Time to Build! My venture capital outlook for 2024
Introduction
In 2023, the venture capital (VC) market experienced a significant decline, with some companies facing down rounds, valuation resets, or even shutdowns due to waning investor appetite, inflationary pressures/other macroeconomic factors and geopolitical conflicts that impacted economies worldwide.
Despite the challenging VC landscape and contrary to prevailing sentiment, I think that this is the best time to invest in start ups. Some of the largest tech companies in the world, such as Apple, WhatsApp, Slack, Microsoft, Amazon, and Uber, were born during “venture capital winters”. These companies demonstrate that successful technology firms can emerge and flourish even during challenging economic periods.
Currently, with valuations at a low point, investors are engaging in more thorough due diligence which creates an environment where genuine founders, committed to building, and thoughtful investors intentional about their investments, can meet. In super bullish markets, there is often a fear of missing out on potential gains. Hence, investors may be more inclined to follow trends and invest in popular sectors, sometimes driven by the fear of not participating in the market’s upswing. While founders, fueled by entrepreneurial optimism, may launch startups with a short- term focus, confident in easier fundraising opportunities and a positive market outlook. This lack of in-depth scrutiny often leads to fewer meaningful outcomes in the long term.
I believe that 2024 will be a great year for venture capital, marking a resurgence of purpose-driven partnerships and lasting success stories.
As we navigate these dynamics, it’s crucial to consider the broader macroeconomic indicators to glean insights into the trajectory of the venture capital landscape. If you are interested in learning more about start up investing watch my video, how to invest in start ups here.
Let’s begin with a recap of predictions I made for 2023.
Review of my predictions for 2023
It is well-established that post-COVID-19 inflation rates in major markets, such as the US, have been steadily rising. Studies show that prices of consumer goods have increased by over 24%, and energy costs have risen by over 29%.
The Russia-Ukraine war further exacerbated supply chain difficulties, with energy costs being the most impacted. As a countermeasure, interest rates were raised, resulting in scarcer capital and fewer allocations available to VCs. This set the stage for the onset of a funding winter in 2022. To learn more about the events of 2022, you can read my article on the private equitization of venture capital.
Based on these trends, I predicted that in 2023, the ecosystem would experience market correction leading to some startups shutting down, survival mergers and acquisitions, increased cost-cutting efforts to manage capital and runway, stricter due diligence by VC firms seeking to deploy capital, a drop in valuations, an intense focus on profit and revenue as the market value, and a shift to more early-stage funding than growth and late-stage funding.
Events in 2023 proved these predictions to be true, with established startups like Stripe reporting valuation cuts and a significant number of startups shutting down — according to a study by Carta.
Watch the video of my 2023 predictions for more information here.
My 2024 Predictions
I project that interest rates, will remain high. This will continue to drive valuations downward, making it an exciting time for value investors to invest. Additionally, geopolitical shifts will be interesting to watch especially the rise of the Middle East, while rising wage rates in
China and India will further position Africa as the go-to outsourcing partner of choice.
If you would also like to watch my more detailed video explaining my predictions for 2024, click here.
- Interest Rates; Higher for Longer
The last 50 years have witnessed the most variations in interest rates, reaching peak levels in the 1980s at over 10% and then declining significantly before and during the COVID-19 pandemic.
The chart above highlights that interest rates either hit zero or came very close to zero just once in the last decade, significantly reducing the probability of a return to zero in the foreseeable future.
Moreover, the recent US CPI report indicated that prices rose 3.1% from the prior year and 4% on a core basis. The reasons for this are not far-fetched. The US is still battling with high inflation rates in
electricity, natural gas, food, and devices.
Also, as the Russia-Ukraine conflict continues and the Israel-Hamas war persists, supply chain difficulties are also likely continue to occur, keeping inflation higher for longer. Conflict in the Middle East particularly affects energy prices which contribute to inflation as well as disrupting one of the worlds most important shipping routes.
In addition to this, the Federal Reserve’s itself noted in its 2024 meeting schedule and interest rate outlook that rates may not decline much and could maybe fall to the 4% to 5.5% range by December 2024.
