A tough and rough year for East African startups

Private capital, which is largely injected on slightly older companies, also declined by 50.9 percent to $339 million, from last year’s $690 million, even though the number of deals rose from 66 to 67 in the nine months to September.

Investor activity is significantly dampened across the content, but it is particularly worse for East Africa, which not only recorded a slump in the value of deals, but also in the average value per deal.

“The reduction in venture capital flows is largely due to the retreat of global investors (particularly from North America) who had opportunistic rather than dedicated mandates for African investments,” AVCA said in a quartrely assessment of venture capital activity on the continent.

Venture capitalists are also now prioritising putting their money in established companies run by ‘notable’ founders rather than in early-stage start-ups, constraining funds available to feed the continent’s budding innovations.

Notable decline

“This shift toward doubling down on existing investments has resulted in fewer deals overall and a notable decline in aggregate funding, further amplifying the region’s challenges in attracting capital amidst global economic uncertainty,” AVCA said.

But even as investors favour injecting cash into more established companies, they are moving away from other forms of private capital to private equity, which grants them ownership of a part of the company rather than just lending to them.

Initial assessment by the continental body that tracks start-up activity reveals that the funding drought has significantly affected the small companies across the continent, with many scaling down operations to keep up with the lean times.

Read: Poor investor relations cited for start-up funding hitch in Africa

“As the funding downturn persists within the venture capital industry, startups in Africa have been forced to scale down growth and shift focus to streamlining processes and product offering to stay afloat,” stated AVCA.

Globally, funding for startups has shrunk by 15 percent during the quarter to September, but Africa’s venture capital funding, specifically, dropped faster than in any other part of the world, while Latin America and North America saw a 13 percent and 14 percent growth respectively.

As Europe and Asia respectively posted 39 percent and 44 percent decline in the value of VC deals closed in quarter three compared to last year, Africa’s dropped by 47 percent, indicating a dip in investor confidence on the continent’s economic prospects.

Other regions on the continent are not having it any easier. Southern Africa’ s VC deals dropped by 74 percent to $152 million in the first three quarters of the year, from $577 million a similar period last year.

Central Africa recorded the largest drop yet, from $46 million last year to 6 million, while West Africa’s venture capitalist funding to startups fell 57 percent to $185 million from $431 million. North Africa’s remains the top attractor of VC deals, albeit a fall from last year’s 532 million to $368 million.

With the funding drought, the worst affected sectors are the healthcare, utilities, real estate, and industrials, which not only recorded a decline in investor funding, but also saw a drop in the share of the continent’s startup funding directed to them.

Financial technology (Fintechs) and artificial intelligence (AI) startups dominate the funding received this year, jointly getting 45 percent of the total venture capital funding so far this year.