By Ajong Mbapndah L
Venture capital investment in Africa soared to record levels in 2020 as global investors demonstrated confidence in key sectors, according to a new African Private Equity and Venture Capital Association (AVCA) report.
The report published in July 2021 provides data and analysis on VC deals that took place on the continent between 2014 and 2020, along with information on the profile of investors that participated in VC deals in Africa over the same period.
Despite the global challenges in 2020, investment activity told a story of African resilience and resurgence, says Alexia Alexandropoulou , Research Manager at the AVCA .
In a year when COVID-19 created chaos everywhere, a record number of 319 venture capital deals were recorded, with African start-ups raising US$1.1bn in total reported deal value, the report highlights.
Buoyed by above-average economic growth on the continent, a favourable macroeconomic outlook, the magnitude of the market and a growing middle class consumer base, the pace of deal-making on the continent has noticeably gained momentum since 2017, says Alexia Alexandropoulou in a Q & A with PAV to discuss the report .
Let us start with the introduction of African Private Equity And Venture Capital Association, What Does the AVCA Do?
Alexia Alexandropoulou : The African Private Equity and Venture Capital Association (AVCA) is the pan-African industry body which promotes and enables private investment in Africa. AVCA plays a significant role as a champion for the continent’s Private Equity (PE) and Venture Capital (VC) industries, serving as a conduit for industry stakeholders currently engaged or interested in private investment in Africa.
AVCA operates across four key verticals: Research, Training, Networking and Advocacy: educating, equipping and connecting members and stakeholders with independent industry research, best practice training programmes, and networking opportunities for knowledge exchange and capacity building. AVCA’s member base convenes a diverse range of actors within the private investment space, spanning PE & VC firms, institutional investors, foundations and endowments, pension funds, international development finance institutions and professional service firms.
For those who are not familiar with venture capital, what is it and how does it work?
Alexia Alexandropoulou : Venture capital is an investment practice within private equity featuring short-medium term direct equity or equity-linked investments in startups or small companies believed to have tremendous growth potential. VC Fund Managers act as financial intermediaries, raising and managing capital from a range of external investors. VC funds typically pool funds from high-net-worth individuals, family offices and institutional investors such as development finance institutions, pension funds and insurance companies. Venture capitalists have a lot of latitude and thus a higher threshold for investment risk than conventional private equity. VC investors typically target startups which rarely have a significant market share at the point of investment, whereas PE investors typically target investments in more mature, established companies with proven business models. For entrepreneurs and founders, venture capital can be a vital source of early-stage funding particularly in conditions where capital raising opportunities or access to conventional debt instruments are limited.
How important is venture capital in the development of Africa today?
Alexia Alexandropoulou : By commercializing innovation, venture capital has a pivotal role to play in Africa’s development. In sub-Saharan Africa, invention and innovation are driving the economy and creating innumerable opportunities for economic development, job creation and poverty reduction. Venture capital has the power to accelerate the structural transformation of Africa’s economies, which are uniquely and overwhelmingly comprised of Small and Medium Sized Enterprises (MSMEs). MSMEs are the vehicle of Africa’s economic development, accounting for almost 90% of all companies and nearly 80% of the continent’s employment. Venture capital not only provides monetary support to startups, but also technical or managerial expertise to nurture these small businesses in their early stages of development. Venture capital is thus of instrumental importance given the dominance of MSMEs in Africa’s economic landscape, supporting Afro-entrepreneurs as they pave the way for Africa to “leapfrog” into modernity.
The AVCA recently published its 2020 VC in Africa report, can you share some of the key findings with us?
Alexia Alexandropoulou : In July 2021 AVCA published the second edition of its Venture Capital in Africa report. The report provides data and analysis on VC deals that took place on the continent between 2014 and 2020, along with information on the profile of investors that participated in VC deals in Africa over the same period. Between 2014 and 2020, 933 VC deals were recorded in Africa with a total reported value of US$5bn. In 2020 (an undoubtedly challenging year for private investment globally), the patterns of investment activity told a story of African resilience and resurgence: a record number of 319 VC deals were recorded, with African start-ups raising US$1.1bn in total reported VC deal value.
The report also highlights the increasing interest of both international and local investors in opportunities emerging in Africa’s VC landscape. It’s noteworthy that of all the investors that participated in VC deals in Africa from 2014 to 2020, North American based investors represented 39%, followed by European investors at 24% and African investors at 22%. Investors from the Asia-Pacific region, in particular China and Japan, have displayed a keen appetite for African venture capital.
