It is the Great Sobering and everyone is asking harder questions.

Gone are the days of idly arguing about how racism manifests in lower (but still high) valuations for African startups compared to their US and European peers. Gone is the “tech is the new [insert natural mineral/commodity]” vibe. And gone are quite a few of the companies born (and which blossomed) at the beginning of the roaring Twenties.

Almost three months ago, I wrote “There was nothing special about raising $5 billion” for the September 11 issue of Next Wave. By now it should be clear why—brace yourself for it. There was nothing special about raising $5 billion because there is nothing special about how venture capitalists (VCs) funded African tech/tech-adjacent companies. Context is the differentiator, the “special”. As the stream of capital made its way into Africa from celebrated US and European funds, context was mostly lacking.

I mean, there is always something special about making investment decisions if you’re on either side of the table. And there are certainly a lot of unique opportunities in Africa. But the advent of venture capital, that distinctly American flavour of private equity, with legendary offspring like Genetech, Apple, and Microsoft, has not found its African palate.

Becoming lean again. Chart design – Mobolaji Adebayo, TC Insights

Outside of the PR and media spotlight, people are only now asking hard questions more often and openly. As a journalist, I cannot help but notice the flood of second-guessing that trails the announcement of a formerly well-funded startup shuttering its doors, or a new one opening shop. It seems like everyone, from the investment committee to journalists and even users, are asking, “What is the business?” with more earnestness than was common in the heady days of 2021.

It is the Great Sobering. The realisation that technology won’t change much if you remove the nitro-boosters. And how little we understand (and pay attention to understanding) what scaling ventures beyond VC means. There is enough hangover to go round—journalists, tech bros, VCs and of course, the annoyingly ever present, regulator-incumbent class.

Checkpoint financing

It was bound to happen. Local VCs helped catalyse foreign investment into the space. Founders took advantage of the momentum to float their boats. And when venture capital, a tiny (relative to global PE holdings) but loud asset class combines with the obscure nature of private markets, you have a good recipe for entrepreneurial inebriation.

The bill of the thrill is expectedly high. Like the drunk Nairobi boda (motorcycle) driver who, with me riding pillion, sped recklessly for 15 minutes, collected 1000 Kenyan shillings, (instead of 200 Kes) and dropped me at the wrong address (my fault), when I first visited Nairobi.

But all of that is changing now. A rising tide lifts all boats, and when it ebbs, it leaves the naked swimmers without cover. Semil Shah, co-founder of Haystack, an early stage investing outfit writes, “For an early-stage founder, it can feel like the walls are closing in. And they are. In previous downturns, startups could still be acquired for modest or great sums; today, these types of transactions feel frozen, and larger-cap acquisitions face regulatory, shareholder, and balance sheet scrutiny.”

Checkpoint financing means founders and VC investors alike will need to prove to their investors that they can clear milestones over and over again. Even if it’s just for show, no one wants to look like a softie, “…the larger the financing, the more checkpoints to clear,” notes Shah. Ask your friends who have raised or are trying to.

Read: AXA Mansard is partnering with Insurtech innovators to disrupt the insurance ecosystem

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Experimentation and data over-replication

Personally, I am growing fascinated with incumbent businesses in Africa. Businesses that have grown through the structural deficiencies that permeate African markets. This is not to ignore that a good chunk of these businesses were built on patronage networks and deals that would be grounds for jail or worse in more organised societies. It is to understand why the few that thrive outside the shady corners do so, where their analogue strengths are greatest, and how they sustain distribution networks across diverse markets.

Photo: Chasing Outliers: Why Context Matters for Early-Stage Investing in Africa, © Tayo Akinyemi, Osarumen Osamuyi

Going deeper by understudying incumbents and running experiments will become “importanter” as we navigate a changing market. Venture studios and hands-on learning while building should be the focus. It is not a new point to make. This is the point Scott Walker and Belinda Bowling are fixated upon with the African Scalecraft project, a study of the enablers, and future pathways for scaling commercial ventures in Sub-Saharan Africa.

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TechCabal Insights has partnered with Zone (formerly known as Appzone) to release a whitepaper on payment infrastructure in Africa.

In it, they explore the challenges that sit at the heart of innovation within the space, and what stakeholders in the private and public sectors need to do to address these challenges. They also look at the work that’s being done by innovators in the industry. Download your free copy here.

“Many of these opportunities will be discovered through experimentation and exploited through stellar execution. In many cases, large, profitable opportunities in Africa are more likely to be created by deploying well-understood business models in poorly understood markets, rather than relying on frontier technology and innovation,” note the authors of Chasing Outliers: Why Context Matters for Early-Stage Investing in Africa. More than ever, investors and founders will need to immerse themselves in research and education. The payoff will be enormous for people who are patient enough. If this sounds like too much work for an investor or founder, maybe you should reevaluate your approach.

If anything, 2021 opened a door to unlock the entrepreneurial power in a digital Africa. It was never a call to celebrate Africa rising 2.0, but to understudy how a digital revolution in the demography and economies of Africa could create new opportunities. We would probably have been better off for it, if a piece of the capital inflow over the past three years had been devoted to researching and learning about markets over starting new companies with hyper-growth-at-all-costs thinking.

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The Next Wave show-ad

On the third episode of The Next Wave show, we speak with Buchi Okoro, founder and CEO of Quidax and Marius Reitz, general manager for Africa at Luno. They talk about how Africa’s crypto industry is evolving, what adoption on the continent will look like over the next few years, as well as how stakeholders can effectively balance the gains and risks associated with cryptocurrencies.

If you missed the broadcast on CNBC Africa, you can catch up here.

The Next Wave is brought to you by TechCabal in partnership with Flutterwave. It airs on Wednesdays at 4:30 PM (WAT) on CNBC Africa (DStv Channel 410)

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