Business

Africa: Fintech Leads in African Startup Investment But Huge Funding Gap Remains

Cape Town — A Briter Bridges report reveals African startup investment trends, as interest in startups across the continent continues to grow, particularly in the financial technology (fintech) space. However, gender disparities remain as the report found that funding to African startups are mostly secured by all-male teams. Additionally, and for both all-male and all-female teams, the largest investments are allocated to companies registered or incorporated outside Africa.

allAfrica's Andre van Wyk takes a closer look at the business of startups, funding and how it works on the continent…

The financial reality for African startups

Many startups struggle to secure Series A funding which, according to Investopedia, refers to an investment in a privately-held, start-up company after it has shown progress in building its business model and demonstrates the potential to grow and generate revenue. As such, many African startups have to pursue bootstrapping, which is an attempt to found and build a company from personal finances or the operating revenues of the new company.

Alternatives remain in incubators, accelerators and tech hubs, according to Hannah Subayi Kamuanga, who you'll hear more from in the interview below. These are structures that are becoming more prominent in Africa and have have the sole mandate of identifying start-ups at a *pre-seed and **seed-level to incubate them from six months to one year. During this time, a startup will have access to an office, Internet connectivity along with commercial strategic support and be assisted in creating a business plan for potential investment presentations.

The Briter Bridges Report findings, the most significant of which are detailed below:

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Mega deals and M&A across Africa

Hundred million dollar business opportunities are not the norm in Africa yet, according to the report. However, over the past few years, the total of single, non merger-and-acquisition (M&A) deals above U.S.$100 million saw its highest number yet. It should be noted that despite this being in a limited number of cases which represent 3% of all disclosed deals, they have secured more than 55% of total disclosed funding. As such, this investment size acts as a pull for major investors.

The continent's startup M&A market in 2021 accounted for a smaller percentage of capital flows compared to 2020. This despite the market's activity having nearly doubled year-on-year with 33 acquisitions in 2021 compared to 17 known deals in 2020. Half of investment were made up of acquisitions but a notable level of activity was attributed to several Africa-Africa startup transactions.

Where does growth capital come from and where is funding focused?

The 20 largest deals of 2021 across the continent saw the majority of investors originating from the United States and the United Kingdom. Among African countries, South Africa and Mauritius were the highest ranked nations with investors of similar capacity. Asian investors, particularly major firms like Tencent and Toyota, represent a growing number of Asian interests in the investment space.

Corporates interests in innovation across the continent was summarised thus: "The growing number of investment appetite towards Africa's entrepreneurs has resulted in the rise of corporate venture funds and corporate innovation initiatives interested in harnessing the skills, networks and technologies developed by local companies in a variety of sectors. These often take the form of foundations, tech-focused or impact investment vehicles, and corporate social responsibility-related (CSR) programmes. Energy, logistics, fast-moving consumer goods and financial services are the core recipient of corporate interest. The U.S., Japan, South Africa and France present highly active players."

Financial technology (fintech) companies received the largest amount of funding on the continent. The sector secured two thirds of total funding into Africa's technology firms. This is a trend that continues among deals valued above U.S.$50 million as fintechs capture more than 40% of investment funds. It has also been noted that the most recent wave of digitisation, possibly as a consequence of the Covid-19 outbreak, has propelled sectors like agriculture, e-commerce and healthcare.

How much does gender play a role in African startup investment funding?

The report found that funding to African startups are primarily, and disproportionately, secured by all-male teams. Additionally, and for both all-male and all-female teams, data found that the largest investments are allocated to companies registered or incorporated outside Africa. In a similar vein to 2020's findings, all-male companies secured the vast majority of funding volumes in both total numbers and value in 2021. Further, fintech startups were found to be the best performing sector for all-male teams.

