Between Q1 2023 and Q1 2024, at least five South Africa startups managed to raise follow-on funding rounds. In a funding downturn, raising one round is already tough enough, let alone two within a year, making this feat by startups like Planet42 and Carry1st all the more impressive. 

Over the last two years of the VC downturn, the South African ecosystem has shown more tenacity than its peers across the continent, according to VC firm Partech. Business culture and macroeconomic conditions are the top two reasons South Africa has bucked the trend, said ecosystem experts.

Apart from startups in the country being able to raise follow-on funding, South Africa was the only ecosystem in sub-Saharan Africa to see an increase in average valuations in 2023, according to data by MAGNiTT. The country also held its ground in terms of attracting venture capital in terms of deal value and volume.

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“Despite a -34% YoY decline in total equity funding in 2023, South Africa has been the most resilient ecosystem in the top 4, emerging as the new leader of the African tech funding landscape,” Partech shared in its annual report.

Some investors state that at the peak of VC inflow into Africa, South Africa was mostly left behind by countries like  Nigeria, Egypt and Kenya. Development Finance Institutions (DFIs), major contributors to VC funds on the continent, believed that the country was “too developed” to pour funds into. Local institutional investors also did not back the VC asset class due to perceived risk.

“SA startups may not be paper unicorns, but they are generally robust, sustainable and capital efficient,” says Keet van Zyl, managing partner at Knife Capital told TechCabal. He added that South African startups also have a good balance of sensible valuations based on real unit economics, which makes them investible in a macroeconomic slump.

Will Green, co-founder of business development firm Co.Lab, concurred that because of how risk-averse the South African VC market has been in the past, startups have had to build solid businesses to even get a sniff at VC cheques. When the market reset as it did, those principles of good unit economics and fundamentals have proven to be the saving grace for the SA ecosystem, Green told TechCabal.

Macroeconomic resilience is a factor

Despite facing high unemployment levels, load shedding and a declining currency, South Africa’s macroeconomic fundamentals have held up compared to most of the continent. For example, while Nigeria’s inflation throughout 2023 was 24.5%, South Africa’s 6.0%. Additionally, while the Kenyan shilling devalued by 20% against the US dollar in 2023, the South African devalued by 8%.

According to Clive Butkow, managing partner at Conducive Capital, the resilience has trickled down to the country’s startup ecosystem. SA’s currency, inflation and other macroeconomic factors have held up better than peers, Butkow told TechCabal. However, Butkow admits that being able to raise capital internally enabled the South African ecosystem to weather the great American VC flight. 

Over the last year and a half, South Africa has seen a rise in capital from banks, pension funds and family offices being funnelled into VC funds. According to data from the Southern Africa Venture Capital Association (SAVCA), 11% of South Africa’s private equity (PE) firms investments went to technology companies. This represents the highest investment of any sector by the country’s PE firms. 

What is interesting about the companies that private equity investors are backing is that most of them recorded a “rapid growth in revenues”, according to the report by the SAVCA,  perhaps showing investors’s principles for companies with solid unit economics. Additionally, the startups that raised follow-on capital, Carry1st and Planet42, are rapidly growing, having collectively raised hundreds of millions of dollars in venture and debt funding. Carry1st is a mobile game publisher while Planet42 is a rent-to-buy car subscription service. Carry1st’s latest round was $27 million while Planer42’s has raised $150 million.

More data from the African Private Capital Association (AVCA)  shows that the southern Africa region attracted the highest volume (26%) and value of deals ($2.6 billion) with South Africa in front amidst growth in sectors like IT, software, logistics, and transportation.

In showing faith in South Africa’s tech startup ecosystem, investors have also reaped rewards, perhaps motivating them to further invest either directly in startups or VC funds. In 2023, exits in the South African ecosystem returned investors R318 million (~$17 million), representing a 3.8x return multiple on the R83 million (~$4.4 million) invested in such deals.

How long can South Africa’s resilience last, though?

The funding winter is not showing any signs of abating. Every quarter, data reports from publications such as TC Insights paint a gloomy picture, with deal volumes and values declining. Even in South Africa, despite its tenacity, startups such as WhereIsMyTransport have had to shut down due to funding challenges. With some startups having raised bridge rounds, a longer funding winter is likely to affect dilution and cap tables, leading to a further cashflow crunch.

So in light of the uncertainty of the funding environment for the foreseeable future, how long can the South African ecosystem keep holding out? 

According to van Zyl, this will vary from company to company. Still, overall, he expects the majority of startups which have learnt from the ecosystem’s values to hold out for as long as possible. “The great startups will remain tenacious.”

Butkow also expects South Africa’s relatively stable macroeconomic fundamentals to sail startups through the stormy funding weather. Additionally, he also expects the country’s low-risk profile to help attract foreign capital into local VC funds and startups. “For investors, risk equals uncertainty and when you have limited capital, you want as little relative uncertainty as possible and SA offers that.”

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