The Expanding Landscape of Venture Capital in Africa

The venture capital ecosystem within Africa has experienced substantial and consistent expansion. Significant capital injections from both domestic and international sources have reached record levels in recent times.

Illustrating this growth, African startups secured only $400 million in funding during 2015. This contrasts sharply with the $2 billion invested across the continent by 2019, as reported by the Africa-focused investment firm, Partech Africa.

Discrepancies in Reported Funding Amounts

However, the $2 billion figure isn't the sole indicator of investment activity. Various sources, including publications like WeeTracker and Disrupt Africa, have published differing analyses of the African venture capital market.

A comparative study conducted last year revealed both methodological differences and areas of agreement among these reporting outlets.

For the year 2019, WeeTracker estimated that African startups attracted $1.3 billion in investment. Disrupt Africa, conversely, reported a total of $496 million for the same period, while Partech Africa maintained its figure of $2 billion.

Impact of the 2020 Pandemic

An increase in these figures was anticipated for 2020. However, the onset of the global pandemic introduced considerable uncertainty and disruption.

Many companies were forced to reduce their workforce as investors adjusted their strategies, and the process of due diligence was significantly slowed during the initial months of the year.

New projections emerged in May, with AfricArena forecasting deal closures to fall between $1.2 billion and $1.8 billion by year-end.

Resilience and Acquisitions in 2020

Investment activity did recover, with venture capital funding experiencing a strong upward trend from July through December.

While 2020 did not replicate the large-scale deals seen in 2019, nor reach the $2 billion benchmark, it proved to be a successful year for acquisitions.

Notable examples include WorldRemit’s $500 million acquisition of Sendwave, Network International’s purchase of DPO Group for $288 million, and Stripe’s acquisition of Paystack for a sum exceeding $200 million.

Data Sources for 2020 Investment Analysis

To gain a more comprehensive understanding of venture capital investments in Africa during 2020, we will analyze data from Partech Africa, Briter Bridges, and Disrupt Africa.

Understanding the Variances in Startup Funding Data

In the year 2019, Partech Africa documented $2 billion in investment flowing into African startups. However, the following year, 2020, saw a decrease to $1.43 billion according to their reports.

Briter Bridges calculated the total venture capital funding for African startups in 2020 at $1.31 billion, encompassing both disclosed and undisclosed funding rounds. This figure represents an increase from the $1.27 billion recorded in 2019.

Disrupt Africa, conversely, indicated a rise in funding, moving from $496 million in 2019 to $700 million in 2020.

Methodological Differences and Data Discrepancies

As observed in the previous year, the discrepancies in these figures stem from differing methodologies. These variations encompass the types of deals analyzed and the very definition of what constitutes an "African startup."

Cyril Collon, a general partner at Partech, explains that their data focuses on equity deals exceeding $200,000 in value. Their definition of an African startup prioritizes primary market operations or revenue generation within Africa, irrespective of headquarters location.

Companies that expand globally are still categorized as African entities by Partech, even as their reach extends beyond the continent.

Defining an African Startup

Briter Bridges employs a comparable approach. Dario Giuliani, the firm’s director, states that their research organization deliberately avoids relying solely on geographical location to define an African startup.

Factors such as taxation, customer base, intellectual property, and the composition of the management team all contribute to a company’s identity, according to their methodology.

Disrupt Africa’s Criteria

Disrupt Africa focuses on startups that are seven years old or less, actively scaling their operations, and demonstrating the potential for future profitability.

Their reports specifically exclude entities that are spin-offs from larger corporations or those that have matured beyond the typical startup phase, based on their established criteria.

Fintech’s Continued Leadership and the Prominence of Key African Nations

Although overall funding experienced a decline, Partech reports that African startups concluded a greater number of deals in 2020 compared to the prior year. The firm indicates that 347 startups finalized 359 deals in 2020, an increase from the 250 deals completed in 2019. This rise is linked to a surge in seed and bridge funding rounds, driven by capital constraints during the pandemic-related lockdowns.

A recurring observation across the three analyzed reports identifies fintech, health tech, and clean tech as consistently appearing within the top five sectors. However, fintech demonstrably secured the largest portion of venture capital investment directed towards Africa.

Partech’s data reveals that fintech accounted for 25% of all funding secured by African startups last year. Following closely were agritech, logistics & mobility, off-grid technology, and health tech.

Briter Bridges’ findings corroborate this trend, showing fintech companies representing 31% of total VC funding during the same period. Clean tech secured the second position, with health tech in third. Agritech and data analytics rounded out the top five, respectively.

