The Decline of Global Investor Activity in Africa’s VC Market in H1 2024

The Decline of Global Investor Activity in Africa’s VC Market in H1 2024 has become rising strong concern in the Africa Venture Market.The first half (H1) of 2024 has been a pivotal period for Africa’s venture capital (VC) market. While the continent’s startup ecosystem has shown resilience and continued to grow, a significant shift has been observed: a noticeable decline in global investor activity. This trend, though concerning, has been balanced by a rise in local capital, suggesting an emerging confidence in Africa’s potential and a recalibration of the funding landscape.

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The Global Pullback: Understanding the Causes

The decline in global investor interest in Africa’s VC market can be attributed to several interrelated factors. Chief among these is the ongoing economic uncertainty that has lingered since the COVID-19 pandemic. The pandemic’s effects, coupled with geopolitical tensions, rising interest rates, and inflationary pressures, have created a more cautious global investment environment. Investors, especially those from developed markets, are increasingly prioritizing mature markets or sectors perceived as less risky. This has resulted in a tightening of the purse strings when it comes to investing in emerging markets like Africa.

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In H1 2024, Africa saw a significant reduction in the number of unique investors, with a 29% year-on-year (YoY) decline compared to H1 2023. This decrease is largely attributed to a marked pullback from investors based in key African markets, such as South Africa, Kenya, and Nigeria, which collectively experienced a 46% YoY drop in investor participation. In contrast, unique investors from Egypt showed resilience, nearly doubling their number from 11 in H1 2023 to 20 in H1 2024. Despite this increase in Egyptian investors, the overall trend reflects a broader hesitancy among local and international investors to engage with the African market during this period.

Additionally, the competitive nature of Africa’s startup ecosystem has intensified. With an increasing number of startups vying for funding, the pool of available capital has become more stretched. This heightened competition has made it more challenging for startups, especially those in later-stage funding rounds, to secure the substantial investments needed to scale. The allure of Africa’s potential is undeniable, but for global investors, the perceived risks are prompting a more selective approach.

The Rise of Local Capital: A Silver Lining

Amidst the global pullback, local capital has emerged as a critical force in Africa’s VC market. Several factors are driving this trend, which may signal a long-term shift in the continent’s investment dynamics:

1. Growing Confidence in the African Market: The maturation of Africa’s startup ecosystem has not gone unnoticed by local investors. The successes of homegrown tech giants and the rapid digitalization of economies across the continent have bolstered confidence. Local investors, who better understand the nuances and potential of their markets, are increasingly willing to bet on the success of African entrepreneurs.
2. Increased Access to Capital: The financial landscape in Africa is evolving. The development of local financial institutions, coupled with the establishment of new investment funds focused on African startups, has increased the availability of capital. These local entities are now playing a more prominent role in funding startups, reducing the sector’s dependence on foreign capital. Since 2021, there has been a steady increase in the participation of local investors in Africa’s venture capital scene, reaching 39% in H1 2024. This figure represents a 15 percentage point increase from H1 2023 and signifies a 2.6x rise from the levels seen in 2021. Notably, when excluding MEGA deals, the share of capital deployed by local investors would have been even higher, at 52%, indicating that smaller and non-MEGA deals are largely supported by local capital.
3. A Focus on Supporting Local Entrepreneurs: Beyond financial returns, many local investors are driven by a desire to support the growth of African businesses. This sense of purpose is not only about profit but also about contributing to the continent’s broader economic development. As a result, there is a growing emphasis on investing in startups that align with the unique needs and opportunities within Africa.

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Investor Types and Trends

The composition of investor types remained relatively stable, with venture capital firms (VCs) continuing to dominate the scene, accounting for 55% of all investors in H1 2024. This proportion aligns with the trends observed in other emerging venture markets (EVMs) like MENA and Southeast Asia (SEA). The share of accelerators, however, decreased slightly, while investment companies showed a gradual increase in their presence, rising from 11% in 2020 to 16% in H1 2024. This diversification in the types of investors reflects a broader shift towards more varied and potentially more stable sources of capital within the venture ecosystem.

Implications for Africa’s Startup Ecosystem

The rise of local capital has profound implications for Africa’s startup ecosystem. First, it offers startups more stable and culturally aligned funding sources. Local investors, with their deep understanding of the market, are often better positioned to provide not only financial support but also strategic guidance tailored to the African context. This can lead to more sustainable growth and a stronger alignment with local market needs.

Moreover, the increased presence of local capital reduces the reliance on global investors, whose involvement can be subject to external economic forces. This shift could lead to a more resilient entrepreneurial ecosystem, one that is better insulated from global economic volatility. Local capital is also more likely to support ventures with long-term potential, as opposed to those that offer quick exits.

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Navigating the New Landscape: Strategies for Success

For African startups, the decline in global investor activity presents both challenges and opportunities. To thrive in this new landscape, startups must adapt their strategies:

• Demonstrating Strong Fundamentals: Startups that can showcase solid business models, clear paths to profitability, and robust governance are more likely to attract local investors. In a more selective funding environment, fundamentals matter more than ever.
• Highlighting Social and Environmental Impact: African startups that can demonstrate a positive social or environmental impact will find themselves in a favorable position. Impact investing is on the rise, and local investors are increasingly looking to support businesses that contribute to sustainable development goals.
• Exploring Alternative Funding Sources: Beyond traditional VC funding, startups should consider alternative funding avenues. Angel investors, crowdfunding platforms, and government grants are all viable options that can help bridge the funding gap. Additionally, partnerships with development finance institutions (DFIs) can provide access to patient capital with a focus on long-term growth.
• Engaging with Local Investors: Building relationships with local investors is crucial. Startups should actively seek out local funding sources and networks, participate in local investor events, and leverage platforms that connect African entrepreneurs with local capital.

The Road Ahead: Building a Sustainable Ecosystem

As Africa’s VC market continues to evolve, it is essential for all stakeholders—startups, investors, and policymakers—to adapt to the shifting landscape. Policymakers, in particular, have a role to play in fostering a supportive environment for entrepreneurship. This includes creating favorable regulatory frameworks, improving access to capital, and promoting policies that encourage local investment.

For investors, both local and global, the key will be to recognize the unique opportunities that Africa presents. While the risks may be higher, so too are the potential rewards. By taking a long-term view and working collaboratively with local stakeholders, investors can contribute to the growth of a vibrant and sustainable startup ecosystem in Africa.

In conclusion, the decline of global investor activity in Africa’s VC market is not a sign of retreat but rather an opportunity for recalibration. The rise of local capital, driven by confidence in Africa’s potential, marks a new chapter in the continent’s entrepreneurial journey. By navigating this shifting landscape with agility and foresight, Africa’s startups can continue to thrive and contribute to the continent’s economic transformation. The resilience of investors in Egypt and the increasing share of local capital suggest that there are pockets of strength within the continent’s venture landscape that could drive future growth and investment.