African start-ups face challenges after record funding drive in 2022

With recession looming and job cuts accelerating across technology companies, private equity and venture capital firms are trying to conserve cash

Cairo. Start-up investment has been concentrated in four of Africa's more developed markets: Egypt, Nigeria, Kenya and South Africa. AFP

African start-ups raised a record $5.3 billion last year, though that may be the high-water mark as a deepening slump in the technology industry reduces the funding pool.

While investment in 2022 exceeded the previous year by just $100,000, the number of deals jumped 20 per cent to 964, according to data from Briter Bridges, a market intelligence company.

“There are some red flags in that the mega-deals are largely driven by overseas, non-African-committed investors,” said Dario Giuliani, director at Briter Bridges.

“There is a risk that the pool for growth funding may be limited in 2023.”

Global funds such as Sequoia Capital, Tiger Global and the failed crypto company FTX led the largest investments in African start-ups over the past few years.

But with recession looming in many Western nations and job cuts accelerating across technology companies — Amazon is laying off more than 18,000 employees — private equity and venture capital firms may choose to conserve cash.

“Valuations of tech companies” are depressed, said William Sonneborn, International Finance's global director of disruptive technology and funds.

“Private businesses aren’t immune from how listed comparables are valued. I expect several high-profile downrounds on the continent this year.”

While more than a third of African start-up funding was for FinTechs last year, the trend is shifting, Mr Sonneborn said.

Health technology, climate and farming technology will attract funds this year, he added.

Investment has been concentrated in four of the continent’s more developed markets — Egypt, Nigeria, Kenya and South Africa — which are battling economic challenges from slowing growth to currency depreciation. That may hit financing opportunities, according to Briter Bridges’ Mr Giuliani.

The Egyptian pound is at a record low, while the Nigerian economy is reeling under rising debt and its currency is weakening.

Ghana and Kenya have also seen their currencies depreciate.

“While in 2021, companies were encouraged to grow at all costs, they now are focused on preserving cash, reducing burn and delaying their next round as long as possible,” Mr Sonneborn said.

Shares of African start-up Jumia Technologies, which trade in New York, have fallen about 68 per cent in the past 12 months and the company’s founders quit in November.

Chipper Cash and Wave were also affected by the collapse of Sam Bankman-Fried’s FTX, which had invested in both.