Funding for African startups has waned in recent months, with 2023 being one of the slowest years since the pandemic for deals both in volume and amount. Founders tell TechCabal what they think about the downturn.
The heady days when the African (read as Nigeria, Egypt, Kenya, and South Africa) tech ecosystem announced funding deals every week now seem like a distant past. Today, African startups are faced with a new reality where investor appetite has dropped. Some founders told TechCabal that in response to this, there has been a shift towards forgoing venture capital and instead focusing on attaining profitability. They also shared that other steps such as adjusting valuations, pivoting, and bootstrapping have been resourceful ways of navigating what has been a difficult period to raise capital.
According to data from The Big Deal, African startups have raised $536 million in 2023. For context, African startups had raised over $950 million by April last year, representing a 68% decline in 2023.
Considering the waning investor appetite, it is now highly recommended that founders approach investors with lower valuations for their startups. Bashir Aminu, the founder of Coinprofile, a YC-backed crypto startup, shares this opinion. “Companies might want to think about adjusting their valuations to better match the current downturn.” Aminu says this could help startups connect with investors and get funding more easily. “A more down-to-earth valuation can show investors that a company is being realistic and willing to adapt,” he added.
Axel Peyriere, an angel investor and the founder of AUTO24.Africa, an Abidjan-based startup, told TechCabal that he has noticed “more humility in founders’ mindsets”. He shared that startups in the big African markets are reducing their valuations. Peter Oriaifo, a partner at Oui Capital, a venture capital firm, agrees with Aminu. He told TechCabal that startups “need to compromise on valuations”. Aminu, however, added a note of caution for startup founders: “Of course, we still need to be careful not to give away too much control of a company in the process,” he said.
Peyriere added that the current funding climate will allow the ecosystem to mature faster and become more trustworthy. “Founders will [have to] rely more on clear metrics, economics, and KPIs. It’s not by how much you raise but by what you do with the money that you raise.” He added, “this will bring back trust and transparency with investors in general.”
Can acquisitions and pivots save companies?
Aminu said that the funding downturn might make things a bit tougher for companies trying to raise funds. He added that “startups might need to focus on making money and using their resources wisely, which could lead to stronger businesses in the long run. But it could also slow down growth and innovation for a bit. Plus, we might see more companies joining forces.”
Romain Poirot-Lellig, the founder of Kwik, a Lagos-based logistics startup, told TechCabal that the effect of the funding downturn on startups could see an increase in acquisitions. “So what we can expect is that startups that [have managed to scale up reasonably] are going to play a leading role in their verticals. They’re going to take about 20 of the startups that have not been able to scale up but may present some interest in terms of technology, market share, and staff,” he said.
Fluidcoins, Instadeep, Qualified, and AutoTager are some of the acquisitions that have happened this year. Some startups are also pivoting their business model. Treepz, a mobility startup with a pan-African presence, recently pivoted its business model to a car-sharing marketplace from a ride-hailing company that allowed users to rent buses, SUVs, and trucks.
Johnny Enagwolor, a co-founder of Treepz, told TechCabal that his company pivoted to focus on the best margins of profit. “Eventually, we took a hard look at the business to find out what model was giving us the best margins and could scale better. Then we decided to take a full pivot toward car-sharing,” he said.
Samuel Eze, the founder of OurPass, a fintech that recently pivoted from a one-click checkout to business banking, gave the same reasons for his company’s pivot. He told TechCabal that “when we decided to start scaling the product, it was already post-COVID, and the dynamics of the market had changed. [A one-click checkout solution] didn’t matter to businesses anymore.” He added that the company already has a path to profitability with its new offering.
A focus on due diligence
Peyriere told TechCabal that he hoped the funding downturn could help shine a brighter light on corporate governance practices for startups. In agreement, Yunus Ibrahim, an analyst at Future Africa, a venture capital firm, told TechCabal that for investors, the downturn meant an uptick in the intensity of due diligence processes and valuation deliberations.
“We are seeing more VCs conduct extensive due diligence to mitigate investment risks and increase the likelihood of portfolio companies returning the fund. Also, VCs are taking a more meticulous approach to valuations by negotiating better terms with founders and paying closer attention to unit economics and fundamentals,” Ibrahim said.
Yunus anticipates that in the long run, VC firms will likely reduce the number of companies they back while increasing ticket prices. Based on their convictions, some VCs may even prioritise specific sectors, he says. Eghosa Omoigui, general partner at EchoVC, a VC firm, described a situation where VC firms now intentionally drag out the investment process by sending money in tranches and paying closer attention to the startups.
He added that some VCs are also divesting themselves of some portfolio companies as they seek to keep tabs on the promising ones. “All of this points to a trying market putting founders and investors to the test. But the interesting thing is this could also be the best time for VCs to invest. There are great deals on the table at better terms, and founders are swifter to take advice,” he said.
What should startups do?
Elizabeth Yin, co-founder and general partner of Hustle Fund, a US-based venture capital fund, shared on Twitter that investors are choosing safer options, such as sitting on dry powder, instead of risky investments like startups. She advised founders to ignore investors for the next year and instead focus on trying to get to profitability.
Oloyede Gbolarin is the CEO of Fonder, a bootstrapped gifting startup. He told TechCabal that his 5-month-old startup is forgoing investors that have shown interest for now and is instead bootstrapping as a way of “weathering the storm”. “We started accounting for the impact of the current funding climate early on, as the low investment terrain coincided with when we started developing our product and company. We envisioned a situation where we might have to rely on our personal resources and acted accordingly, deciding to bootstrap for as long as possible and not to seek out any exorbitant funding,” he said.
Omoigui’s earlier point proves that startups may need to prepare for more extensive due diligence processes (which may continue after a cheque has been written). Founders must also prioritise the creation of sustainable businesses with strong unit economics, which ultimately provides them with the compelling competitive advantage that creates market leaders.