Therefore a combination of history, geopolitical factors, CPI numbers and the predictions of the Federal Reserve itself all point to these higher interest rates persisting. From a venture capital perspective, this means that more LP’s will allocate away from VC to private credit and fixed income. This will make it harder for venture capital firms and in turn start ups, to raise capital.
The only possible exception is if there is a recession in the US, which most forecasters estimate is 20% to 25% probable. In this case, the Fed will be forced to cut down rates to support the stock market and the wider economy, particularly since its an election year in the United States.
2. China’s economic crisis may impact the rest of the world.
As the world’s second-largest economy, constituting 18.37% of global GDP and renowned as the “world’s factory,” developments in China’s economic landscape hold substantial implications for the global stage. The current turmoil in China’s property market, representing almost 30% of the nation’s GDP, has prompted interventions from the central bank to avert a crisis.
Moody’s recent downgrade of China’s credit outlook to negative underscores the escalating risk associated with mounting debt. Consequently, the projected GDP growth for China is set at 4%, a significant reduction compared to the 6% to 7% range observed over the past decade.
China’s economic challenges have reverberations beyond its borders, impacting various sectors globally. The venture capital market, in particular, faces potential shifts as China’s economic slowdown may influence investor sentiments, fundraising dynamics, and the overall investment landscape. The intricate interconnectedness of the global economy implies that developments in China can trigger a ripple effect, shaping trends and opportunities in venture capital on a worldwide scale. Understanding these dynamics becomes pivotal for participants in the venture capital arena seeking to navigate and capitalize on emerging opportunities amidst the evolving global economic landscape.
3. Geopolitical Shifts — The Rise of “Arab Money”/BRICS
The 2023 BRICS summit was a notable event as it was the first in-person gathering of Brazil, Russia, India, China, and South Africa since the onset of the COVID-19 pandemic. This coalition, gaining momentum in global power and influence, aims to establish an alternative power bloc to the EU and the US. While not explicitly stating an agenda to challenge the dominance of the US dollar in global transactions, there has been an underlying tone suggesting such ambitions.
Despite this, the likelihood of de-dollarization appears improbable to impossible in the foreseeable future, given that 88% of all international transactions globally are still conducted in the US dollar.
“Arab Money” is a song by American hip hop recording artist Busta Rhymes, released as the lead single from his eighth studio album in 2009. As far as I know, Mr Rhymes neither a trained economist or a seasoned multi-asset class investor. However, over a decade ago, this lead single appeared to predict the rise of the Middle East as financial services hub; in its own unique way, lol.
Looking ahead to 2024, a significant shift is anticipated with the continued emergence of investors from the Gulf region as strategic Limited Partners (LPs) in funds. Oil-rich Arab nations, preparing for a post-oil era, are channeling substantial capital through their sovereign wealth funds into the venture capital market.
A case in point is Saudi Arabia, which has intensified its investments in U.S. venture capital in recent years, injecting approximately $2 billion annually. Its diversified portfolio includes partnerships with renowned global VC brands such as Andreessen Horowitz, 500 Startups, Techstars, among others. This influx of Gulf region capital into Western investments reflects a broader trend shaping the global financial landscape and influencing the dynamics of venture capital.
For more information on what becoming an LP in a fund actually means, watch my video here.
4. Tech Company Valuations to Stay Down, Making It an Exciting Time to Invest
Navigating the complexities of 2023, marked by uncertainties in the Chinese economy, two global regional conflicts, high-interest rates, persistent inflation, and geopolitical shifts, has resulted in reduced inflows into the venture capital asset class. While many companies successfully optimized their burn rates and stretched their runways throughout 2023, the year 2024 is poised to bring them back to the market for capital infusion.
These companies, having last raised capital during the venture capital boom of 2020–2021, are re-entering a transformed market in 2024. The landscape now reflects more tempered valuations, signaling the likelihood of down rounds, bridge rounds, and an overall decrease in company valuations. In the insightful words of Howard Marks from Oaktree Capital, “The best bargains are things you buy at the peak of pessimism.”
As the funding winter persists, tech valuations are anticipated to hit historic lows, presenting an enticing opportunity for investors driven by value. It is a well-established principle, particularly in low credit cycles, that investors stand the chance of securing substantial returns when sound deals are available at more attractive prices.
