Who is funding Africa’s startups?

You might have heard this 17th-century English quote, “He who pays the piper dictates the tune”. The more direct equivalent is the golden rule, which says, “he who has the gold makes the rule”. These quotes emphasise the power those with resources wield in making decisions and determining outcomes in economic or social settings.

This explains why investors hold significant influence across different sectors—they provide capital for businesses to hire staff, purchase equipment, create products and distribute to their customers. You could say that investors make the business world go round, especially in the startup ecosystem.
 

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Startups require capital as the need for rapid growth embedded within their DNA requires them to raise money from investors to achieve their growth targets.

It is no surprise that funding receives significant attention from operators and other stakeholders in the African ecosystem. Although most of the attention is focused on the trends and movement in the number (volume) and size (value) of startup investments, we need to pay attention to where these investors are coming from.

In other words, “who is funding African startups?” because, as the quotes show us, they will ultimately determine the shape and features of the African technology ecosystem. We can see an example in the first phase of the Nigerian ecosystem, where foreign investors threw money at founders to replicate business models from silicon valley, not paying attention to the local market realities.

To get this insight, we can turn to Africa: The Big Deal, a database of funding rounds in the African tech ecosystem, curated by Maxime Bayen (Catalyst Fund) and Max Cuvellier (GSMA) update.

Before looking at the data, we need to note some important points.

First, this analysis focuses on the data captured on investors—the number of deals an investor makes above certain thresholds. So, activity is measured by the number*, not the deals' value. For example, if investor A has made 50 investments of $100,000 each, while investor B has made 12 investments of $1,000,000 each, the database counts investor A as the more active investor.

Another more salient point is the distinction between the definition of a deal for investors and startups. If an investor participates in a startup funding round, it is counted as a deal; simultaneously, a startup may have several investors participating in a single “deal”. Understanding this explains why the database captures circa 1,764 startup deals while investor deals stand at 4,075 from 2019 to 2022 (YTD).

Keeping these points in mind when analysing funding sources' data is helpful. At this point, we can dive into the data and see what it says.
 

African investors rising

We can start by looking at the top ten investors in Africa, who would instinctively have the most deal count from 2019 to 2022 (YTD). Using a continental lens, we see that five of the top ten investors are from North America—they make up 50%. Remember, this is just us counting which investors make up the top ten.
 

Once we consider the total deals made by the top ten investors, the data shows that Africans facilitated more deals. The chart below shows that African investors were responsible for 46% of investment deals to startups in the continent. At first glance, the data tells a story quite different from all the talk of “Foreign VCs” playing a more significant role in the African ecosystem.
 

This may soothe the ears of those continually advocating for more local VC involvement in the ecosystem; however, we have been looking at the top 10 investors. The question then is whether this trend will hold if we expand it to cover all the deals recorded by investors in the African ecosystem between 2019 and 2022 (YTD).

The chart below shows that African VCs still hold the top spot when all deals from 2019 to 2022 are considered, with a slight lead above North American VCs. I emphasise North American investors because they are the most active after African investors, whether among the top ten or the whole.

African investors are pulling their weight, responsible for more than 1 in three deals on the continent. Nevertheless, it is not sufficient that African investors are the most active investors; remember, this discussion of who is funding startups is typically looked at through the lens of “domestic” vs “foreign”.

Considering this and classifying all non-African investors as foreign, the first thing that jumps out is that two out of all three deals or 66% of deals in African startups are provided by foreign investors. Despite leading all other continents in deal counts, on the whole, domestic investors only account for around 30% of investment deals.

Depending on what side of the fence you lie on, this may be good or bad news for you. 

How does Africa stack against other nascent ecosystems? Stylised facts from a recent report by Endeavour Nigeria point to the resemblance between the current stage of the African ecosystem and those of Southeast Asia and Latin America (LatAm) between 2010 and 2015.

Let’s zoom in on Latin America in 2015. Data from the Association for Private Capital Investment in Latin America—LAVCA shows that the top ten investors were from LatAm, accounting for 96 out of 133 deals (with disclosed investors).

But, how do African investors stack against North American investors and foreign investors—on a whole when we look at the historical trends? We do this because it is not sufficient to look at the data from a cross-sectional perspective, which we have been doing so far. The historical trend can throw up hidden patterns, especially concerning annual changes, which are lost when we look at the snapshot of the data.

In 2019, African investors seemed unaware of the tech ecosystem's opportunity. Domestic investors made 60 investments, which was lower than European investors with 64 deals and North American investors with 100 deals. A fun fact—Y Combinator was the most active investor that year, being involved in 10 deals across Africa.

From 2020 onward, this changed.

You’ll notice a massive jump in the number of deals between 2020 and 2021-2022 (YTD). 2020 was an exciting year in the tech ecosystem—Fawry, an Egyptian fintech startup, became a Unicorn, and Paystack, the fintech darling of Nigeria, was acquired by Stripe for $200 million. COVID accelerated the development and adoption of digital financial services in various African countries, contributing to the over 227% growth in deals across Africa between 2020 and 2021.

The deals by African investors also reflected this growth—investment deals by domestic investors grew by 230% and 246% in 2020 and 2021, respectively. This growth outpaced the growth of foreign and total deals, likely pointing to base effects at play. Base effects typically occur when the previous value of an indicator is relatively low, so even small absolute increases result in a higher growth rate. Even with the growth, the total deals by African investors accounted for less than 40% of total deals made by investors in those years, albeit up from 23% in 2019.
 