Investors in Africa’s VC scene have also shown diversification by type with PE and VC fund managers, direct investors, corporate venture firms accounting for the largest share of investors by type. Global corporations – such as Visa, Yamaha and Shell – have actively supported new entrepreneurial ventures in Africa; a fact that further illustrates the increasing diversification of actors investing and operating in the industry.
With the COVID-19 pandemic, the volume of total reported venture capital deals in Africa in 2020 rose to 319 from 140 in 2019; how is this explained?
Alexia Alexandropoulou : The pace of deal-making on the continent has noticeably gained momentum since 2017. There was a 13% YoY increase in deal volume between 2017 and 2018, and a 23% increase between 2018 and 2019. This surge in deal activity was buoyed by above-average economic growth on the continent, a favourable macroeconomic outlook, the magnitude of the market and a growing middle class consumer base. Given these long-term growth fundamentals remain unchanged despite the momentary economic disruption caused by the Covid-19 pandemic, the rise in total VC deals in 2020 represents the continuation of an existing upward trend since 2017.
The exponential rise in the volume of reported VC deals in 2020 could also be attributed to the relatively long deal-making timelines in Africa’s PE & VC ecosystems (discussed further in Question 5). The dramatic surge in deal activity between 2019 and 2020 reflects growing investor interest and appetite for investments in Africa in recent years. This 128% YoY increase is likely the actualisation of a pipeline of investments which were already underway or sourced in 2019, given the continent’s strong macroeconomic performance and growth trajectory at the time. Regardless, the volume and value of VC deals reported in Africa in 2020 illustrates the resilience of the industry, the commitment of investors currently active in Africa, and the promise of Africa’s growth story.
What are some of the most lucrative sectors for Venture Capitalists?
Alexia Alexandropoulou : AVCA’s second VC in Africa report reveals that investors were attracted by investment opportunities across a variety of sectors. However, some sectors presented a higher level of activity with local and international investors demonstrating their confidence and growing appetite for these key industries.
Financials remained the most prominent sector for VC investment, accounting for the largest share of VC deals by both volume (22%) and value (26%) in Africa from 2014 to 2020. Information Technology (18%) and Consumer Discretionary (16%) accounted for the second and third largest share of VC deals by volume within the same timeframe. The continued popularity of the Consumer Discretionary sector is mainly attributed to the rise of online platforms that provide consumer services and the rise of e-commerce platforms, which cumulatively represented 93% of companies that received venture funding within the Consumer Discretionary sector in 2020. Utilities is another sector that has been quite popular among early-stage deals, with investors being attracted by companies providing alternative power solutions. An example is the US$12mn Series A investment round in SparkMeter, a developer of off-grid electricity management services and equipment led by Goodwell Investments in partnership with Alitheia Capital in August 2020.
AVCA’s VC in Africa report also acknowledges the vital role of technology in driving economic growth in Africa, as 90% of all reported VC investments from 2014 to 2020 were in technology or technology enabled companies operating across a variety of sectors. Within technology, investments in financial technology have consistently attracted a significant proportion of the volume of venture capital funding channelled to the continent. However, technology is also being harnessed outside of the Financials sector. HealthTech, E-Commerce, EdTech, CleanTech and AgriTech are some of the verticals that have exhibited significant growth. Overall, technology has developed into one of the highest-interest emerging sectors for private investment in Africa.
In terms of spread, which parts of the continent or countries were the most attractive for Venture Capitalists?
Alexia Alexandropoulou : There is significant cross-regional variation in the distribution of VC funding across the continent. Southern Africa attracted the highest volume of VC deals (24%) in Africa between 2014 and 2020, followed by East Africa (22%) and West Africa (21%). Multi-region VC deals accounted for the greatest share of VC deals reported in Africa by value at 47%.
In terms of countries, South Africa (21%), Kenya (16%) and Nigeria (15%) accounted for the bulk of VC investments reported in Africa between 2014 and 2020. This trend reflects similar patterns to PE activity on the continent. PE and VC investors have been attracted by the size of these economies and the opportunities that have emerged in these countries.
Egypt is increasingly gaining popularity among investors. The country’s share of the total volume of VC deals reported in Africa between 2014-2020 increased to 12% from 9% in 2014-2019, reflecting Egypt’s establishment as a significant VC hub on the continent. Egypt’s popularity as an investment destination will likely continue to grow, particularly as it was chosen by the largest share of LPs as an attractive country for PE investment in Africa over the next three years in AVCA’s 2021 Private Equity Industry Survey.