5. Artificial Intelligence Market Boom
In 2024, artificial intelligence (AI) is expected to continue its growth and expansion in various industries, with numerous projects and trends emerging. The true victors will be investors who don’t just invest in AI for its own sake. Instead, they are sector experts who see AI as a powerful enabler and catalyst for real customer-driven solutions. These investors focus on disruptive innovations that have the potential to transform entire industries
According to CB Insights, healthcare AI companies have raised $2.6 billion across 192 deals in 2023 YTD, despite a slowdown in overall funding. The Harvey L. Neiman Health Policy Institute projects that AI funding will continue to increase, resulting in a massive number of new products during the next decade, with medical imaging accounting for 85% of digital health’s venture capital funding. Generative AI and its applications will serve as a cross-sector enabler in fintech and healthtech.
Stanford Seed Funding is seeking proposals that support new and ambitious ideas that reimagine artificial intelligence in
healthcare, using real clinical data sets, with near term clinical applications that have a well-defined and testable impact.
Google announced that it is funding 15 AI-powered projects, including eight digital health initiatives, to improve provider experience and patient access to care. AI technologies have the potential to transform healthcare in Africa by automating medical
procedures, improving outcomes, and decreasing the cost of treatment. AI technologies, such as telemedicine platforms and AI-assisted diagnosis, can help improve access to healthcare services, particularly in remote areas.
6. IPO Deals may Recover
In the realm of Initial Public Offerings (IPOs), two prospective scenarios cast shadows on the horizon. Should interest rates undergo a rapid reduction this year, there is potential for the IPO market to undergo a revival. However, the likelihood of such a scenario hinges on the occurrence of a recession in the US. As of now, this outcome appears improbable, given the resilience demonstrated by the US economy in the face of over a year of rate hikes.
Consequently, the more plausible scenario involves a ‘higher for longer’ trajectory, where interest rates remain elevated in America. This could pose challenges for IPOs to regain momentum, particularly in terms of volume. Companies saddled with substantial debt may encounter impediments in pursuing public offerings due to the heightened cost of borrowing.
Despite this, during phases of heightened geopolitical risks, the volume of IPOs typically experiences a downturn. However, the silver lining emerges in the form of a higher standard for the IPOs that do materialize. This can be attributed to investment bankers having a more manageable workload, affording them the opportunity to conduct meticulous due diligence before introducing offerings to the market
7. Growth in the African Tech Ecosystem
Financial services: The African tech ecosystem is expected to see a lot of consolidation across sectors, especially in fintech. Africa is the financial technology capital of the world and we will continue to see more financial services innovation coming out of the continent. 70% of the world’s mobile
money transactions are made in Africa, a trend that would go on for a long time because Africa has leapfrogged technological advancements especially in financial services.
According to a Mckinsey report, African fintech revenues have the potential to reach eight times their current value by 2025, driven by increasing smartphone ownership, declining internet costs, and expanded
network coverage. The African fintech market is projected to reach $65 billion by 2030, representing a 13-fold increase over 2021, and is expected to continue to grow at speed.
Healthcare: We will also see that during downtimes, healthcare brings stability to investment portfolios because healthcare is both defensive, inflation resistant and counter cyclical. Furthermore, the aging population, technological advances, and the global reach of disease are driving factors for healthcare investments.
More outsourced work to Africa: The devalued currency of most African countries now makes it super attractive to outsource work to Africa. This is crucial because wage rates are rising in China and India, making it increasingly expensive for companies to outsource services there. For
instance, studies by Bloomberg show that China’s upper-middle class now dominates, with over 200 million urban households having disposable income of $16k — $34k.
Furthermore, enabling this shift is the fact that Africa’s digital economy is growing and is expected to reach $180 billion by 2025. Digitalization has the potential to create new jobs and boost the productivity of existing ones. Ten to twelve million young Africans enter the labor market each year, and an estimated one-third of the 600 million young people entering the global labor market by 2030 will be young Africans.
New approaches to apprenticeship or employment matching, such
as gig jobs, job matching, and distributed manufacturing platforms, are expected to become more prevalent in Africa.
