African Startups See Funding Surge: Fintech Leads the Way

Global Venture Capital Trends and the African Startup Ecosystem

The Exchange is currently undertaking a global investigation, examining startup landscapes across various regions to assess their performance amidst an unprecedented surge in venture capital investment. A substantial influx of capital is currently being directed toward emerging technology companies worldwide.

However, this capital distribution isn't uniform. While the United States has experienced a significant increase in funding for its startups, the venture capital activity in China has shown signs of moderation.

A Growing African Venture Capital Market

Beyond China, the majority of prominent startup hubs and regions are attracting considerable investor attention. The African continent is demonstrably included in this trend.

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Preliminary data suggests that Africa is poised to surpass previous investment records for venture capital funding this year. The first six months of 2021 witnessed approximately double the amount of capital raised by African startups compared to the same period in 2020.

Currently, African startups have unprecedented access to funding.

Analyzing Capital Flow Dynamics

However, aggregate figures can sometimes be misleading. A small number of exceptionally large investment rounds can create an overly optimistic impression of the overall investment climate for startups.

To gain a more accurate understanding of capital access within a startup market, it’s crucial to analyze the specific stages of development where funding is readily available and those where it remains limited.

Data Collection and Expert Insights

To this end, The Exchange compiled data from multiple sources regarding Africa’s venture capital performance in Q2 2021 and the first half of 2021. We also consulted with Dario Giuliani of Briter Bridges, a data provider specializing in African business intelligence, and Julio Dibwe Mupemba of Toumaï Capital to enrich our analysis.

Our goal is to determine which startup stages are experiencing the easiest and most difficult access to capital, assess whether Africa remains underfunded, examine evolving trends in founder diversity, and investigate the substantial venture capital totals observed in the fintech sector in recent quarters.

Resurgence in 2021

Following a challenging 2020, investment in African startups via venture capital is experiencing a significant rebound. Reports indicate that funding secured during the first half of 2021 exceeded $1 billion, though minor discrepancies exist in the data – inconsistencies in VC data reporting are a common occurrence.

While structural issues contribute to slightly differing figures, various sources generally agree on the overall upward trend and approximate totals.

For example, The Big Deal, an Africa-focused newsletter, reported $1.14 billion in funding for deals exceeding $1 million, and $1.19 billion when including deals between $100,000 and $1 million.

These figures align with Briter Bridges’ assessment of $1.2 billion in disclosed funding from January to June 2021, and the Global Private Capital Association (GPCA)’s estimate of $1.03 billion. These numbers also support predictions made earlier in the year by tech accelerator AfricArena, which projected that “investment into [African] tech startups will be between $2.25 and $2.8 billion, representing the most substantial year for tech investment on the continent.”

To provide context, Toumaï’s Mupemba highlighted that African startups “remain undercapitalized,” with the collective funding across the continent’s 54 nations being less than that of France alone.

He further noted that “Back Market has raised more capital than Nigeria and Ghana combined,” referencing Back Market’s recent $335 million funding round.

Nevertheless, the increase in deployed capital is undeniable. According to The Big Deal, venture capital invested in African startups in the first half of the year “represents more than double the amount raised in H1 2020.”

As previously noted, 2020 was a difficult year for African venture capital, but the 2021 results to date significantly surpass the $512 million reported by GPCA for H1 2019, prior to the pandemic.

Similar to other markets, increased investment often attracts further funding, suggesting that recent substantial rounds could stimulate additional VC investment. TechCrunch’s Tage Kene-Okafor recently emphasized two key factors driving investor interest in African deals: “Paystack’s acquisition by Stripe and Flutterwave achieving unicorn status.”

Notable recipients of significant funding during the first six months of the year included Zipline ($250 million), TymeBank ($109 million), Chipper Cash ($100 million), and Gro Intelligence ($85 million). This momentum is expected to continue, as South African payments startup Yoco announced an $83 million Series C round today.

Capital Distribution in the African Startup Landscape

Beyond the substantial figures, which stages of African startups are experiencing plentiful funding, and which are facing shortages? Mupemba asserts that Africa “requires a greater volume of funds directed toward pre-seed and seed stage companies.” The rationale, according to the investor, is that while “an increase in seed-level deals” is observable, the majority of “capital continues to be allocated to pre-Series A and Series A ventures,” indicating a preference for more established businesses.

Mupemba identifies pre-Series A and Series A rounds as the most actively funded stages within the African venture capital ecosystem.

Giuliani of Briter Bridges offers a slightly differing perspective. He suggests that “a growing emphasis on seed and Series A” investments in Africa is contributing to larger round sizes. However, Giuliani also highlights a surge in “very early-stage” activity, attributing it to the increasing acceptance of angel investments, a reduced perception of risk, and the emergence of new support programs for Africa-focused startups, both within and outside the continent.