So who are some investors contributing to this increased investment activity among domestic investors? The data shows that investors from Egypt and Nigeria feature prominently among the top 10 domestic investors; you will notice that these are two of the Big 4 countries within Africa’s technology ecosystem.
 

The other two—Kenya and South Africa, also have one investor in this group. In this respect, Nigeria tops the list with 4 of the top 10 domestic investors, which made 155 deals or 38% of deals this group did. Overall, this observation of domestic investment dominated by the four countries with the most startup activity in Africa makes sense because we can expect investors within a country to back startups from that country before looking outward. Mauritius is an outlier among the African investors because it does not dominate startup funding but has an investor that accounts for the most deals by any single African investor between 2019 and 2022—Launch Africa with 111 deals.

This increase in African investors putting more skin in the game should be celebrated for several reasons. Local investors have a unique view and context of the domestic country landscape, which enables them to identify ideas that can thrive here. At the same time, local investors can work with foreign investors to ensure they back brilliant founders that may not fit the mould of the “ideal” founder in the eyes of the foreign investors.

What can funding data tell us?

Some things stand out from the foregoing analysis. African—or domestic—investors account for a lower share of the number of deals on the continent, although this has been increasing. The good news is that domestic funders’ share of total deals is not increasing because total deals are shrinking. Hence it is both an absolute and relative increase.

But this insight does not tell us anything except that there is room for growth in deals done by domestic investors across the continent. To make this more nuanced, we can look at the stage where the investors are playing. One easy hack to achieve this is embedded in the data design.

As I said earlier, the data counts the number of deals made by investors over a certain threshold. In 2019, that threshold was $1 million; $500,000 in 2020 and $100,000 from 2021 onwards.

This little tweak in the data’s methodology lowered the criteria for deals captured and led to more deals being recognised.

So, while attributing the growth in the deal count to bullish sentiments related to the African ecosystem is possible, this new information tells us that the growth was probably due to including deals already happening in the background but were not being recognised. At the same time, when you consider that after this change in methodology, the deal count by African investors increased at a faster rate than foreign investors, it tells us that African investors are most likely cutting checks in the <$1 million range, which according to the database is early stage capital (venture rounds, pre-seed, and seed).

This is not an assumption; Launch Africa, which made all its investments between 2021 and 2022, has average deal sizes that fall below $500,000. At the same time, almost all of the top ten most active investors in Africa invest in seed to early stages, such as LoftyInc, Ingressive, Future Africa, and Flat6 Labs. The other investors—Algebra, Chadaria, CRE Ventures and Golden Palm also have several early-stage deals but have made some deals at the later growth stage. The majority of All-On’s deals are grants valued below $500,000.

However limiting this approach is, what it does is help us quickly see that domestic investors in Africa play more at the early stages than in later stages, leaving this to foreign investors. This is quite expected considering the experiences of other ecosystems. In 2015, domestic investors in LatAm majorly participated in early-stage deals and co-invested in some growth and late-stage deals.

Foreign investors providing more growth stage funding is not bad because startups require the funding anyway. If domestic investors cannot provide it, then that vacuum needs to be filled by an alternative. And this becomes important considering that in a previous analysis, we highlighted how as the global funding winter sets in, late-stage funding had experienced a decline between Q1 and Q2 2022, with early-stage funding remaining constant. This should not come as a surprise because foreign investors are more sensitive to shocks from their domestic markets and the markets in which they invest, which may affect their investment decisions. For example, the African Private Equity and Venture Capital Association (AVCA), in a March 2022 report, found that “64% of LPs and 86% of GPs surveyed perceived currency risk as important or very important when investing in African private equity.”

Expectedly, this reliance on foreign capital and the tendency for this to fluctuate in the face of unexpected market movements has led some to advocate for domestic players to step up in the African ecosystem. Regardless, it is vital that we acknowledge that ultimately this discussion about who is funding is motivated by the need to balance context, competence and consistency. We need inventors that have a proper context of local markets, understand the needs and are willing to commit to building this sustainably. Beyond funding, startups need investors with technical knowledge and networks that can support growth and finally, startups investors need to be willing to go the long haul.

On which category of investors display these traits, Peter Kisadha, who invested in startups at Future Africa and is now building his startup, says that it depends. According to him, local investors typically have a more nuanced understanding of the market and share a closer connection with founders, making it easier to cut a check. At the same time, they bring local links with key public and private stakeholders within a country that can move the needle to get things done locally. On the other hand, foreign VCs come with networks or connections that may transcend local investors’ and can open doors, especially when a startup is expanding internationally. Who stays longer is really up to the ideology and philosophy driving the investors.

If you have been paying attention, you will notice that each class of investors has a role to play, and no one is inherently better than the other. In short, the synergy between domestic and foreign investors may help unlock opportunities for both and avail more capital to the startups. The 2015 report by LAVCA referenced earlier noted that cross-border partnerships between local and foreign investors fuelled growth rounds in the region’s leading startups. Thus, we should seek balance—and the data says there is an opportunity for us to achieve this by more domestic investors stepping in to back African founders building innovative startups.