Why growing VC investment does not match returns from Africa

The size of seed and angel venture capital (VC) deals globally rose slightly over the past two years, and was unaffected by the pandemic. According to Statista, in the second quarter of 2021, seed and angel deals were valued at $6.3 billion and a huge part of the $4.9billion African startups got at the end of 2021 is from VC.

This represents a growth rate of 258 percent compared to 2020, and is six times higher than the global average between 2015 and 2020.

Despite this huge investment from VC, Africa is seen to be the region with the lowest return in the world at 2.7 percent. Asia/Pacific recorded 11.1 percent, while the United States and Europe recorded 12.1 and 15.6 percent respectively.

Venture capital is the term used to call the financial resources provided by investors to startup firms and small businesses that show potential for long-term growth. While it is an important source of capital for entrepreneurs who often have problems with financing their needs through risk-averse banks, VC investments incorporate a high level of risk as only some of the VC-backed companies develop into successful and highly profitable businesses.

Read also: Buhari approves diaspora investment fund

Experts have attributed the poor performance range to regulatory policies across the continent including the ban on ride-hailing services in Nigeria, the tax on mobile money services in Ghana and Cameroon.

Also, structural barriers limit expansion for startups leading to limited growth. Factor in the reduction in gross domestic product (GDP) per capita from $1,599 in 2019 to $1,484 in 2020, which becomes clear why poor returns from investment are common.

This means that the African economy is contracting on a per capita basis whereby people are demanding less, sales are slow which in turn makes returns on investments low.

To curb low investment returns in the continent, startups are advised to leverage strategic partnerships with established companies to build new digital technologies that benefit both parties and the consumers at large.

More importantly, there is a need for governments across the continent to implement innovation-friendly regulations so startups and venture capitalists can thrive. Countries including Tunisia, Senegal, and Nigeria are beginning to change the narrative in this area by passing startup bills into law.

As the funding windfall continues, it is important that investors are able to receive significant returns from their investments in African startups, to encourage new and existing investors to pour more funds into projects and ideas innovated by Africans.