Additional data from Briter Bridges' "In Search of Equity: Exploring Africa's Gender Gap in Startup Financing" report found that female African tech entrepreneurs are less likely to pitch for equity financing. With fintech recognised as the most promising sector for securing investment, a caveat remains in that there is a noticeable lack of female tech startup founders. Of those present, they trend towards sub-sectors like education technology and health technology, two areas that receive notably less investment overall compared to financial technology and even then, hold less promise compared to their male counterparts. The report also found that female startup founders are less confident in their ability to pitch to investors. This exists despite a large number of these female founders being better educated than male founders.

Founder of Briter Bridges, Dario Guiliani, spoke on the report, saying: "The ecosystem has been dominated by men for many years. The number of women involved in the tech startup ecosystem is small, and that is even possible because there has recently been a lot of push towards educating more African women in STEM courses. We decided to really try and put out the numbers because the idea of this report is to try to inform more policy-making, more public and private enterprise engagement and more funding for female tech entrepreneurs."

A closer look at the practical difficulties African startups face

allAfrica's André van Wyk chatted with Hannah Subayi Kamuanga who attended the 9th Sankalp Africa Summit held in Nairobi, Kenya in March 2022. The Country Officer for the Democratic Republic of Congo for Proparco, a subsidiary of Agence Française de Développement focused on private sector development, Kamuanga sits on the investment committee of Launch Africa Ventures, a pan-African early stage investment fund. She was also an investment banker in London with expertise on capital markets and M&A in developed markets.

Why is there a high financing gap in Africa and what do you think may be its cause?

Early stage ventures (including SMEs) in sub-Saharan Africa face a huge finance gap of U.S.$330 billion, according to the World Bank. Other statistics available. Many early stage ventures fail to secure loans or funding because they are unable to provide key information about their businesses to capital providers including clear financial statements, detailed business plans and /or market studies. The management teams are sometimes too operational and lack financial acumen and/or literacy.

In addition, founders are not equipped to source and identify the right type of investors and capital providers for their business due to a limited knowledge of the funding solutions and landscape. Also, many founders are not trained to present their pitch well – making them look less investor-ready (even if the fundamentals of the businesses might be solid).

Also – some early stage ventures do not meet the criteria yet when it comes to the turnover generated and other KPIs required for institutional funding. In this instance, it is key for African founders to focus on bootstrapping for as long as maximum including savings, re-investment of profits, love money and angel investments.

Early stage ventures were also lacking credit profiles and tangible track record – this has been overcome by an increased number of financial institutions and fintech ventures offering supply chain financing, … and assist early stage ventures in building their loan profiles. Digital loans are also becoming main street, enabling early stage ventures to access funding even in remote places. With the use of big data and AI, fintech operators are capable of tailoring the funding solutions to specific clients.

Hopefully, structures such as incubators and accelerators will continue to assist founders in closing the gap of knowledge and data that have been hindering investment processes in Africa for early stage ventures.

Diversified sources of funding are increasingly available for founders, mainly early stage funds, incubators and investment clubs that have the mandate, the knowledge and appetite to do this type of transactions. These solutions are complementary to bank financing solutions which were historically not relevant nor fully available. Noteworthy, crowdfunding platforms, peer-2-peer lending and other community banks (through cooperatives for instance) are gaining traction in some regions too. We have seen a higher number of start-ups raising multiple rounds of funding and gaining the unicorns status.

On a positive note, according to research from SubStack, in 2021, $4.3 billion in venture capital funding was invested in 818 deals across Africa from over 800 investors – This is more than 2.5x higher than the $1.7 billion raised in 2020 in 244 deals across Africa, and the the $1.3 billion raised in 2019 in 121 deals across Africa. The global interest for the African tech ecosystem remains strong despite the pandemic. In particular, in the first 7 weeks of 2022 alone, more than $ 1 billion in VC funding has been raised by African tech startups.

Based on Partech research report, most of the early stage funding is still allocated to series A funding, with a slight increase for seed funding. However, the pre-seed level remains underserved. Alternative sources of funds have been accumulating like never before, including international investors looking at Africa closer given the low yields available in developed markets and increased instability witnessed there. The historical negative perception of Africa is slowly changing with decreased level of corruption, increased ease of doing business, and improved governance. Default rates are not materially higher than in other regions.

