Over the last half-decade, the boom in the African tech ecosystem has produced some remarkable valuations, with unicorns like Nigeria’s Flutterwave and Senegal’s Wave raising hundreds of millions of dollars. Even some unproven smaller startups have raised millions in fairly short order. In the first quarter of this year, African startups raised a whopping $1.8 billion, which is more than was raised in all of 2019, according to analysis by Africa: The Big Deal. And yet few people ever batted an eyelash over how those astronomical numbers were reached. It was a prime example of “momentum” investing, as one veteran venture capital partner told me last week: as long as money continued to flow into the market, other investors would follow, convinced more by the trend itself than any business fundamentals or founder talent.

The accepted premise went something like this: Africa is a massive market opportunity with 1.2 billion people and a growing middle class, paired with underdeveloped physical and digital infrastructure. Informal economies were everywhere, ripe for being brought online by digital companies. If you made the right bet in such a young ecosystem, you could hope to make an outsized return. That “Africa rising” idea saw investors stream into the market, many with little knowledge or experience in sub-Saharan Africa.

The reality is a bit more complicated. The addressable market — the actual number of customers that can be reached — is much less than 1.2 billion. Looking at the potential of an app-based idea, for example, an investor might see 500 million phone subscribers, but that doesn’t mean all the phones are smartphones, and it doesn’t mean that all those phone subscribers can afford enough internet data to power an app built for a seamless, “always connected” lifestyle. In other words, investors still have to figure out the real size of the opportunity — the “serviceable addressable market” — and, within that, how much they can capture. 

That disparity has become more stark as funding has started to slow significantly in the West, and most Africa-based investors and founders — fully aware that much of the funding has originated from Silicon Valley — are now expecting the funding to slow here too. It means more pointed questions are already being asked of founders, according to two VCs and one founder I’ve spoken with in the last two weeks.

The root of these misconceptions is a lack of widely available consumer and business data, which allows investors to gamble on the best-cast scenario in an “up market” but less so when investors are tightening their belts.The data vacuum affects more than just the tech sector, but the effects there are more apparent because of the size of the bets being made.

Jake Cusack, co-founder of investment advisory CrossBoundary, ironically calls it “first-mover disadvantage.” Without a pool of reliable information and few other tech companies for investors to compare against, the inability to benchmark can encourage inflated prices. It’s not just about the raw potential of market size, Cusack said — an investor needs to identify pockets of willingness and ability to pay for new services. 

That pushed Yannick Lefang to found his consumer market research company Kasi Insight in 2013. “The main problem we’re attempting to solve is the disconnect between the potential of the continent and its reality,” Lefang told me. “It’s really summed up by the lack of reliable data.” 

Kasi Insight has spent the last few years building consumer panels and now surveys between 500 and 1,000 people in 20 African countries every week, to offer some of the key findings a tech founder or a VC might need to understand their market opportunity.

According to Lefang, while companies like traditional fast-moving consumer goods (FMCG) manufacturers or luxury goods makers often sign up for his company’s services, few tech companies or investors ever do. “Everyone knows there’s a lack of data, but that doesn’t mean they’re going to buy your data,” he said. 

It’s been a similar case for Fraym, a market research firm that uses a mix of household survey data and geospatial satellite data, parsed by machine-learning software, to understand consumer markets in Africa and other developing regions. Bobby Pittman, chair of Fraym and founding partner of Kupanda Capital, said foundations, NGOs, and government agencies, rather than tech companies, have dominated its client base. “As investors, we built Fraym because we wanted to understand the market for ourselves — but not many other investors do,” said Pittman.

“The venture deals have been happening so quickly, with so much frothiness, that there’s not enough time to do the due diligence."

For the large part, any concerns about the lack of data has barely slowed down African founders or their backers, where venture investing hit $4.4 billion last year, more than triple the pre-pandemic levels of 2019.  

Not all investors are indifferent to the minimal due diligence. “Investing here does involve a lot of art,” said Ike Echeruo, managing partner of early stage fund Constant Ventures, which this week announced the launch of a $100 million fund to back African startups. “You can see the lack of data as a disadvantage, but this is inherent in all informal systems,” he added. “There are other things you can see … by anecdotal sampling of people and extrapolating carefully.” 

He said his firm’s analysts and associates spend time in the marketplace talking to business people and consumers about their local challenges. But Echeruo also agreed high valuations had become an issue in recent months, with little evidence to back up the expectations. “I’ve seen a lot of decks that come through and, in many cases, it’s not clear to me what is driving this assessment.”

Behind the rush, too, was that simple push of momentum investing. In a so-called “hot” market, where investors are competing to fund the next coveted startup or admired founder, there’s often a rush to beat rival VCs to “getting on the cap table,” said investors I spoke with. That meant thin due diligence. “The venture deals have been happening so quickly, with so much frothiness, that there’s not enough time to do the work,” said Pittman of Fraym. “We’ve had major startups reach out ahead of a funding round, but even before we could figure out what was going on, the deal was already closed.” 

Lefang echoed the same, saying that many international VCs operating in Africa aren’t incentivized to do deep market research, given they might not be in it for the long haul. 

Ngozi Dozie, who co-founded Nigeria-based consumer loans fintech Carbon in 2015, said he’s had to gather data independently from government agencies, established banks, and institutions like the World Bank and McKinsey, to better estimate his startup’s true market potential. 

After “triangulating” data from industry bodies, including the Nigeria Inter-Bank Settlement System, EFInA (a financial inclusion nonprofit), and mobile phone industry data, he estimates the total market opportunity for his business to be roughly 30 million users, in a country of 200 million people. But, realistically, he estimates the serviceable opportunity at closer to 10%–20% of that. Dozie said he believes that the fintech startups, traditional banks, and others are going after a very similar market base. “We’re all fighting over the same 6 million customers, in my opinion,” said Dozie. “If I’m being generous, I’d say 10 million.”

Most of the investment action over the last year has been in the fintech sector, where young companies are racing to overtake out-of-date, over-regulated, and under-resourced legacy infrastructure. The sector has produced the continent’s most-recognized unicorns, like Flutterwave, Chipper Cash, and Wave. Last year, fintechs — whose subsectors include payments, remittances, neobanks, consumer loans, and financial infrastructure — accounted for 53% of all funding

In recent months, that rush has come hand in hand with increased concerns and naysayers in recent months doubting whether Africa’s combined markets realistically have enough financial services consumers to justify the number of fintech startups or the high valuations assigned to some of these companies. And it’s not likely to completely cool off anytime soon. Constant Ventures’ Echeruo said his fund will certainly be looking at this space. “Fintech in Africa is still underinvested, but the opportunity is looking for real problems to solve, such as the lack of credit — an enormous problem.”

If, as expected, the funding slows as much as some founders fear, there will be a natural shakeout of the entire ecosystem, and the calls for better investor due diligence will grow louder. Those who understand the realistic size of the market opportunity could be well positioned if they already have cash on hand and a good cost structure, said Dozie: “It’s ultimately a zero-sum game: if I win, someone loses.”