Africa’s early-stage startups are facing a new funding squeeze as venture capital firms increasingly prioritize backing proven companies over riskier young ventures in a bid to deliver returns to investors.
In the first half of the year, African startups raised around $1.4 billion, on par with the same period last year. But the number of deals fell sharply, according to separate fundraising tallies by Africa: The Big Deal, and TC Insights, raising average check sizes as a result. Beneficiaries of this trend tend to be later-stage companies with strong revenues, scale, and a firm handle on customer needs, rather than seed and series A startups that are still formulating their strategy, investors told Semafor.
The focus away from the early stage is expected because “exit discipline has become a credential rather than a footnote” for African investors, said Ibrahim Sagna, executive chairman of Silverbacks Holdings, an investor in this week’s $250 million round by Moove, the Lagos-born Waymo fleet manager. His firm banked its 10th exit earlier this year when Nigerian payments provider Flutterwave — in which it is an investor — acquired Mono, another Silverbacks portfolio company. “Fewer, better vetted bets” on growth-stage African tech companies will define the ongoing VC cycle, Sagna said, concentrating capital in businesses that are guaranteed to generate cash flow.
African VC fund managers are “coming under a lot more scrutiny in terms of cash returns, not just paper performance,” Justin Stanford, partner at South African early-stage investor 4Di Capital, said. Investors are being more discerning when assessing startups for realistic exit timelines, he said, “pushing managers to be more later stage” and dampening early-stage deals. 4Di, which backed AI-enabled agritech Aerobotics and Kenyan ecommerce logistics startup Wasoko in their earliest funding rounds, is preparing to raise a larger warchest that will succeed its current $20 million fund. But, as part of a revised thesis for better returns, the firm is considering taking up stakes in later-stage startups by buying out existing investors through secondaries, Stanford told Semafor.
Secondaries “could be something that we have to look at,” said Lexi Novitske, general partner at Norrsken22, a firm investing in middle-stage African startups out of a $205 million fund and on track to make seven investments this year. Norrsken22 could consider acquiring startup stakes from other investors to plug deal flow gaps, Novitske said.
