The funding downturn that has gripped the global and African tech ecosystems since the latter quarter of 2022 has, in 2023, led more African founders to return to the fundamentals while challenging their view on valuations.
This viewpoint emerged during a panel hosted at the 10th edition of the African Fintech Summit outside Lusaka on 2 November, featuring Hangwi Muambadzi (Head of Africa at CommerzVentures), Vuyo Mzini (Head of Portfolio, Launch Africa Ventures), Dolapo Agbaje (Director, Apis Partners), and Philani Mzila (Investment Manager, Founders Factory Africa). The panel was hosted by Mwelwa Kenneth Chibesakunda, founder of Financial Insight Zambia.
Chibesakunda kicked the panel off by asking its participants what they had seen in the ecosystem since the beginning of the current downturn. Agbaje noted that what many in the ecosystem had referred to as an “investment winter” had led to a 53% decline in the number of fintech businesses operating in the vertical.
“This can be attributed to a few things. We all know geopolitics, rising global interest rates and associated inflation in many of the markets we operate in. If you overlay that in an African macro and its ethics issues, it paints quite a bleak picture,” Agbaje said.
However, while the current status quo was challenging, Agbaje said that in specific industries, strong “structural and early tailwinds” existed, ticking off cash-to-digial and in-store-to-online as examples. Furthermore, some fintechs’ business models allowed them to mitigate some of the market’s broader issues, pointing at asset lending prices and the increasing size of loans.
Mzila said the current funding slowdown actually represented a significant opportunity for discerning investors and founders willing to grind out the current raising cycle. The result will be market consolidation.
“If you take the portfolio view, there are a lot of business models that are similar across geographies. It’s a good time for well-positioned companies and strong management teams to acquire geographic reach and a strong team. We see strong opportunities,” Mzila suggested.
In answering the question, Mzini said from his position at Future Africa Ventures, he looked at the current downturn in two ways. The first was the macro environment, with currency devaluation and political instability prevalent and factors that founders could only do a little about. The second was amid these challenges; there are also opportunities for discerning investors. Highlighting recent research, Mzini said millions and billions in raised capital needed to be deployed somewhere. The current market provides opportunities for fund managers willing to talk to founders and who know how to identify value.
Muambadzi echoed Mzini, stating that while the investment slowdown had affected startups ranging from pre-seed to Series B, some sifting will unearth high-quality businesses ready for investment.
“The other slightly divergent view, though we are fintech specialists [within the context of the ecosystem], I come to experience most opportunities that I come across to be more generalist because fintech is such a core component of every sector that you come across,” Muambadzi said.
“There are a lot of investments of investments that are coming across Series B and C that aren’t pure fintech but fintech-adjacent. It’s not as dire as experienced by others.”
When Chibesakunda moved the topic to valuations, Muambadzi felt many founders were still catching up with how the changing macro had depressed valuations.
“I don’t think that same sentiment has reached everyone, especially from a founder’s perspective. I find a lot of people are still catching up to where we are now as an ecosystem. One of the dangers of chasing higher valuations is that, at some point, you have to grow into them and exit,” Muambadzi said.
“As an ecosystem, Africa does not have a strong [exts] record. Where are we going to IPO? Who is going to buy this company? Where is the anecdotal evidence of companies who have walked that journey? But a lot of startups that we come across… they seem to be pushing the ‘How do I get the highest valuation and bragging right?’ without thinking about the sustainability of the business they are creating.”
Mzila said that while the current downturn is causing short-term pain within the ecosystem, it would lead to amortization of the valuation curve and more accurate pricing. For founders on the thick wedge of that change, as highlighted by Agbaje, it’s a bitter pill to swallow since their businesses may have lost anywhere between 50% and 80% of their value. What makes it more complicated is the emotional cost, with many founders deeply attached to their ventures.
Wrapping up the panel, Chibesakunda asked his guests for their opinions on what 2024 may hold.
Mzini felt that a “bolstering” was underway. Founders that survived the current funding downturn were likely to emerge with a focus on the fundamentals, a “reversion” where more and more founders are speaking about platform-orientated and value chain plays.
Mzila, as the last person to speak, felt that investors may increasingly spread their wings in search of value across the venture maturity curve.
“I’m expecting a lot more allocations among VCs. We have investors investing across different stages across different verticals, and as their startups reach the end-point of their journey, a lot more deal sharing and supporting the winners that come out of this tough funding cycle.”