How will the venture capital environment develop in Africa? Will investors direct their attention towards the emerging economy of the vast continent? Or will Africa continuously experience an investment drought in the coming years? Well…all of that will depend on the overall landscape of the continent, both economically and specifically with regards to venture capital.
So, in this article, we will give you an overview of the African economy and the current venture capital environment as a foundation for understanding the continent’s potential, and for the articles to come!
Written by: Jonathan Ouyang
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ECONOMIC LANDSCAPE
As with any economy, the African economy holds much potential in its growth in the next few years. But, as to be expected, it is not without its setbacks. In this section, we’ll break down the African economic landscape into two sections: the first discussing the positives, and the second discussing the negatives.
The Positives
In 2024, Africa is to become the second fastest growing economic zone in the world, just behind a China and India propelled Asia. Overall, the African real GDP is expected to grow by 3.2% this year, an improvement from last year’s 2.6%. In fact, 12 out of 20 of the world's fastest growing economies will be in Africa, with Senegal leading the pack, boasting an expected GDP expansion of nearly 10%.
What is this growth driven by? Mainly by two aspects. The first is by a vibrant and booming service sector, with the financial, healthcare and telecommunications industries leading the pack. As mentioned in a previous article, with many of the startups in these industries being specifically founded to support the needs of the community, it is no wonder why they are the first to reap the benefits of the emerging markets. The second is the commodity market. As Africa is a naturally resource-rich continent, its exports of resources will continue to perform in an upwards trajectory given the current conditions.
The Negatives
Now the setbacks, most notably troubled exchange rates continent-wide, and an increase in the debt-service requirement in the coming years.
According to the Economist Intelligence Unit, most of the continent is to expect a depreciation of their currency, with some even experiencing double-digit drops. This is thus a potential disincentive for foreign investors who are looking to enter the African market, as their returns are likely to be eroded by a devaluing currency.
The second issue is an increase in Africa’s debt-servicing burden. Due to a proliferation of external shocks such as Covid, the Russo-Ukraine war, natural disasters caused by climate change, havocs from inflation, and the aforementioned weakening currency, Africa is likely to experience a debt-squeeze overall. With the absence of external debt restructurings this year, debt-service makes up some of the most important financial events for Africa this year. For example, Kenya, on the 24th of June, will have to redeem a Eurobond valued at US$2bn in a single bullet payment. Below is a more comprehensive diagram on the issue:
It is evident that while Africa is positioned to be an extremely promising emerging market, it is not without its drawbacks. However, we believe that despite these drawbacks, the future of the region is extremely optimistic.
VENTURE CAPITAL LANDSCAPE
While it is true that the total amount of venture capital funding Africa receives is among the least weighty worldwide, it has begun to see a steady increase in the past decade. As the diagram below illustrates, the amount of capital Africa is receiving has grown with a CAGR of 23%, despite the drop in the 2023 period.
We posit that this rise in funding can be attributed to a growth in the VC ecosystem of Africa, as well as the robust development of the fintech, healthcare and telecommunications industries.
VC Ecosystem Growth
The first trend in this regard is the growth in the number of startups. Africa has seen a steady rise in this department, where there are 3,000 new startups since 2022. This is no doubt a testament to the uplift in Africa’s entrepreneurial spirit and its commitment to innovation.
The second trend here is the rise in technological hubs and incubators. These incubators provide valuable physical space, as well as mentorship and networking opportunities for founders to boost their ventures. Co-Creation Hub in Lagos is a wonderful example of this new environment.
The third is the increase in government support, who have begun to recognise the importance of entrepreneurship and innovation as key drivers of African economic development. The support takes the form of tax grants, subsidies, funding schemes and more. Together with a rise in international partnerships with multinational corporations, academic institutions and other organisations such as Google for Startups Accelerator Africa, the continent has created a valuable ecosystem conducive to future growth.
Sectoral Developments
In Fintech, the most notable trends are in mobile money platforms that have transformed the way people access financial services, particularly in areas with limited digital infrastructure. For example, Kenya’s M-Pesa allows users to send and receive money, access credit, pay bills, all with their mobile phones. The platform now serves over 40 million customers, and processes transactions that’s equivalent to nearly 50% of Kenya’s GDP. The number of startups in Fintech have steadily risen. As of 2020, there are now over 400 investors backing fintech startups operating in the continent.
Healthcare technological startups have harnessed technology to improve healthcare delivery, access and outcomes across all of Africa. These companies set out to address issues such as limited access to quality healthcare, inadequate infrastructure and a lack of healthcare professionals. Platforms such as telemedicine allow remote consultations that connect patients and doctors using mobile / web-based infrastructure. Firms such as Baobab Circle and Kangpe are not only driving the continent’s venture capital landscape, but also enhancing healthcare access to all.
And lastly, the telecommunications sector in Africa has undergone one of the most significant transformations in recent years, driven largely by the rollout of 4G and 5G networks, as well as growing demand for digital connectivity and services. Here, mobile operators are continuously investing in infrastructure development. This industry can generate a GDP increase of over $40bn.
So, we hope that this relatively lengthy article has helped you to gain a deeper insight into both Africa’s emerging economy, as well as some of the problems it currently faces, and also the current venture capital landscape and its most notable trends. With promising economies, the continent holds the potential to bring about a wealth of opportunities for venture capitalists in the coming years!
If you’d like to learn more about venture capital in Africa, please do keep an eye out for the coming articles this month!
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