Fears of a global economic downturn are well-founded. Russia’s invasion of Ukraine has pushed energy prices to record highs and disrupted global access to food. This follows the pandemic, which delivered a shock to supply chains, creating challenges for businesses and consumers. With inflation on the rise as a result, central bankers in the world’s largest economies are tightening money flows, with knock-on effects for emerging markets.
We’ve speculated in this column that the global economic slowdown could cause Western investors to shy away from the African continent’s booming tech sectors and, instead, focus on challenges closer to home.
But a report published last month, which examines key elements of African tech ecosystems, suggests that while the extraordinary growth of venture investment over the last five years has been a great narrative, it isn’t the most important story — which is in the still untapped potential of the continent’s digital economy.
The Inflection Point, a report from the entrepreneur incubator Endeavor Nigeria, offers a broad examination of the size of the African digital opportunity. It forecasts that the size of Africa’s digital economy will grow sixfold, to $712 billion by 2050, and insists that the continent “has barely scratched the surface of its potential relative to other regions.”
Endeavor’s claim is based on underlying factors, such as the rates of GDP and consumer spending growth in African countries, the acceleration in the use of digital services in many countries during the Covid-19 pandemic, and the growing digitally savvy young populations with an increased interest in tech jobs. Indeed, the challenges of these markets are also seen as an opportunity. Africa still lags other regions in key digital indicators, such as basic internet usage, meaning there’s plenty of room for expansion. It describes all these factors as “triggering an inflection point.”
And while there are concerns around a funding slowdown, Endeavor has a positive outlook.
“We don’t expect an economic downturn to dry up investments completely,” Tosin Faniro-Dada, Endeavor Nigeria’s managing director, told Rest of World. “We believe funding would be available for good companies solving real problems.”
Even though some African countries have high interest rates, and some have been in recessions over the last five years, Africa has continued to raise significant capital. Venture investments in Africa have grown some 18 times over the last six years, Faniro-Dada said. Between 2020 and 2021, rates of fundraising among African startups were twice that of the global average — albeit from a lower base. To buttress that point, new data from research firm Africa: The Big Deal revealed the first half of 2022 was a record breaker, with funding for African startups topping $3 billion in the first six months of the year. For context, funding for all of 2021 was $4.4 billion.
But even if Africa’s investment boom continues, the more challenging funding environment means that investors will be putting a lot more scrutiny on startups, particularly when it comes to valuations. “The thing is, our valuations were getting crazy in Africa, in terms of the work some of these startups had done to deserve them,” Stone Atwine, founder of Uganda-based fintech Eversend, told me in Kampala last week. “Now investors will want to see numbers: it’s all about unit economics again — not just ‘vibes.’” Still, Atwine said that the effect of any global slowdown “will not be as huge” in Africa.
It may be too early to tell how much of an impact the global slowdown will have. Selam Kebede, director of the Nairobi office of Antler, a global early stage VC, said it’s a question of “when and not if” the African tech ecosystem will start seeing a downturn. “We are already witnessing valuations going down and investors becoming more critical of metrics like burn rate and margins. Startups with a high burn rate relative to their growth will find it hard to fundraise,” she said.
For Ali Hussein Kassim, a veteran investor and tech policy advocate in Nairobi, one advantage of a slowdown might be a more keen awareness that the ecosystem is over-reliant on foreign venture dollars. “This is skewing the investment space to focus mostly on Western values from a VC perspective,” he told Rest of World, referring to the Silicon Valley startup growth culture of “Move fast and break things.” “Don’t get me wrong: I’m all for foreign capital,” he said. “I’m just concerned that there is very little homegrown capital going into these startups.”
One issue Endeavor highlights in its report is the uneven spread of investment money across the various stages of growth. As in most markets, there are more venture deals in early stage companies in Africa, but Endeavor suggests this discrepancy is greater in Africa than elsewhere. The fastest growing bracket in Africa involves deals between $1 million and $5 million, which typically happens in a pre-seed or seed funding round. Endeavor argues that the demand for further rounds of funding in the $5 million to $50 million bracket is likely to increase in coming years, as more of the early stage companies take their next steps. “However, given the significant drop in deal activity from $5 million onwards, it is likely that there will be insufficient supply to meet demand,” write the report’s authors.
For startups, Kebede said that while fundraising is an “excellent signal” to show a healthy market future, it is not the single most important indicator for success. “Ultimately, the best signal should be a mix of a great team, a healthy burn rate, solid margins, and a long enough runway with positive growth,” she said. “The biggest mistake is to think of funding as a proxy for a healthy business and not as a fuel boost to the company to unlock new growth opportunities.”