By Max Cuvellier
African startups have performed better than what many had predicted. In the first quarter of 2023 they raised US$1.3bn (incl. exits) beating all market expectations. Indeed, whether we include exits or not, start-ups in Africa raised more funding in Q1 2023 than they had in Q3 and Q4 2022. The fact that they managed to do so in a tough global financial environment speaks volumes of the resilience of the African tech-innovation entrepreneurship. In Q1 2022, African start-ups in Africa set a new record by raising close to US$1.9bn in a single quarter - a record that is yet to be broken.
Year-on-year however, numbers continue to show a steep slowdown in start-up investment activity on the continent, a trend which started in Q3 2022. In fact start-ups in Africa raised nearly 29% funding less in Q1 2023 (including exits) than they had in Q1 2022, a contraction less severe than in the previous two quarters (-29% YoY in Q1 2023 vs. -45% YoY in Q4 2022 and -47% YoY in Q3 2022). While exits generally contribute to injecting new liquidity in the ecosystem, for this quarter it is important to also analyse the numbers excluding exits, given the magnitude of InstaDeep’s acquisition in January 2023. Exits aside, the amount raised in Q1 2023 was just under half the amount raised a year prior (US$900m vs. US$1.8+bn, -51% YoY), which was a more severe drop than experienced in Q4 2022 (-37% YoY), yet not as dramatic as the Q3 2022 tumble (-64% YoY).
A version of this graph excluding exits is available at the end of this article
If we zoom in at a more granular level and focus on monthly numbers, the story is one of optimism. In fact, February 2023 was a very successful month in terms of start-up fundraising in Africa, with a total of US$700m raised - the third best monthly tally ever recorded on the continent, driven in particular by the MNT-Halan and Planet 42 transactions (half a billion US dollars in total). On the other hand, with a mere US$66m, March 2023 was the first time the monthly amount of funding raised by start-ups in Africa dipped below US$100m since 2020, and the ecosystem’s worst quarter since as far back as August 2020, in the pre-boom era.
More worrying perhaps, is the fact that the number of transactions is at its lowest since 2020 and that this slowdown has affected early-stage transactions more than later-stage ones. While many businesses are still looking to raise money, the number of quarterly equity deals has been halved between Q1 2022 and Q1 2023. Sluggish growth in emerging markets, debt distress and interest rates hikes in OECD countries has caused investors to take a pause or reconsider investments in Africa, leaving African start-ups to compete for the limited finance that is still on the table.
Did the year-on-year slowdown affect certain geographies or sectors more than others? Excluding exits, the weight of the ‘Big Four’ (Nigeria, South Africa, Kenya, and Egypt) increased - from 82% of the total funding raised in Q1 2022 to 90% in Q1 2023. This aggregated number, however, hides strong discrepancies between markets. In Egypt, funding grew 2.4 times YoY, driven by MTN-Halan’s mammoth transaction (US$400m out of US$450m). In South Africa, it was more or less stable (+6% YoY). In contrast, start-ups in Nigeria and Kenya raised 10x times less funding in Q1 2023 than in they had in Q1 2022 (US$61m vs. US$610m and US$44m vs. US$484m respectively). There was no mega deals recorded in these regions this year.
From a sectoral point of view, fintech was once again in the lead, both in terms of number of deals (23%) and of funding raised (US$612m, 46%), though its share of number of deals was lower than in Q1 2022 (23% vs. 30%) but its amount raised was higher (46% vs. 30%). In terms of deal number, fintech was followed by Agriculture & Food, Logistics & Transport, Healthcare and Energy & Water. From an amount raised point of view though, InstaDeep’s exit catapulted Deeptech/AI to the second spot (34%), followed at quite a distance by Heathcare (US$64m, 5%).
If we now compare Africa to other regions, while the continent’s total funding raised is still orders of magnitude smaller than the US, Asia, or Europe, it is doing better from a trends’ perspective compared to the rest of the world. Quarter on quarter, Africa was the only region to register positive growth (+68% QoQ) while according to CB insights all other regions saw a decline in amount raised from -1% QoQ in the US to -54% QoQ in Latin America, with a global average of -10% QoQ. Year on year, while funding in Africa decreased (-29% YoY), it was much less severe than the rest of the regions. In all of them quarterly funding in Q1 2023 was more than halved compared to Q1 2022, from -54% YoY in the US to -80% YoY in Latin America (-60% YoY globally). As a result, Africa surpassed Latin America for the first time in Q1 2023.
Let us have a closer look at three of the most notable deals of Q1 2023 – and the three largest ones. We first need to mention InstaDeep’s acquisition by BioNTech announced in January 2023. This announcement came almost exactly a year after InstaDeep’s US$100m Series B, which I highlighted at the time. The US$448m (GBP362m) acquisition could see shareholders receiving additional performance-based future milestone payments of up to US$247m (GBP200m) – a vote of confidence in co-founders Karim Beguir and Zohra Slim. The fact that InstaDeep, a Tunsia-born start-up, is competing with international players in the fields of Artificial Intelligence and Machine Learning, also goes to show that start-ups in Africa have the potential to be much more than local copycats of models proven elsewhere, a preconception too many still hold outside the continent.
The second transaction to be highlighted this quarter is the US$400 million-worth of funding announced by MNT-Halan (Egypt) in February. A mix of equity and securitised bond issuances, this new financing is believed by MNT-Halan to be the largest transaction in Egypt and the Middle East in at least a year and tipped the company over the US$1bn valuation mark, therefore making it a ‘unicorn’. Half of the amount – US$200m – was invested by Chimera Abu Dhabi, who last year announced their US$10bn Alpha Wave Ventures II fund.
Finally, car rental company Planet42 announced US$100 million in funding in February. Born in Estonia but based in South Africa, the start-up will use this new funding to fuel its growth in both South Africa and its expansion market Mexico. US$15m out of the total is an equity investment from new and existing shareholders (inc. Naspers Limited, Andrew Rolfe and Change Venture). The rest of the amount is split between debt from existing shareholders (US$10m) and a US$75m credit facility. This announcement also illustrates a trend we have discussed in the past – and which accelerated with the global investment slowdown – i.e. start-ups communicating not only on their equity rounds, but also on debt and credit facilities to signal their dynamism to the market.
Find out more about the African start-up ecosystem at Africa: The Big Deal, a project by Max Cuvellier and Maxime Bayen.