Africa Erupts As A Deal Hotbed

Resilient global venture capital flows are propping up Africa’s tech startups.

Duplo, a Nigeria-based business-to-business payment platform, recently raised $4.3 million in seed funding. The effort was so successful that venture capitalists offered the startup more money than it asked for, according to co-founder and CEO Yele Oyekola. In fact, the company “had to turn down” some investors because it was oversubscribed.

“This new funding will enable us to address bottlenecks that hinder the seamless flow of money in other sectors, and to further transform how they make and receive business payments,” says Oyekola. “If you’re solving a big problem in a big market, with a good team that delivers tangible results, investors will always be happy to take a look at what you are doing.”

Lately, investment firms are certainly happy to look at Africa-based companies—especially those that specialize in fintech.

One of those firms is Oui Capital, which—alongside Liquid2 Ventures, Soma Capital, Tribe Capital, Commerce Ventures, Basecamp Fund and Y Combinator—invested in Duplo.

“Africa has come of age,” says Peter Oriaifo, principal at Oui Capital. In August, the Lagos- and Massachusetts-based firm completed the closing of a $30 million fund, its second, dedicated to African tech ventures.

There are “key catalysts working” to Africa’s benefit, Oriaifo says, citing “falling data costs” and improved internet access. Internet use in Africa grew 23% between 2019 and 2021.

There’s also the Africa Continental Free Trade Agreement (AfCFTA), which has supercharged Africa intraregional trade and e-commerce. This makes it even more imperative for cross-border payments within the continent to be faster, mobile and digital, he explains.

Fintech is also helping make financial services more accessible to Africa’s growing population, which is expected to double to 2.5 billion people by 2050. Countries such as Nigeria will see its population grow from the current 200 million to 400 million.

Similar growth trajectories have been projected for the continent’s other highly populated nations, such as Ethiopia and Kenya, whose economies have also been hubs of investment for tech. Ethiopia just approved a policy that allows foreign banks to do business in the country—a major boost to the fintech sector.

Indeed, the landscape is ripe for deal-making. In 2021, a total of $4 billion in venture capital was channeled into African tech startups.

Advisory firm McKinsey says the number of tech startups operating across Africa surged to 5,200 in 2021. Nearly half of these startups were in fintech.

The trend continued in 2022. Start-up funding for companies in the region reached $3.6 billion for the eight-month period of January to August, according to Africa: The Big Deal, a database that tracks venture activity across the continent. That “compares really well to the same period in 2021,” which recorded $2.3 billion.

Also, the number of $100,000-plus deals increased from 486 last year to 608 this year, the report continued.

Rather than a “fintech disruption,” Africa is currently experiencing a “fintech eruption,” one expert from McKinsey said, adding: “Local and international investors [are] taking notice—African fintech is emerging as a hotbed” for deals.

With just about 456 million adults in Africa projected to have bank accounts by the end of this year, it is up to local fintech players to introduce solutions that boost financial inclusion through mobile apps, digital wallets and online payments.

Fintech startups have become so important for Africa that they now have combined revenue of up to $6 billion, McKinsey reported. The overall value of the sector is expected to reach $230 billion by 2025. Such robust flows of financing have been pivotal for a number of African countries, including Nigeria, which continues to attract the highest volume of financing.

Other top destinations for global tech venture financing include Egypt, Kenya and South Africa. These African markets make up a third of Africa’s startup incubators and accelerators and get as much as 80% of the foreign direct investment (FDI) that flows into Africa’s tech industry, according to African Development Bank’s (AfDB) 2021 report. Tanzania, Uganda, Senegal, Kenya, Zambia and Morocco are also garnering interest.

The continued attractiveness of African startups for venture capital can also be attributed to “increasing investor appetite for riskier opportunities spread over the past five years,” says a Nairobi, Kenya–based investment associate.

Fintech startups that ran successful fundraising include Egypt’s Fawry, Senegal’s Wave Mobile Money and Nigeria’s Flutterwave, which is now pursuing an initial public offering.

Beyond Fintech

Even though fintechs are getting the lion’s share of the continent’s venture capital, other sectors—e-commerce, mobility, e-health and logistics—also appeal to global investors, so long as there’s stability and growth prospects in the markets where they invest. This helps them determine the prospects of success for the African ventures they choose to fund.

African startups “operating in stable regions that can demonstrate good market traction and strong growth, along with good fundamental operating metrics, continue to attract interest from investors,” Spike Ventures managing partner Todd McIntyre says.

Spike Ventures has contributed to a $30 million capital raise by Algeria-based Yassir, which targets French-speaking African markets with an app that provides on-demand services such as ride-sharing. 

For McIntyre, it is a case of ticking the “important checkpoints” in pursuit of proper due diligence when deciding which startup to invest in. It is also important to include a lead investor with in-region experience and to determine the “CEO quality and experience in-region,” McIntyre says.

Spike, for its part, peruses the “team composition, revenue and customer acquisition metrics, as well as overall size” of the addressable market for each solution, he explains.“African startups are often addressing some of the primary needs of consumers, like mobile banking, ride-share and food delivery,” he says.

Interest and appetite to invest in African tech, however, mirrors global trends, where rising interest rates, inflation and supply chain disruptions are also impacting investment flows. As a result, the pace of deals has somewhat slowed in recent months compared to 2021. African tech startups raised $247 million in July and $228 million in August. That’s down from 2021, when tech startups raised $309 million in July, $683 million in August, and $824 million in September.

“Growth-stage investors are grappling with repricing in the public market for technology stocks,” Oriaifo says. Public markets “are the ultimate buyer for startups, hence this pricing comes into focus” for growth-stage venture capitalists, he says. “Unsurprisingly, we’ve seen growth-stage VCs move down-market in recent months, displaying interest in seed-stage deals, likely in an attempt to achieve better entry valuations.”

McIntyre and other executives with Africa-focused VCs agree. “Investors are being more cautious across the board and conducting greater due diligence” whenever they see an opportunity, he notes.

For Dare Okoudjou, founder and CEO of Johannesburg-based MFS Africa, “The global macro issues haven’t changed the fundamental issues that fintechs, like MFS Africa, are trying to solve” across the continent.

MFS Africa, which operates a digital payments hub, received one of the biggest VC checks for an African company. After securing $100 million in August, MFS Africa extended its Series C capital raise to $200 million and plans to use the fresh capital to invest in other African startups.

This has boosted its offerings, as it forays into debit and credit cards linked to mobile money accounts, rather than bank accounts. The switch operated by MFS Africa interlinks about 400 mobile money platforms from Zimbabwe, Kenya, Nigeria, Ghana, Tanzania and the Democratic Republic of Congo, among other African countries. This allows for speedy settlement of cross-border payments, including remittances and business-to-business transactions, via mobile money and digital platforms.

Okoudjou believes that the market opportunity for these types of businesses is still massive, emphasizing that “companies solving big problems should be able to continue to raise money” from global investors.

“The second half of this year will be telling, but the first half of 2022 saw venture funding increase by 125% over the first half of 2021, indicating that cash for the right African tech businesses is still out there,” he adds. “That said, the macro climate will cause investors to rightly be more focused on valuations and path to profitability.”