Start-up investments in Africa face serious slowdown in 2023

By Max Cuvellier Giacomelli

2023 marked the end of at a decade of continuous year-on-year growth for start-up investments in Africa, during which the amount raised grew more than 400-fold, from a mere US$12 m^[1] in 2013 to US$5 bn in 2022.^[2] While the fall in equity funding in Africa between 2022 and 2023 (-57% YoY) was most severe among all continents, the others - North America, Asia Pacific and Europe - also did pretty poorly (-36%, -49% and -45% YoY respectively).^[3] That said, while 2023 results might read as a counter-performance, they still look very positive when compared with pre-‘funding heatwave’ numbers. Indeed, between 2020 and 2023, equity funding in Africa grew by +76%, by far the best performance of all regions: over the same period, Europe grew +12%, while North America (-12%), Asia Pacific (-39%) and Latin America (-43%) underperformed.^[4]

If we consider equity, debt, and grants for deals US$100k and over (but exclude exits), start-ups in Africa raised US$2.9 bn in 2023, a -39% YoY decline.^[5] However, trends look very different for the two main funding instruments. Equity investments were more than halved between 2022 and 2023 (-57% YoY), falling to US$1.7 bn. Meanwhile, debt financing boomed (+47% YoY) from around US$700 m in 2022 to US$1.1 bn in 2023. As a result of these two opposite trends, the equity-to-debt ratio of funding raised on the continent evolved dramatically between 2022 and 2023, going up from $0.17 of debt raised for every US$1 of equity funding secured to $0.65 cents for every dollar. The growing importance of debt comes not only from a change of strategy from start-ups in terms of how they finance their growth, but also from a larger number of investors offering debt; it is also likely that in a context where ‘announceables’ are rare, start-ups and investors are now more amenable to talk about debt transactions than they were in the past. On the exit front, volumes are too low (we recorded only 19 exits in 2023) and data too patchy to identify meaningful trends. However, it is worth mentioning two exits in particular that represented the overwhelming majority of exit value in Africa in 2023, both involving Tunisian ventures: InstaDeep’s acquisition by BioNTech^[6] and Expensya’s acquisition by Medius.^[7]

Geographically, the region attracting the largest share of funding (31%) was East Africa where US$880m were invested last year, 91% of which went to Kenya alone (US$800m), boosted by the Sun King[^8] and M-Kopa^[9] deals in the energy sector. While Tanzania and Uganda lost serious ground, Rwanda overperformed, attracting US$44m, compared to US$4m the previous year. Northern Africa came second (US$670m, 24%) as Egypt’s performance (US$640m, 95% of the region’s total) was largely driven by the nearly half a billion dollars of funding secured by fintech MNT-Halan alone over the period. Tunisia and Algeria start-ups – which had both attracted over US$100m in 2022) – showed very little funding activity in 2023: merely US$4m worth of deals in Tunisia, and no recorded deals over US$100k in Algeria. Third was Southern Africa (US$620m, 22%), the only one of the four main regions to register positive YoY growth (+6%). However, little activity was recorded beyond South Africa, which claimed 97% of the region’s total funding. For the first time since we started tracking numbers in 2019, Western Africa placed fourth, attracting US$600m (-62% YoY). Compared to the other blocks where the regional ‘giant’ represented over 90% of the regional funding last year, Nigeria ‘only’ claimed 68% of the total invested in Western Africa in 2023 (down from 77% in 2022 and 85% in 2021). In absolute terms, the once-dominant behemoth attracted three times less funding in 2023 than in 2022 (from US$1.2 bn to just over $US400m), barely half of what was raised in Kenya. This absolute and relative decline of Nigeria can be traced to macroeconomic indicators (inflation, FX), but also to the absence of the mega deals (US$100m+) that were boosting numbers in previous years. The other two regional runners-up – Ghana and Senegal – also recorded serious YoY decline; only Benin did great (from merely US$200k in 2022 to US$71m in 2023), though its performance mostly relied on two deals. Central Africa – despite very encouraging growth (+33% YoY) – continues to trail far behind the four main regions, with just over 2% of the funding raised in 2023. Finally, the prevalence of the Big Four was at its highest on record as only 13% of all the funding in Africa was raised outside Kenya, Egypt, South Africa and Nigeria.

The two sectors attracted the majority of funding on the continent in 2023 with a combined 69% of the total amount - Fintech (US$1.2 bn) and Energy (US$800 m).^[10] Despite a serious drop in absolute numbers year-on-year (minus US$600m), fintech kept its share of total funding raised at just above 40%. Behind the attractiveness of the sector is both the fact that fintech continues to be building the rails that enable all other sectors, and that more investors have the keys to value and evaluate fintech business model, based on past deals on the continent and globally. Energy was the only sector with healthcare to record positive YoY growth last year, thanks in part to the contribution of large deals from the above-mentioned Kenya-based ventures Sun King and M-Kopa. Logistics & Transportation remained the third most attractive sector though the amount raised reduced drastically from US$580m in 2022 to US$220m in 2023. Healthcare (US$190m) and Agritech (US$180m) were a close fourth and fifth, respectively. It is interesting to note that if we look transversally at all ventures with a climate angle, those raised a combined US$1 bn in 2023, illustrating both the potential of ‘green’ investments in Africa, and the increased focus of investors in this space.

Talking of investors, we recorded a reduction of the number of investors active in at least one US$100k deal last year in line with the reduction in amount raised: -39% YoY (619 vs. 1,000+).^[11] Nearly half of those investors had not invested in either 2021 or 2022. Compared to 2021 and 2022, Africa-based investors represented the largest share of investors active on the continent in 2023 (35%), ahead of North America- (30%) and Europe-based (25%) investors. Of the 280+ investors who were active in at least one deal on the continent in both 2022 and 2023, 83% either reduced (47%) or maintained (36%) their level of activity YoY. As the number of deals was smaller, and as some of Africa’s historically most active investors were raising new funds, the number of investors who managed to participate in at least a US$100k+ deal a month on average went down from 20 in 2022 to 7 in 2023.^[12] With 56 deals – more than one a week on average – Techstars was by far the most active player on the continent last year. Despite being far less active, Launch Africa* (both 2021 and 2022’s most prolific investor), Founders Factory Africa, Ventures Platform, Catalyst Fund, Norrsken, and Y Combinator made up the rest of the list. Of those, only Catalyst Fund* – which formally started its climate-focused VC operations in 2023 – hadn’t made the list last year.

Now all eyes are on 2024, it is as hard as ever to predict what investments will look like this year. However – and despite the global economic and political instability –, it does feel like 2023 might have set a ‘new normal’, after two years of near overheating. As such, we can hope that the ecosystem maintains the same level of activity in 2024…

Find out more about start-up investment trends in Africa at Africa: The Big Deal, a project by Max Cuvellier Giacomelli and Maxime Bayen.