What are some of the challenges that venture capitalists are faced with across Africa?
Alexia Alexandropoulou : VC fund managers are looking to back strong businesses that fit their investment strategy. Although many businesses may be identified as potential investments, it can be difficult to gauge if they are ‘’investment-ready” businesses that could pass due diligence processes. This concern was amplified with the onset of Covid-19 and associated containment measures in 2020, which constrained on-site visits and abruptly halted due diligence processes. Whilst the isolationist containment measures that inhibited extensive travel across the continent have since reduced significantly or been removed altogether, they have given way to similar constraints arising from the slow vaccine rollout in sub-Saharan Africa. This prolonged disruption to risk assessment and due diligence processes has created additional operational difficulties for investors and fund managers trying to identify new opportunities in Africa’s VC landscape. The result is a delay in the capital deployment process, which can have an impact on investor confidence.
Beyond these difficulties in deal sourcing, venture capitalists also contend with prolonged deal-making timelines in Africa compared to developed markets. For example, research surveying fund managers in Kenya found that the average time taken between identifying an investable opportunity and closing the deal was one year, in some (albeit very rare) cases extending to as long as three years. This protracted timeline can cause challenges for fund managers, given the 10-year average life cycle of a typical VC fund, within which firms are expected to take over a company, restructure it and make a profitable exit. The relative infancy of the deal intermediary and service provider ecosystem in Africa further problematises the situation, where the onus is placed entirely on fund managers for all the work between deal sourcing and portfolio exit. As such, deal execution, which is extended over a longer timeframe in Africa’s VC industry, can be a challenge for venture capitalists active on the continent.
For businesses that will be glad to be considered for funding, what words of advice do you have for them?
Alexia Alexandropoulou : AVCA principally convenes Africa-focused investment actors and professionals to champion private investment in Africa but does not in itself make capital allocations or direct investments. Nevertheless, entrepreneurs and businesses seeking funding should be aware of the following, which represent key metrics VC investors look at when determining the quality and investability of a startup:
- The skills and expertise of a startup’s management team. This is a crucial determiner of a startup’s likelihood to secure venture financing. Given that startups rarely have a significant market share when seeking early-stage financing, VC investors tend to evaluate the organisation’s management team and make calculated judgements on the team’s ability to execute their business plan. VC investors are more likely to back seasoned managers and experienced executives that they perceive as capable of navigating a start-up’s fragile early stages of growth.
- The need for skilled leadership. VC investors prefer to partner with experienced managers with demonstrable track records, particularly when investing in markets with a high degree of volatility relative to other parts of the world. As such, talent acquisition and proficiency should be a key focus for entrepreneurs and businesses seeking VC funding. The startup team will need to display a thorough knowledge of and experience with navigating the unique and varied requirements of doing business in their chosen industry.
Alexia Alexandropoulou : The future of venture capital in Africa is bright. From a capital raising point of view, there has been a discernible shift in the investment stage focus of private equity firms on the continent, particularly in the last five years as the momentum of investments in early-stage companies in Africa has grown. Several PE firms that previously mainly targeted investment opportunities in African MSMEs have started to consider emerging opportunities in the venture capital space as well. Simultaneously, we have also seen African fund managers that traditionally focused on PE investments on the continent shift gears to raise VC funds. An example is AfricInvest, a Tunisian-based private equity fund, which partnered with Cathay Innovation to launch a US$168 million fund targeting startups in Africa. Avenues for startups to access capital and grow their businesses with affordable and tailored credit are on the rise as venture capital develops into a recognised and definable investment theme in Africa.
The horizon is equally bright from a regulatory and institutional point of view. More African governments are recognising the catalytic role of startups as engines for economic growth and thus championing the goal of nurturing vibrant and supportive local ecosystems. Africa’s VC industry is poised for growth in this supportive, dynamic environment.
Despite the relative infancy of the entrepreneurial space in Africa, a culture of entrepreneurship is growing across the continent. From an entrepreneurial point of view, there are yet more reasons for optimism regarding the future of venture capital in Africa. Afro-entrepreneurs are leveraging technology and developing ground-breaking solutions addressing the most pertinent challenges on the continent. As the continent develops “African solutions to African problems”, the number of “investment-ready” businesses also grows commensurately, creating more investment opportunities for so-inclined venture capitalists.