What is driving this heightened activity at the earliest stages, as noted by Giuliani? He explains that he is “particularly encouraged by the expansion of local early-stage capital availability,” largely fueled by successful founders “reinvesting” by establishing funds and syndicates, alongside individuals returning to Africa.

Analyzing these two viewpoints, it becomes apparent that while more capital may be becoming accessible to the very earliest-stage African startups, the supply remains insufficient to satisfy the demand and needs of founders.

Concerning the later stages of venture capital, Giuliani points out that funding for African “growth-stage companies still primarily originates from international investors and corporations.” This external capital serves as a positive force, bolstering Africa’s developing, internally-sourced venture capital environment, though it isn’t a complete solution.

For the African startup ecosystem to truly flourish, an increased supply of early-stage capital is essential. It prompts consideration of complaints heard from early-stage investors in markets like the United States regarding valuation and competition. Could they broaden their search to a market characterized by abundant founder ambition but limited available capital?

Shifting our focus to sector-specific funding trends within the African venture capital scene, let's examine sector allocation. According to The Big Deal, 48% of capital invested in the first half of 2021 was directed towards fintech startups. While fintech has historically performed well in Africa, its dominance – commanding half of all startup investment on the continent – is noteworthy.

Briter Bridges data reveals that three out of four $100 million rounds raised in Africa during H1 2021 were secured by fintech companies. (These rounds involved Chipper Cash, TymeBank and Flutterwave.) This represents a significant 75% concentration of mega-rounds within a single sector, a potentially surprising level of focus.

What accounts for fintech’s ability to attract such substantial capital in Africa? Giuliani explained to The Exchange that it’s difficult to provide a “scientific” explanation for the success of fintech on the continent. However, the strong fundraising performance of African financial technology startups “appears to mirror global trends.” This is a valid observation, as fintech is a globally popular sector, witnessing significant fundraising activity in the United States, Europe and Latin America this year. It may be even more prominent in emerging markets, where established players have a weaker presence and consumers are more likely to adopt innovative solutions.

However, funding isn’t limited to fintech in Africa. Giuliani identifies e-commerce, clean tech, and supply-chain focused sectors as receiving “comparable interest” to fintech. It’s possible that these three areas of founder focus will capture a larger share of overall venture capital in Africa’s future.

A key area The Exchange intends to monitor is the proportion of international venture capital invested in Africa that flows into fintech versus other sectors, alongside similar data for domestic African venture capital funds. Any divergence could reveal a pattern: international funds potentially prioritizing fintech startups, while Africa-based funds demonstrate a greater willingness to invest across a broader range of sectors.

Smart Capital in African Startups

A significant opportunity exists for Africa-based funds to specialize in pre-seed capital, particularly what is known as “smart money.” While African startups are increasingly represented in programs like Y Combinator, this alone isn't sufficient, according to Olumide Soyombo, a seasoned investor.

Soyombo, a prominent angel investor, is now establishing Voltron Capital, a fully operational fund designed to broaden the scope of his investment strategy.

Emergence of Female-Focused Funds

Similarly, Odunayo Eweniyi, co-founder and COO of PiggyVest, a Nigerian fintech company, has partnered with Eloho Omame, managing director of Endeavor Nigeria, to create FirstCheck Africa. This is an angel fund specifically targeting female founders.

This initiative reflects a growing trend of new funds and angel networks concentrating on African female entrepreneurs, including organizations like Alitheia IDF, Dazzle Angels, Enygma Ventures, and Rising Tide Africa.

Increased Funding for Female CEOs

According to recent analysis, the rise of funds dedicated to supporting female entrepreneurs has played a role in the increased number of female CEOs securing funding in 2021 compared to prior years.

Data from The Big Deal indicates that 14% of funding was allocated to companies led by female CEOs in the first half of 2021. This represents a substantial improvement from the 2% recorded in the first half of 2020, though gender balance remains a challenge.

Furthermore, the proportion of funding directed towards all-male founding teams decreased from 88% in 2020 to 77% in 2021.

Factors Driving Change

While a considerable gap persists, Giuliani identifies several factors expected to facilitate greater funding for African women in the future. These include diminishing societal stigma surrounding entrepreneurship, reduced obstacles to market entry, improved access to financial resources, and a growing number of women pursuing education in technology and finance.

Miishe Addy, co-founder and CEO of Ghana’s Jetstream, recently emphasized the need for investors to reconsider their evaluation of women leaders who are currently underfunded.

A Rapidly Evolving Landscape

The African startup ecosystem is undergoing rapid transformation. Capital allocation across different sectors and investment stages is expected to change quickly as new opportunities emerge and certain markets become saturated.

Fintech, for example, may eventually become a more competitive market. However, it is evident that investor interest in African startups is at an all-time high, and these funds are increasingly being distributed to a more diverse group of entrepreneurs.