• Tuesday, July 23, 2024
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Investors vie for control amid Africa’s tech funding drought

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Tech companies in Nigeria and other parts of Africa came short on the funding trail, finding it difficult to convince investors to sign more cheques than they did in the previous year or even fulfil existing funding obligations in the first quarter of 2023. Instead, investors are revisiting their funding agreements and tightening loose ends, which could include discontinuing a funding pledge or taking more stringent measures to protect their investments.

The total funding raised by tech startups in Africa in Q1 2023, at $700 million, was the least they have seen in two years. It dropped by 29 percent when compared with Q1 2022, according to data from the Big Deal. The report showed that the number of deals at $100,000 and above also declined with around 150 recorded in Q1 2023, less than half the Q1 2022 tally at over 300.

“You have to go back to 2020 to find a quarterly number of deals so low,” said one of the authors of the Big Deal report, Max Cuvellier, head of mobile for development, GSMA.

The startups raised only $66 million in March 2023, making it the worst month in 2.5 years (since August 2020) and the first time the monthly amount of funding raised by startups in Africa dropped below the $100 million mark since 2020.

Jide Adamolekun, chief financial officer, Autochek, says the decline could be deeper than 29 percent. The Big Deal notes that the decline hits 52 percent year-on-year when exits are excluded. Disrupt Africa, an Africa-focused media company that also publishes funding reports puts the quarterly decline at 57.2 percent.

Nigerian tech companies appear to be the most affected with funding in the ecosystem dropping by 92.1 percent in Q1 compared to the same period in 2022. Samuel Okwuada, co-founder and CEO of Remedial Health, tells BusinessDay that late-stage tech companies are among the most affected as they are struggling to secure funding due to a shortage of active local investors that support their needs.

“Early-stage pre-seed and seed deals are still happening but are relatively few and far between,” said Okwuada.

The funding drought has seen some tech companies cut the number of workers they have to survive while others have simply closed shop. Over 1,000 tech workers have lost their jobs as companies like 54gene, OnePipe, Nestcoin and Lazerpay, conducted layoff activities. Companies in the cryptocurrency space appear to be the most impacted by global funding, with about four companies ending their operations.

Although the hike in interest rates from countries like the United States of America and the United Kingdom accelerated the economic meltdown in most companies, experts say the funding decline is mainly a market reset from the hype that has characterised activities in the global tech ecosystem in recent years. Many venture capital and equity investors have splashed dollars on different tech startups in the hope they will secure big returns on investments or an exit once the valuations of these companies rise.

“VCs are making fewer deals and at lower valuations. Even though many investors still have significant funds, they are being more painstaking in their due diligence and taking longer to deliberate before making any commitment,” Adamolekun said.

An investor who preferred to remain anonymous to speak freely said the market meltdown was not a result of a lack of capital in investors’ hands. As a matter of fact, many venture capital firms have raised fresh funds in the past year as they plan to deploy in startups on the continent. For example, Partech, a Parisian venture capital, announced in February that it secured an initial $250 million in funding for its second AfricaTech LP vehicle, surpassing its initial target of about $235 million. The African fund now plans to reach a final close of not more than $300 million. Partech’s first fund for Africa, invested in 17 tech companies at Series A and B stages across nine countries that operate in 27 markets.

Google also announced in February that it was receiving applications for the third cohort of its Black Founders Fund for startups in Africa. The fund’s goal is to promote job creation and wealth generation in the continent. The programme provides startups not only funding but also hands-on support, connections, and resources to help founders build solutions that are relevant to the African economy.

While tech companies remain attractive, investors are wary of staking money on the potential of a startup to deliver what the founders are promising. Recently, investors have been quick to invoke the Act of God clause in many of the startup agreements.

The Act of God is given as a force majeure clause that protects the investor from any contractual liabilities that are outside human influence. The clause eliminates or limits liability for injuries, damages, or other losses related to natural catastrophes. While this clause became prominent in the COVID-19 pandemic era, today investors can invent any circumstance as an ‘Act of God’.

The nature of funding is such that startups rarely receive in cash the total amount of money promised in a funding raise. When a founder approaches an investor for funding and manages to convince him to commit, the investor hardly takes out a cheque and signs the money despite an announcement having been made as to the raise. The funding is usually a commitment by the investor to fund the startup based on the fulfilment of certain conditions. The funds are eventually released in tranches which are stated in the funding agreement.

The VC investor BusinessDay spoke to said it is often impossible to argue or do anything against an Act of God or when an investor decides to withhold his promise. Founders that plan to seek relief are often advised not due to the repercussions.

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“Investors talk to each other. So when you go against one investor, he might decide to put a bad word in the ears of the next investor you are targeting which could end the funding plans. So when an investor decides to go back on their commitment, the best some founders can do is to cut their losses and move on. That is why you are seeing more companies cutting the number of workers taking pay cuts to continue to run their businesses because there is little they can do,” the investor said.

Some experts say the outlook remains positive for startups in Africa. Local investors are expected to increase their positioning in the tech funding market thereby bridging the wide gap that has existed for a long time. Recent funding deals have seen local investors or Africa-focused funds take leadership positions. Adamolekun expects to see a consistent level of early-stage investments as these funds are placed and equipped to fund companies at that stage. For growth-stage companies and more mature startups that need more significant capital, Adamolekun says there is a need for more mature and sophisticated capital to meet their investment needs.

“The local investment community has stepped up in some ways to fill in some gaps, especially with seed-stage companies or companies needing a bridge round to help power through the hard times or scale up rapidly. However, these deals are relatively few and far between,” Okwuada, co-founder, and CEO of Remedial Health, said.

He said tech companies that plan to survive the current market crisis need to quickly adapt by prioritising profitability. Doing this may require reducing their burn rate and becoming more capital efficient to increase their chances of long-term success.