The major African tech breakthrough of 2021 was that it is becoming easier for startups to close $100 million funding rounds, as Wave, MFS Africa, TradeDepot, and about eight others did. The trend has continued this year with InstaDeep, PalmPay, Flutterwave, Moove, and Wasoko (formerly called Sokowatch.)
Amid talk of a global slowdown in venture capital activity, African startups have raised more in each of the first five months this year than in the same months in the past four years (thanks to mega rounds by Wasoko and others). The US, and Asia saw declines in the first quarter this year versus last.
But a new report suggests that despite the funding boom for fast-growing startups, investors with an eye for Africa should aim to close a gap between seed and later stages.
The mushy middle in African startup funding
Produced by Endeavor Nigeria (a branch of Endeavor, the global entrepreneurship support organization) in collaboration with McKinsey and Company, the report (pdf) argues that strong growth in consumer spending, rural-urban migration, and digital penetration are acting as firm pillars for Africa’s nascent digital economy.
Venture capital investment in Africa has grown too, from $277 million in 2015 to $5.2 billion last year. Collaboration between foreign firms (Y Combinator, Tiger Global, Softbank, Visa) and local investors (TLcom Capital, CRE Ventures, Future Africa, Kepple Africa Ventures) has fueled that growth.
But it’s not enough that money is pouring into the continent. It also matters where it is going.
Investment activity in 2021 reinforced two patterns. Firstly, 80% of 681 deals were for seed stage startups raising between $200,000 and $5 million. Then at the later-stage end of the scale (above $50 million), there were fewer investments (21) but those commanded checks averaging $140 million. The result is that somewhere in between lies a mushy middle of underserved startups whose needs are between $5 million and $50 million, Endeavor Nigeria’s report shows.
From seed stage to series A, the number of investments into African startups fell off by 84% last year, the report shows (citing Crunchbase data.) The difference in investments between both stages in other regions is lower: 37% in the US, 70% in southeast Asia, and 66% in Europe.
The gap could contain ‘non-consensus’ opportunities
To be sure, investors tend to shy away from mushy middle startups because they are at a stage marked by uncertainty about product and market fit. It is easier for an investor to gamble small checks on very early stage startups (or even ideas) or go big on stable, fast-growing companies.
But the middle is “where we see an opportunity, because that’s often where you can come in for a great company at a great price before it accelerates and becomes obvious,” said Derin Adebayo, who leads the global Endeavor team’s Access to Capital unit. Citing an investment principle, he says the key is to be non-consensus and right.
And the argument for investors to take the plunge is that Africa’s digital economy—whose value is projected to reach $712 billion in 2050—is at an inflection point, accelerated by the impact of covid-19 on appetite for digital services, and an increasing supply of software developers and other tech talent in Nigeria, Kenya, Egypt and South Africa.
Some of what the report advocates for is already happening. For example, each of the 4 rounds Tiger Global has led for African startup deals this year—Float (Ghana), Bamboo (Nigeria), Union54 (Zambia), JABU (Namibia)—has been for around $15 million.
But Tosin Faniro-Dada, Endeavor Nigeria’s CEO, says this doesn’t have to be left to super investors like Tiger Global. “I’ve sat down with people who have never been to Africa but they have the funds to invest. Many still don’t have context about Africa.”