As the curtains draw on the tumultuous year that was 2023, the African tech startup landscape stands as a testament to resilience amid adversity. The funding downturn gripped both the global and local tech ecosystems. It also sent shockwaves through the entrepreneurial corridors, forcing founders to reevaluate their strategies and revisit the core principles that underpin successful ventures.
Headlined by the pressing question, "Is 2023 the winnowing moving African founders back to the fundamentals?" a discussion at the 10th African Fintech Summit unfolded against the backdrop of a 53% decline in fintech businesses. This stark reality forced introspection within the entrepreneurial community.
In this article, we seek to answer the pivotal question: Did past year's trials propel African founders back to the fundamentals, or will they seek alternative ways?
Let’s dive in.
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 discussion hosted at the aforementioned African Fintech Summit outside Lusaka on 2 November. The group consisted of 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 our markets. 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 strong “structural and early tailwinds” existed in specific industries, ticking off cash-to-digital 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 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.
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 amortisation 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 between 50% and 80% of their value. The emotional cost complicates it, with many founders deeply attached to their ventures.
Startup success hinges on achieving Product-Market Fit and delivering customer value focus. It’s one of, if not the most, critical soft skills an early-stage startup founder needs to master.
“What did the African Startup Funding Landscape Learn in 2023?”
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, political instability prevalent, and factors that founders could only do a little about. The second was amid these challenges, there are opportunities for discerning investors. Highlighting recent research, Mzini said millions and billions in raised capital need to be deployed somewhere. The current market provides opportunities for fund managers willing to talk to founders 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 coming across Series B and C that aren’t pure fintech but fintech-adjacent. It’s not as dire as experienced by others.”
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.”
Amidst the adversities in 2023 that the leaders spoke about, a silver lining emerged – the challenges persist, but so does the indomitable spirit of innovation.
The path forward demands a commitment to adaptability, collaboration, and a steadfast adherence to the right core values. The stories of those who weathered the storm and emerged stronger serve as beacons of inspiration for the entrepreneurial community. There are a lot of emerging sectors in the African early-stage startup funding ecosystem that offer not just profitability but also solutions to critical issues.
Join the conversation! Whether you're a founder navigating the startup landscape or an investor seeking opportunities, we’d love to hear your thoughts on the lessons from 2023.
Let's foster a culture of collaboration and knowledge-sharing as we navigate the dynamic terrain of African tech entrepreneurship. The journey is ongoing, and your perspectives are integral to shaping the narratives of success in 2024 and beyond.
Together, let's propel the African startup ecosystem to new heights. Connect with us to continue the dialogue.
