• Tuesday, July 16, 2024
businessday logo


Why Africa startup funding declined in Q1

Startups borrowing falls as equity funding rebounds in Q1

Funding raised by African startups declined by 57.2 percent in the first quarter of 2023 as startups begin to feel the bite of economic recession, the latest report by Disrupt Africa shows.

Startups have raised $649 million between January 1 and March 31 this year, compared to $1,5 billion reported in the same period of 2022.

However, in terms of the volume of deals realised, In the first quarter of 2022, 175 startups secured funding, down 87 startups that have raised capital in the first three months of the year.

Oyindolapo Olusesi, co-founder of Mustarred Crest attributed the decline in funding to the persisting macroeconomic issues facing the economy, tightening monetary policies, hikes in interest rates, etc.

“Africa is not faced with the problem alone, as global startup funding in the first quarter of 2023 is in decline, falling to $76 billion from $162 billion last year,” Olusesi said.

However, experts suggest that the decline in funding for African startups is due to a combination of factors, including the ongoing economic downturn, investor caution, and a lack of viable business models. Some also point to the challenges African startups faces, such as poor infrastructure, regulatory challenges, and limited access to funding.

Despite these challenges, African startups remain resilient, with many continuing to innovate and create new business models to drive growth in the sector. The key now is for investors to recognise the potential of the African tech ecosystem and provide the necessary support for these startups to thrive.

Read also: Tekedia Capital woos investors to aid funding of early-stage startups in Africa

In 2022, Disrupt Africa reported that Nigeria led the way, but the “big four” share continues to decline, Nigeria was the best-funded country in Africa for the second year running, with 180 startups (28.4 percent of Africa’s funded ventures) raising a combined $976 million (29.3 percent of the continent’s total) – substantially ahead of all other countries on both counts. In the continent’s other leading startup ecosystems, Egypt and Kenya reported decent growth, while South African funding fell from 2021.

A report on how inflation impacts venture capital and startup investment by Zapflo disclosed that “Running an early-stage start-up is extremely difficult. Due to a lack of organizational structure, limited networks, and expertise, combined with operational inefficiencies and a small customer base, generating a net positive cash flow is tough. These internal, firm-specific factors are only made worse when combined with the external impact of inflation, which adversely impacts the entire economy.”

Nigeria’s headline inflation for the month of February increased by 21.91 percent representing a 0.09 percent surge from January’s inflation rate of 21.82 percent, National Bureau of Statistics data shows.

However, this inflationary trend is not peculiar to Nigeria alone, record high inflation rates have been witnessed across major economies of the world largely due to the disruption of supply dynamics as a result of the Ukraine-Russia conflict which started in the first quarter of 2022.

The inflation rate in the United States of America touched an unprecedented level of 9.1 percent in June 2022 before slowing down to 6 percent in February 2023 while the United Kingdom’s inflation rate got as high as 9.6 percent in October 2022 before gradually easing to 8.8 percent as of January 2023.

According to the latest Global Economic Prospects report, global growth will slow from 2.9 percent in 2022 to 1.7 percent in 2023. The outlook has several downside risks, including the possibility of higher inflation, even tighter monetary policy, financial stress, and rising geopolitical tensions.

Apart from the macroeconomic recession, and the collapse of the silicon valley bank which was later acquired by the first citizen bank, although startups may not have been directly impacted by the run on SVB, there were indirect consequences as many founders had their money with the bank.

“It is not an issue peculiar to Africa. It is a global issue. Investors will be more scrutinous with their dealings and founders will need to be more transparent in their use of investor money going forward,” Olusesi said.