Startup Funding Drought: Where Are Africa’s Once Prolific Investors Going?

Africa’s burgeoning tech startup ecosystem, once a magnet for global investors, is currently experiencing a harsh reality. The once-promising landscape is now marred by a significant decline in startup funding. With a 57% drop in funding secured in the first half of 2024 compared to the previous year, the continent is grappling with a funding drought that has sent shockwaves through the entrepreneurial community. 

The Drying Investment Well

The data is stark: a significant portion of investors reviewed (about 59.1%) have curtailed their funding activities in 2024. This trend is evident among both local and international players. Firms like Voltron Capital and Zrosk Investment Management in Nigeria, Beyond Capital Ventures in the USA, and Nclude and A15 in Egypt are among those that have significantly reduced their investment pace.

The repercussions of this funding winter are far-reaching. Several investors have suffered substantial losses due to the recent failure of their African portfolio companies. EchoVC, DoB Equity, MSA Capital, Adaverse, Remapped Ventures, and B&Y Venture Partners are prime examples of firms grappling with the fallout from high-profile startup failures.

A Shift in Focus: Geographical Diversification

In response to the challenges in the African market, many investors (about 35.2%) are adopting a strategy of geographical diversification. This approach aims to spread risk and tap into new growth opportunities. Khwarizmi Ventures from Saudi Arabia, SOSV Select Fund from the USA, and Nama Ventures from Saudi Arabia are among those expanding their investment horizons.

Beta Ventures offers a compelling case study of this trend. The firm has dramatically shifted its focus away from African startups to explore opportunities in markets like Japan. Investments in HYDRONEXT, Enjoy Works, and Rayda underscore this strategic pivot.

The Missing in Action: Investors on Hiatus

A concerning trend is the emergence of a group of investors who have completely withdrawn from the African market (about 11.4%). Unicorn Growth Capital, Imperial Venture Fund, Accion Venture Lab, and KNF Ventures have been inactive for at least two years. While the reasons for this hiatus are varied, it undoubtedly exacerbates the funding challenges faced by African startups.

USA and Nigeria remain central to African venture capital, but a significant shift is occurring

• Geographical Distribution: The majority of African prolific investors reviewed are based in the USA (30.7%) and Nigeria (13.6%), highlighting these countries as major hubs for venture capital.
• Shift in Focus: Many of the investors are shifting their focus away from Africa, either diversifying geographically or ceasing investment activity altogether.
• Diverse Strategies: Investors from Asian countries such as Japan, China and Saudi Arabia are increasingly exploring geographical diversification, suggesting a broader strategy to mitigate risks and capture new market opportunities.
• Investment Pauses: A notable number of investors, especially from the USA and South Africa, have reduced their investment activities, reflecting either strategic reassessments or economic prudence. The termination of South Africa’s Section 12J tax incentive in 2021, which had provided substantial tax deductions for investments in venture capital companies, has significantly influenced investor behavior in the region. This policy change has resulted in a marked decline in South African investments in African startups.
• Regional Impact: The reduction in funding is particularly impactful in Nigeria, Egypt, and South Africa, regions that traditionally have been significant beneficiaries of venture capital but are now experiencing a slowdown.

Implications for the African Startup Ecosystem

The current funding drought has profound implications for the African startup ecosystem. A decline in investment can hinder innovation, job creation, and economic growth. Startups may face difficulties in scaling their operations, attracting top talent, and competing globally. Moreover, the exit options for founders and early investors become limited, dampening the overall entrepreneurial spirit.

Additionally, the shift in investor focus towards geographical diversification could mean that African startups will need to work harder to attract investment. They may need to present stronger value propositions, demonstrate more robust business models, and perhaps even seek out alternative funding sources, such as local investors, government grants, or crowdfunding platforms.

The Bottom Line

While the current scenario paints a grim picture, it also offers an opportunity for introspection and recalibration within the African startup ecosystem. Startups and investors alike must adapt to the changing dynamics. For investors, this might mean developing a deeper understanding of local markets, building stronger relationships with local entrepreneurs, and fostering more resilient business models. For startups, this period could serve as a catalyst to innovate under constraints, pushing for greater efficiency and sustainability in their operations.

The startup funding drought in Africa is a multifaceted issue, rooted in a mix of market volatility, strategic shifts by investors, and broader economic challenges. Understanding where Africa’s once prolific investors have gone requires a nuanced analysis of their current strategies, including reduced funding activity, geographical diversification, and complete inactivity. While the immediate future may seem uncertain, the resilience and ingenuity of African entrepreneurs, coupled with strategic recalibrations by investors, could pave the way for a revitalized and more sustainable investment landscape.

Africa’s startup investors Africa’s startup investors Africa’s startup investors Africa’s startup investors Africa’s startup investors Africa’s startup investors