How effective is funding to Africa’s tech start-ups?

Since 2016 African tech start-ups have recorded an increase in funding, that has helped push up the tech sector in the continent. With the pandemic, most investors mainly focused on tech, a trend that strengthened most African start-ups. As the world started to slowly recover from the pandemic, funding to African tech start-ups hit new heights.

In 2021, businesses substantively benefited as funding hit the $2 billion mark. On the other hand, the latest report by African Tech Startups Funding reveals that 2022 was a great year for the continent’s tech start-ups as funding surpassed the $3 billion mark. 

A total record of 633 African tech startups were able to raise Sh445.22 billion ($3.33billion) over the course of 2022. This was an increase compared to 2021, when the number of tech start-ups stood at 564 and the total funding was Sh287.46 billion ($2.15 billion). The number of investors in 2022 was also on a rise, standing at 987 different investors in comparison to the 771 tracked in 2021. 

Despite, a 12.2% growth in the number of tech start-ups and 55.1% growth in total funding, the yearly rate of growth slowed down since the period of the pandemic. Compared to 2020, whereby the total funding stood at Sh93.79 billion ($701.46 million), in 2021, the growth was up 206.3%. the number of African tech-start-ups that managed to raise funds also decreased from 167 between 2020 and 2021 to 69 between 2021 and 2022. 

Additionally, the growth in the number of investors managed to record a slowdown. The 2021 record was more than double that of 2020 but the growth between 2021 and 2022 stood at only 28%.

In the first three months of 2023, overall growth of funding has taken a major hit. According to Disrupt Africa, database for Africa’s start-up ecosystem, between January 1st and March 31st, African startups raised Sh86.81 billion ($649.30 million), which is significantly lower than the Sh203.22 billion ($1.52 billion) raised in the same period last year. The funding managed to drop by a record of 57.2%. In terms of deal volume, while 175 African startups had raised capital in the first quarter (Q1) of 2022, only 87 have been able to do so in the same period in 2023.

In 2022, Q1 was especially crucial for tech start-ups as it was responsible for around half of the total start-ups and total funding for the whole year. If the same trajectory was to continue the rest of the year, then African tech start-ups will record one of its slowest years. The reduction in funding in the period has been attributed to poor infrastructure, climate challenges and regulatory challenges that many African start-ups face that have led to investor caution. Many investors have shifted to a wait and see option before committing their investment.

Furthermore, the ongoing economic downturns and lack of viable business models have played a major role to low numbers and investments. Despite, the situation, Africa has already seen major investment in its shores. For example, Planet42’s Sh13.37 billion ($100 million) combination of debt and equity raise in February, and Carry1st’s Sh3.61 billion ($27 million) raise. 

The decline is quite alarming. Unlike the period between 2020 and 2022, where many investors looked to tech as the best investment, investors have started considering investments to other sectors. African governments need to throw their support behind these tech start-ups by ensuring they have the right infrastructure and regulatory requirements are not cumbersome but inviting. Only in doing so, will African start-ups continue to innovate and create new business models that not only drive growth to the sector but attract more investors to the shores of the continent.  

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