In addition, attractive returns and strong visibility have been achieved in 2021 which saw 7 new unicorns in Africa: Flutterwave (Nigeria), Chippercash (Nigeria), Swvl (Egypt), Wave (Senegal), OPay (Nigeria), GO1 (South Africa), Andela (Nigeria). The previous 3 were Jumia (Nigeria, 2019), Interswitch (Nigeria, 2019) and Fawry (Egypt, 2020).

What are some of the challenges African start up founders are facing when it comes to bootstrapping?

There is a deeper cultural shift in mindset that needs to continue on the continent, whereby the founders need to continue to learn to save money, reinvest profits of their ventures or consulting gigs into their start-ups to bootstrap their business.

Also – inheritance money should be increasingly used to finance business opportunities instead of being invested in real estate – which used to be the safe option for many families.

In addition, due to a disposable income that remains limited on the continent, there is a lack of family & friends money available to fund early stage start-ups. In addition, there is a lack of formalization of this love money that can lead to misunderstanding once the start-up takes off (was this a grant, loan, equity)? Organisations like ABAN are working hard to ensure that there are sets of legals documentation available and a framework to assist angel investors and investment clubs in their investment process.

To overcome this, African founders have increasingly access to alternative free sources of funding from governments (with grants, subventions, …), international incubators and accelerators offering prize money in the context of start-ups competitions, and foundations such as Tony Elumelu Foundation, offering awards to entrepreneurs having an impact on the continent.

We also see a number of crowdfunding solutions and peer-2-peer lending platforms offering raising options for founders, even at a very early stage.

Nevertheless, all these hurdles are slowly disappearing and the continent is witnessing an increased number of successfully bootstrapped founders since 2018/2019 now raising institutional funding.

What could be done to better promote African startups, either by themselves or supporters?

African start-ups need to be treated as any other start-ups and taken seriously by the international investment community. Yes – the African operating environment is quite complex especially due to low GDP and limited infrastructure, however, it is still possible to develop, grow and scale attractive start-ups that are becoming unicorns (as demonstrated by Wave, Opay…).

African start-ups have developed attractive, profitable business models that are tailored to the African context and fit the investor mandate of most early stage investors in the world. Having African exposure will allow any investor to have a more diversified and attractive risk-adjusted return in geographies that can be somewhat not correlated to the rest of the world in terms of performance.

Early stage investing in Africa should be perceived as a suitable way to allocate capital by institutional investors, providing the right risk-adjusted return and often, higher yields than in developed markets, with decreased default rates. In addition, some of the African macro dynamics are uncorrelated to the rest of the world hence investing in this African opportunity could provide a hedge in an investor portfolio.

Success stories achieved by unicorns and also entrepreneurs generating tens and hundreds of millions of dollars of turnover should be broadcasted and shared more often.

What are some of the challenges African startup founders are facing when it comes to raising early-stage investment funding?

African start-up founders are not well-trained or prepared to pitch their investment idea / venture and / or to share the relevant documentation hence the critical importance of incubators, accelerators and to some extent, investment clubs to assist African founders to compete at the right level.

Many international investors are not familiar with the African context and will disregard African start-ups based on this – this is changing though.

African founders don't have access to investment funds – this is changing through the emergence through start-up competitions, demo day and missions that are increasingly organized by the investment community on the continent.

In your estimation, what are three African startups that currently hold the most promise for funding?

1Trolley – The Egyptian-based, e-commerce company raised U.S.$3 million at a U.S.$45 million cap (pre-Series A convertible). According to their site (https://1trolley.com/), 1Trolley is an on-demand service that purchases, picks up, and delivers convenient goods that are ordered from one's neighborhood stores through the mobile app.

AlphaDirect – The company is an insurance technology firm based in Gaborone, Botswana and raised U.S.$5 million in their Series A at a U.S.$25 million pre-money valuation.

Peach Payments – An online payment processing company, the firm raised a U.S.$20 million Series A at $60 million pre-money valuation. They're based in Cape Town, South Africa.

*The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all.

**The first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises.

Artmotion S.Africa

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