On the state of equity funding for tech startups in Africa
This story was written by MEST Africa’s Head of Marketing, Thea Sokolowski.
The ParTech Africa team recently released their annual report on the 2018 funding landscape in Africa. They cited a record year in which 146 African tech startups raised a total of US$ 1.163 Billion in equity funding, through 164 rounds, at108% YoY growth - breaking the US$1 billion mark for the first time.
According to the ParTech team, “2018 figures are confirming the growing attractiveness of African entrepreneurs, their ability to transform the continent into a global powerhouse and their increasing influence on the emerging market.”
Important to note is that this estimate covers only equity funding for tech and digital companies, and only funding rounds higher than US$ 200K and lower than US$ 100 Million — categorized as late or growth stage equity rounds. It also includes both disclosed and undisclosed funding rounds.
Some rising trends cited include:
- The number of Series A & B stage start-ups attracting funding is massively accelerating, with 70 rounds
- The number of large venture growth deals have increased as well, with 14 rounds
- Kenya, Nigeria and South Africa still leading the race geographically — with Egypt close behind, and Senegal leading for Francophone Africa
This momentum shows no sign of stopping in 2019. We’ve seen Jumia, ‘Africa’s unicorn’, listing on the NYSE — the first African startup to list on a major global exchange. There have also been a number of companies who continue to bring in significant capital. TeamApt raised $5.5M Series A. Boomplay brought in $20M. PEG raised $25M Series C. As well, a number of funds have launched committing investment in African markets, from Seedstars to Ingressive.
The list goes on, and it’s only just Q2.
At last year’s MEST Africa Summit, we hosted a conversation titled ‘Rethinking Silicon Africa’, and heard from MEST & Meltwater Founder & CEO Jorn Lyseggen, CRE Venture Capital’s Pule Taukobong, IDF Capital’s Polo Leteka, Silver Tree Investment Holdings’ Manuel Koser, Knife Capital’s Keet van Zyl, Uprise Africa’s Vuyisa Qabaka and Spark.ng’s Bastian Gotter.
We discussed not only alternative forms of capital that might work in the context of the African startup space, but also the expectations investors and stakeholders need to have in these markets and how this requires a different mindset than Silicon Valley. As we continue to see funding rise on the continent, these topics become more crucial to explore than ever.
Keet van Zyl of South African VC Knife Capital published an article in late 2017 that speaks to the need for investors to shift focus away from the idea of unicorns in Africa and instead take better care of gazelles — small, viable companies with the ability to drive large economic impact and jobs.
“The endless pursuit of unicorn status at the expense of building sustainable companies is not constructive for the ecosystem,” he argued. “I’d rather back some scalable high-growth gazelles on their path to sustainability/ exit!”
One of the the key differentiators of many startups in Africa today — in particular in the tech space — is that they set out to build sustainable companies that solve real problems, because they have to.
Van Zyl argues that Gazelles are also ‘super job creators’ and “create a large share of new net jobs to support their faster growth rates. So to create a lot of jobs, we need to fund Gazelles with so-called ‘smart money’, accelerate their growth, and reduce the risk of failure through access to knowledge and market access networks.”
This idea was discussed further during the Summit, as panelists were asked whether it is the right thing to do for us to try to make our opportunities fit into the model of other types of investments, and whether we need to rethink what VC in Africa really means.
Here are a few notable points from our discussion, which remain relevant in the context of the expanding VC space on the continent.
Lyseggen argued: There are tremendous things you can learn from Silicon Valley. Mostly it’s being inspired by the bullishness, belief in the future and the willingness to put money, time and effort behind startups. But the search for a unicorn is destructive and a very flawed obsession. What Silicon Valley has that is unique is a massive consumer market and a lot of capital, so they could create tremendous successes. But we cannot copy Silicon Valley. Every market has its unique opportunities and needs to pursue those accordingly.
In Africa the opportunities are so big. If you want to start a company in Silicon Valley or in the US, every opportunity is so crowded. In Africa, if you look at the overall conditions for startups, it’s not only about capital and expertise. The biggest driver is the opportunity.
Leteka spoke on her experience in the South African market: We’ve gotten so stuck on the definition of VC and tried to superimpose it on our market. When we started engaging with entrepreneurs in the tech space, the typical response would be “This is how Silicon Valley does it.” My response to them would be that in South Africa, we do not have the depth of knowledge in Venture Capital that you will find in Silicon Valley or in Israel. We need to define what VC is in our context. We can’t cut and paste what happens elsewhere in the world.
We’ve had to figure out what we need to tweak along the way for the people we’re trying to benefit to get the most out of it. Important to learn from best practices, but let’s localize as much as possible, because our problems are very different.
Taokobong went on: To attract any sort of capital as an entrepreneur on this continent, you have to work very hard. As a result, I think we see such high quality deal flow vs what’s happening in other ecosystems. For every 10 deals in the Valley, maybe 0.1 is actually an investable deal. Here there’s a fair amount of good ones.
However, capital is just a service — people tend to think of VC as this be all, end all that will save entrepreneurs. But VC is the same as your accountant, as your lawyer. We’re an enabler. In doing so the approach is we roll up our sleeves, we get involved in working with the founders; we value relationships and experience. We take the world from six degrees of separation to one for entrepreneurs. It’s not just cutting a check, sitting in a cushy office and hoping that this business results in a unicorn. There are different models that can help this ecosystem.
In regards to the future of capital deployment on the continent:
Qabaka said: We need to make what’s happening in Africa normal for everyone else so the flow of capital is more fluid, and so the rest of the world can participate. There is not enough capital finding its way to Africa. If you’re deploying capital, your job should be to do it as best you can. The reality of what’s going on in our ecosystem is that nearly enough money is coming in. If more money was coming in, there would be more deal flow, more risks, and it would start mushrooming and we can dictate terms of how we want to engage with other ecosystems.
Leteka noted: The real opportunity lies in the technology space. Tech accelerators build the pipeline for VC funds.
Koser described patterns he sees in entrepreneurs that pitch to Silvertree, and what he tells them in return: You need to compare apples to apples. You can’t compare to Silicon Valley pitches. A big problem is getting the assumptions right about what is realistic to achieve. Most of the pitches we get have completely screwed assumptions. That’s a very flawed starting point.
I’ll often say “stop reading TechCrunch” because suddenly you think you need $100M for your business, and what you don’t know is that these big companies that raised a lot of money are very often not success stories. The real success stories are the entrepreneurs that took their own money or took a bank loan and were grafting away when you were running around trying to raise unrealistic amounts of capital. The best pitches were people that were very mission-driven by a problem and put their own money to work trying to solve that problem.
As our experts noted, the ecosystem has grown exceptionally, but we all need to be louder about it. Africa’s tech startup landscape is evolving incredibly quickly as the world starts to take notice, and it will require players and facilitators who understand fully the nuances of working in these markets, why this is different than investing in Silicon Valley and the “roll up your sleeves” approach that’s necessary for continued success.
There is such a breadth of opportunity in these markets, and we’re excited about the prospect for the future as these numbers continue to rise. For more expert discussions on the latest in the African tech landscape, stay tuned for this year’s MEST Africa Summit coming in Nairobi, this June.
