Africa’s Reliance on Foreign Investors for Mega Tech Deals
Africa’s tech sector has become increasingly dependent on foreign investors for large-scale funding, primarily due to the limited capacity of African private equity funds and venture capitalists to lead rounds of $100 million or more, commonly referred to as mega rounds. While there are notable African firms like Partech that invest in the growth stage of tech companies with a sizable fund of $265 million, their maximum individual investment per deal is capped at $15 million. The scarcity of African firm-led mega rounds is evident, with only a few exceptions such as AfricInvest’s $100 million investment in payments company Onafriq (previously MFS Africa) in 2021, a significant portion of which was raised as debt.
Seeking Ambition and Validation from Global VCs
In addition to the funding limitations, African startups have actively sought out top global venture capitalists (VCs) to not only secure funding but also to signal ambition and validate their aspirations for global reach. By partnering with global VCs, these startups can tap into their extensive network of companies and investors for sales opportunities and future exit plans. Although global VCs have shown interest in African startups in recent years, with investments from Softbank raising the valuations of OPay and Andela to billion-dollar levels in 2021, the current economic crunch reveals the complexities of this engagement.
Global Investors Retrenching and Focusing on Existing Portfolios
The ongoing economic challenges have caused many global investors to retrench and focus primarily on nurturing their existing portfolio companies. This has led to a reduction in the pricing and volume of growth-stage deals in Africa, affecting the overall availability of funding for tech startups. Lexi Novitske, a partner at Africa-focused firm Norrsken22, points out that global investors like Tiger Global and Softbank are unlikely to invest in Africa in the next 12 months. These firms have become more conservative in their investments, prioritizing sub-sectors and geographies where they have expertise and where there is a more liquid market for big billion-dollar exits.
Navigating the Dynamics of Engagement
African startups face the ongoing challenge of navigating the dynamics of engagement with global VCs. While they require the funding and resources that these investors bring, they must also contend with the shifting investment strategies and focus areas of these VCs. It is crucial for African startups to align their goals and strategies with the specific expertise and market conditions that global VCs are targeting. By understanding these dynamics, startups can position themselves more effectively and increase their chances of securing the necessary funding for growth and expansion.
The Path Ahead for African Tech Startups
As Africa’s tech sector continues to grow and mature, it is essential for the continent to develop a robust ecosystem of local private equity funds and venture capitalists capable of leading mega rounds. Building a network of homegrown investors who understand the unique challenges and opportunities of the African market will help reduce the reliance on foreign investors and provide more funding options for startups. Additionally, African startups need to forge strategic partnerships and collaborations with global VCs that align with their growth plans and provide access to the resources and networks needed to expand their reach on a global scale. By navigating these dynamics effectively, African tech startups can chart a successful path forward and contribute to the continent’s overall economic development.
Analyst comment
Neutral news. The African tech sector relies heavily on foreign investors for large-scale funding due to limited capacity of local funds. However, the current economic crunch has led to global investors retrenching and focusing on existing portfolios, reducing funding availability. African startups must navigate the dynamics of engagement with global VCs, aligning their goals and strategies. Africa needs to develop a robust ecosystem of local investors and forge strategic partnerships with global VCs to reduce reliance on foreign investors and ensure funding options for growth.
