context?

Olúwatóyìn Emmanuel-Olubake: Fast growth ventures tend to be high stress environments and with the added impact of a global macro slowdown I believe paying attention to culture and mental wellness will be crucial to the resilience and productivity of the eventual winners.

Doing this in addition to delivering on core business fundamentals such as healthy unit economics, disciplined cash management and effective monetization of value will position these companies to not just optimize the resources they have but also attract the support they need to keep growing.

How will macro-economic trends globally and in Africa impact the VC space?

Sapna Shah: 2022 was such a volatile macro-economic environment across the world, caused by the effect of the pandemic and the invasion of Ukraine, that predicting 2023 is like gazing into a crystal ball — very unpredictable.

Having said that, it’s likely that the slow down of venture capital being deployed globally will continue and we may feel this in Africa in 2023, with slower growth in capital being deployed on the continent since 2022, or even a lower absolute amount. The outlier might be climate focused investments as this is the one area of VC that is bucking the trend globally.

What will the fundraising environment for companies look like in 2023?

Abel Boreto: My prediction for the 2023 fundraising environment is that things will get worse before they get better. Down rounds, layoffs, closures, and bridge rounds will continue to proliferate in the African startup ecosystem. As a result, we will see a material drop in the amount raised by African startups in 2023 compared with 2021 and 2022, primarily due to a significant reduction in mega deals as global investors slow down investments in growth-stage startups. However, investment activity at the pre-seed, seed and pre-Series A stages will continue to gather pace as investors take advantage of the favourable valuations and terms on offer.

What are the regions to watch in 2023?

Samuel Obinna Kanu: While there will be a continued investment slowdown before things get better, East and North Africa are two interesting regions to watch.

• East Africa, particularly Kenya;
• Kenya went up two places on the list of the top 4 VC funding destinations in Africa between 2021 and 2022, attracting over $1b in VC funding — more than 2x what Kenyan startups raised in 2021;
• It overtook South Africa and Egypt as the 2nd and 3rd highest VC destinations respectively in 2021;
• While East Africa’s performance might be skewed by Sun King’s $260m Series D round, there was still an uptick in the number and size of rounds from the remaining startups that raised VC funding.

Another region to watch is North Africa:

• The region saw exciting activities in 2022 with several large rounds from startups in Egypt and other from countries such as Tunisia;
• While Egypt has been the key VC spot over the past years, Morocco, Tunisia, and Algeria are growing, and we expect to see more activity in the region this year, especially as newly raised funds in Egypt, Morocco, and Tunisia start/continue deploying capital into the region.

What are the sectors to watch in 2023?

Dominic Michel: Ecosystem restoration is one of the most important tools to tackle global warming and prevent biodiversity breakdown yet it remains severely underfunded when compared to other climate action. Africa has some of the greatest natural assets anywhere in the world and if local innovators can leverage the value of these assets to build scalable business models then this represents a huge opportunity for the continent.

While the Global North is trying to move away from a system of centralised power generation and transmission that’s dependent on fossil fuels, Africa has an opportunity to leapfrog such practices by pioneering clean, distributed energy solutions — for example, solar-powered battery swap stations, where customers can access pay-per-use power for their vehicles, homes and businesses.

What do you think the exit landscape will look like in 2023?

Brian Waswani Odhiambo: We will continue to see M&A activity among VC-backed start-ups in Africa. However, these will remain small and perhaps more commonplace between companies that aren’t able to raise capital to weather the capital drought and those that are relatively cashed up.

A majority of these deals will be share swaps with little or no cash exchanging hands. Large strategic acquisitions or secondary sales will remain few and far between because capital providers are still slow to deploy and the global macroeconomic environment remains tough.