THUR, APRIL. 20 2023-theGBJournal |The African Private Capital Association (AVCA) released of its 2022 Venture Capital in Africa Report today.
The anticipated report – which captures VC performance in Africa by deal volume, value, and investment stage – indicates the industry’s resilience during global uncertainty.
Emerging from a year of robust VC activity, private capital inflows continue to propel economic growth and inclusion across the continent. The new report is a comprehensive overview of Africa’s innovation ecosystem, providing critical insights into the sub-regions, countries, and sectors that have cemented Africa’s rising position as a region for VC activity globally and the increasing importance of early-stage investment on the continent.
In the wake of the Covid pandemic and the resulting capital injection, central banks responded to looser monetary policy. Interest rates climbed through the year, seeking to rein in rampant inflation against wider economic and geopolitical instability. The preceding shook the global venture funding landscape which shrunk by 32% from the US$681 million invested in 2021.
The slowdown in the tech sector, historically the largest driver of venture capital activity, contributed to a wider decline. North America and Asia are two key markets for investment in tech, which despite attracting the most capital, also accounted for 73% of the global VC industry’s funding deficit. Africa’s closest socio-economic comparator, Latin America, saw funding reduced by more than half.
Despite more cautious capital deployment around the globe, capital commitments in Africa remained strong. By comparison, Africa’s 21% year-on-year growth in deal volume was 3 times that recorded in Asia (7%), the only other region to record positive year-on-year growth in deal volume.
Looking more broadly, Africa’s single percent drop in deal value from the previous year illustrates how the region was largely unaffected by heightened risk-off investor sentiment experienced in other markets across the globe, which resulted in contractions in start-up funding.
Africa’s venture funding market was valued at US$6.5 billion across 853 deals, including US$1.3 billion of venture debt. Deal volume in Africa last year experienced an industry record, highlighting a near-decade of continuous growth and a compound annual growth rate (CAGR) of 31% between 2014 and 2022. Contributing to this growth is the increased participation of start-ups raising capital for the first time, accounting for 37% of deal volume.
A reduction in big-ticket investments aligns with the global trend of fewer late-stage deals influenced by challenging macroeconomic conditions. However, younger companies in Africa attracted the majority of venture funding across the continent, a testament to accelerated levels of ambition, entrepreneurship, and pioneering enterprise.
Innovation was rewarded with venture funding, as seed-stage funding accounted for the majority of the continent’s VC deal activity while also demonstrating the highest year-on-year growth.
The volume of early-stage (Series A and B) investment deals grew by 25% between 2021 and 2022, increasing median deal value to US$10 million, the highest globally – surpassing North America and Asia and closing the gap with Europe, and signifies Africa’s rapid growth trajectory.
With over three-quarters of Africa’s funding originating from foreign investors, primarily composed of fund managers and investment firms based overseas, AVCA’s research indicates sustained investor confidence in the region.
The repeated investment in businesses was equally encouraging, highlighting investors’ long-term commitment to companies and their onward growth. The report details how 8% of early-stage investments were made in the same company more than once in 2022, while 409 unique companies received additional venture capital following investments in previous years.
Continued investments contribute to the sustainability of these companies, the employment they generate, and the increasing impact they deliver, catalysing more robust commercial and social ecosystems.
A combination of early-stage investment and 15 super-sized deals valued at US$100 million or more represents a growing maturity across the African VC industry. Maintenance of value amidst tighter global VC activity is another indicator of this evolution, supporting positive investor sentiment across the continent.
This has also translated into an impetus to break barriers. Despite room for more growth, over a quarter of start-ups that received venture financing were either female-founded or included at least one female in the founding cohort.
North, West and East Africa dominate deal volume and value
Of the 786 VC deals, 235 were in West Africa, again recording the highest volume of deals across the continent, followed by North Africa (178) and East Africa (168). With US$1.1 billion, North Africa led deal values across the continent, as East Africa attracted US$899 million and West Africa secured inflows of US$843 million.
Powerhouse economies Nigeria, Egypt, South Africa, and Kenya remain the most attractive locations for venture capital investment, accounting for 64% of deal volume and 51% of deal value combined.
North Africa’s prominence in the venture ecosystem is best highlighted by a CAGR of 57% in investment volume and 120% in investment value between 2017 and 2022. Spearheaded by Egypt, economies including Morocco and Tunisia drove further growth.
The three countries saw 170 deals with a reported value of US$798.5 million, dominated by the Information Technology, Consumer Discretionary and Industrials sectors.
Further, the continued interest in investments across multiple sub-regions is illustrated in the US$1.84 billion of inflows directed to start-ups with a multi-regional geographic footprint. Accounting for 10% of deal volume but a significant 35% of deal value speaks to the size of each investment and more companies’ ability to drive geographic expansion.
Business as usual for sector focus
Financials (31%), Information Technology (15%) and Consumer Discretionary (15%) were the three most active sectors by volume for the third year running in 2022, highlighting the prevailing areas of growth. The dominance reflects Africa’s evolving demography, improved connectivity and the changing nature of African consumerism. Driven by technology-enabled services, new products and merchants are reaching new demographics, notably a young, digitally savvy, urban workforce.
A market opportunity of 300 million Africans within digital banking encapsulates the dominance of the Financials sector. More bespoke solutions and improved accessibility are also catalysing VC activity in this sector, valued at US$2.2 billion in 2022. Industrials, valued at US$819 million, is being driven by mobility technology and commercial and professional services such as software improving human resource management. Investment in these areas exemplifies Africa’s place as a region of interest, innovation and world-class service delivery.
Sector focus within venture debt shows some similarities, with financials (30%), utilities (28%) and industrials (15%) responsible for the majority of activity. Venture debt also accounted for four super-sized deals, in excess of US$100 million, while venture capital saw 11 deals of this size.
Abi Mustapha-Maduakor, Chief Executive Officer, AVCA, commented: “Resistance against rippling effects of Covid-19 and global economic headwinds is a reminder of the high-quality investment opportunities on the continent. Despite lower participation by impact investors last year, as experienced globally, the impact continues to be achieved in Africa through a more connected marketplace that drives tech-enabled solutions from healthcare to education. Intuitive entrepreneurs and efficient capital allocation are transforming lives as a maturing VC industry continues to create longevity and opportunities for African industries and societies to reshape the future.”
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