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As funding for start-ups falls across the globe, Africa is standing out as a notable exception, with its underserved population outweighing the effect of inflation and slowing economies.
Funding for start-ups in the world’s second-largest continent more than doubled to $3.14bn in the first six months of 2021, according to research firm Africa: The Big Deal. That compares with a decline ranging from 3.7% in Europe to 43% in Latin American and the Caribbean.
“Macro trends affecting developed-market tech names will be less impactful to Africa. Klarna, PayPal, others are being hit by fears over inflation and what that means for consumer transactions,” said Lexi Novitske, a general partner with Norrsken22, an Africa-focused tech fund that was set up by Swedish start-up founders. “Africa’s story is more around bringing the underpenetrated market online.”
If the trend continues, funding for start-ups may exceed the record $5bn raised in 2021. Entrepreneurs are racing to provide services ranging from payment and healthcare to educational offerings to more than 1.2-billion people on the continent, which lacks adequate financial infrastructure and last-mile delivery. Still, the amount received by African firms is minuscule when compared with countries such as the US, where companies raised $123bn in the first six months of 2022, 11% less than in 2021.
For some investors, that shows the opportunity in Africa.
“The African venture capital market is far less advanced than that of the developed markets,” said Amrish Narrandes, head of private equity and venture capital at Cape Town-based Futuregrowth Asset Management. “It follows that more growth can be expected in the African market.”
Africa’s advantages range from the undeveloped nature of its markets to a relatively young population who are quick to grasp the technology offered by start-ups. The average age of an African is 18, compared with 31 in South America and Asia, the next youngest continents, according to Visual Capitalist.
“Start-up companies in Africa are solving real problems, where existing businesses either do not exist or do not have the dynamism to make changes,” according to the African Private Equity and Venture Capital Association. Traditional banks have failed to broaden access to financial services and decrepit state postal services provide opportunities for delivery companies, it said.
Still, even within Africa hubs are growing at different speeds. In the six months through June, the amount of start-up capital raised increased more than fourfold in Kenya, while it more than doubled in Nigeria. New funding was little changed in SA, according to Narrandes.
The pace of the increase will also likely ease in coming months as the economic woes elsewhere have some impact as many of the funding rounds were agreed upon months earlier, Novitske said.
“I do hear from many founders things are slower,” said Ido Sum, partner at TLcom Capital, a pan-African fund. Even so, “fundamentals are still very attractive, probably more than many other regions,” he said.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.