Disrupt Africa’s analysis also highlighted fintech’s dominance, with startups in this sector raising 24.9% of the total venture capital funding across the continent. E-commerce, health tech, logistics, and energy startups followed in terms of funding received.

The ‘Big Four’ Countries as Investment Hubs

The year 2020 also underscored the significance of the ‘Big Four’ African nations as primary destinations for investment, a pattern evident in at least two of the three reports examined.

Partech’s rankings of the top five countries remained consistent, with Nigeria leading as the preferred destination for venture capital, attracting $307 million in investments. Kenya closely trailed with $304 million, while Egypt secured the third position with $269 million raised by its startups. South Africa received $259 million, and Ghana completed the top five with $111 million, replacing Rwanda from the 2019 list.

Disrupt Africa’s 2019 rankings mirrored this sequence. Kenyan startups garnered $191.4 million in funding, followed by Nigeria at $150.4 million. South Africa secured the third spot with $142.5 million, Egypt was a close fourth with $141.4 million, and Ghanaian startups raised $19.9 million.

Briter Bridges adopted a distinct methodology. While Partech and Disrupt Africa focused on funding activities based on the country of origin and operations, Briter Bridges attributed funding based on the startups’ legal incorporation location or headquarters.

This alternative approach resulted in a slight shift in the positions of the ‘Big Four’. According to Briter Bridges, startups headquartered in the U.S. received the largest share of funding, totaling $471.8 million. South Africa followed with $119.7 million, Mauritius-based companies with $110 million, and African startups headquartered in the U.K. and Kenya raised $107.6 million and $77.1 million, respectively.

Giuliani explained that this methodology was chosen to foster an objective discussion and encourage investigation into more complex factors, such as the need for improved policies, regulations, and financial accessibility.

This highlights the increasing trend of Nigerian startups incorporating their businesses outside of Nigeria, often in jurisdictions like Seychelles and Mauritius, due to unfavorable regulatory environments, business conditions, and tax policies. This trend is likely to persist as foreign investors generally favor African startups incorporated in countries with more investment-friendly laws.

Regional and Gender Diversity in African Venture Capital

An increase in startup ventures across Francophone Africa might lead one to anticipate a corresponding rise in VC funding within the region. However, current data suggests this isn't entirely the case.

According to Partech, Senegal, a leading destination for venture capital, experienced a decline in funding from $16 million in 2019 to $8.8 million in 2020. The nation ranked ninth overall, with Ivory Coast following closely in tenth place, securing only $6.5 million in investment.

Expanding Investment Beyond the Core Four

Positive developments are evident, however, as Partech data indicates that 22 additional countries received investments outside of the traditionally dominant "Big Four" economies this year. The question remains whether this trend will persist, and which nations are poised to reach the $100 million funding milestone.

Tidjane Deme, a general partner at Partech Africa, suggests Ghana as a likely candidate. He draws a parallel to the previous dominance of Kenya, Nigeria, and South Africa, before Egypt emerged as a significant player, and proposes a similar trajectory for the West African nation.

Investor Diversification and Market Learning

“We are observing a distinct diversification as investors explore a wider range of markets,” Deme stated. “Ghana, for example, is already attracting investment exceeding $100 million. While a faster pace is desirable, it’s crucial to acknowledge that both investors and founders are navigating a learning curve as they enter and adapt to new markets.”

Ghana also featured in Giuliani’s projections. He further identifies Tunisia, Morocco, and Rwanda as emerging economies rapidly gaining attention from global investors and developing increasingly sophisticated startup ecosystems.

The Continued Dominance of the Big Four

Tom Jackson, co-founder of Disrupt Africa, offers a contrasting perspective. While acknowledging positive signs from other markets, he believes the "Big Four" will maintain their leading position.

“Investment will increasingly extend to other markets, and early indicators are encouraging,” Jackson explained. “However, the venture capital landscape remains relatively nascent, and these four major markets possess a substantial advantage that will likely endure for years.”

Gender Representation in Funded Startups

A critical diversity assessment must also address gender representation. Despite ongoing discussions surrounding inclusion, Briter Bridges reported that only 15% of funded startups in 2020 featured women in founder, co-founder, or C-level roles. Partech’s data aligns closely, placing this figure at 14%.

Significant efforts are still required to improve these statistics, and we may see a greater focus from early-stage firms on addressing this gap in representation.