Startups focused on building tech talent, such as Altschool Africa, are bound to see significant traction. According to the African Development Bank, Africa has a huge asset in its population, and equipping its youth with education, skills, and jobs can be the most sustainable key to
economic growth. Smart investments in human capital, through education, health, and social programs, are the accelerators of economic growth.
Here are some other factors that make it an exciting time to invest in African tech:
a. Innovation: Africa, with venture capital averaging $1–2 per person, is set to drive the next global tech wave. Despite the low funding, it has become a leader in Fintech, contrasting with North America, Israel, and Singapore, which receive nearly $1000 per person in venture
capital.
b. Burgeoning Consumer Market: McKinsey projects Africa’s consumer spending to reach $2.1 trillion by 2025, with an 8% CAGR. Fuelled by a growing youthful population, this market surge is driving increased demand across sectors, including technology.
c. Mobile Phone/Internet Access Penetration: Africa’s mobile phone penetration reached 80% in 2019, creating a vast market for services like apps, e-commerce, banking, and entertainment. Investors can tap into this potential by targeting sectors that cater to mobile
users’ needs, driving innovation and growth.
d. Favourable Demographics: Africa boasts the world’s youngest, fastest-growing population, which contrasts with aging trends in Europe, North America, and parts of Asia. Nigeria alone is expected to welcome more newborns this coming year than nearly all of Europe combined.
To better understand the business case for investing in Africa, watch my video here.
My Advice to Founders
a. Concentrate on Customers: Prioritize customers and delve into Joe Mullins’ book on customer funding, highlighting how customers can become a funding source. Watch Professor John Mullins’
“Customer Funded Business” YouTube video, from London Business School, for more insights.
b. Don’t be Afraid of Being Profitable: If you’re going to fundraise, make sure that you have long runways and make sure that you are hitting those metrics. Concentrate on customers
c. Prudent Cash Management and Financial Controls: Implement rigorous financial controls to optimize cash flow, ensure prudent expenditure, and ensure to keep your burn rates low.
d. Get to Know Your Sector: Develop a deep understanding of your sector and engage with specialist investors who are familiar with your industry. They can offer a lot of tailor guidance and access.
Conclusion
In conclusion, my outlook anticipates macroeconomic changes that will continue to pose challenges to funding availability in 2024 but will also present exciting opportunities for investors.
The tech sector, particularly in Africa, shows promise. We believe that strategic investments can yield above bench mark returns. As the global financial landscape evolves, adaptability, customer-centric strategies, and prudent financial management will be key for founders and investors alike.
A proactive approach to navigating these shifts will contribute to sustained success in the dynamic business environment. If you are interested in learning more about these insights, please email us on investor.relations@healthcap.co
About Me: As the General Partner and Founder of HealthCap Africa, a Pan-African specialist fund focused on fintech and healthtech investment, I bring over 15 years of expertise in healthcare, finance and venture capital.
The first fund I co-founded and ran, achieved remarkable results, including
an IRR of 25% and a DPI of 5.01x, with a successful exit from Paystack.
My entrepreneurial journey includes founding “Flying Doctors Nigeria,” a tech enabled emergency response service company addressing urgent healthcare needs across 45 African countries. I have a degree in Medicine and Surgery, a Master’s in finance and Economic Policy, and am completing my Phd in Finance focused on fintech/monetary policy this deep subject matter expertise allows me to add value to our portfolio companies in unique ways.
Learn more about me here.
About HealthCap Africa: Founded in 2020 by Dr. Ola Brown, HealthCap Africa is a specialist VC fund focused on healthtech and fintech startups.
HealthCap has invested in 18 companies, generating 1,000 jobs, HealthCap’s geographical focus spans key African markets — Nigeria, Kenya, South Africa, and Egypt — representing 52% of Africa’s GDP/
Led by Dr. Ola Brown- a medical Doctor and finance/venture capital expert and supported by a dynamic team with nearly 50 years of experience. HealthCap is committed to profitability and positive impact in Africa’s growing sectors.
Join us in pioneering purposeful and profitable investments for transformative growth.
