'Funding winter': Did venture capitalists previously back African start-ups without proper due diligence?

After 2023 was characterised by a funding downturn of start-ups in the African tech ecosystem, venture capitalists are speaking about backing ventures on the continent hastily and without proper due diligence in the past.

African start-ups had until then enjoyed a boom in funding from venture capital firms, with financial technology (fintech) firms accounting for most of the funding secured.

But 2023 saw decreased activity amid a so-called funding winter, especially in Africa’s ‘Big Four’, where the Kenyan start-up ecosystem flies high alongside Egypt, Nigeria and South Africa.

At the 2024 Africa Tech Summit in Nairobi on Wednesday, venture capital professionals acknowledged that behind some of the colourful announcements of closed deals and funding rounds was a fad by foreign investors seeking to back African start-ups without adequate research.

Andreata Muforo, a partner at TLcom Capital admitted that while there is a decrease in capital to back start-ups, some foreign investors entering the continent might not have done adequate due diligence before investing in African ventures.

Edmund Higgenbotam, the managing director of Verdant Capital noted that a lot of valuations were “insane” at the time.

“Some businesses that were funded during this time shouldn’t have been, if we were to be candid, although there is no denying that some are doing well,” he noted, adding that there was haste in funding and closing deals then.

Ms. Muforo exuded confidence that as 2024 kicks off, all is not lost. She noted that the situation is getting back to “pre-hype” numbers and called for more research in start-up backing.

“You might have to do more work and take longer but there are opportunities out there still,” she said.

She underlined the need for more capital dedicated to Africa, whether local or foreign, to sustain the continent’s tech ecosystem.

Ngetha Waithaka, a general partner at Norrsken22, on his part, said that start-ups that were raising high amounts in 2021 and 2022 might have to raise funding at a discounted valuation now.

The panelists linked the rush in closing funding deals to some of the several collapses which have been witnessed in recent years.

Data from the start-up funding tracker ‘Africa: The Big Deal’ at the close of last year showed that Kenya registered a 25 per cent year-on-year (YoY) decline despite attracting the most funding with just under $800m (Ksh.126 billion), which is 28 per cent of the continent’s total.

It was followed by Egypt with a 20 per cent YoY decline, South Africa, which saw an eight per cent YoY increase, and Nigeria with a 67 per cent YoY decline.

Several factors have been attributed to the difficult operating environment in the African tech ecosystem, among them rising inflation, weakening currency and unfavourable interest rates which saw foreign investors shift capital from emerging and frontier markets.

The Africa Tech Summit brings together tech leaders, finance institutions, investors, trade bodies, start-ups and media. It is meant to provide insight and networking with the African tech ecosystem to drive investment and business in African tech.

Now in its sixth edition, this year’s convention in Nairobi runs on Wednesday and Thursday.