A panel discussion at the recent Africa Financial Industry Summit pointed to the need for VC-backed start-ups to focus on cash management and profitability.
Africa’s venture capital (VC) industry has seen significant growth in recent years. The number of VC transactions recorded on the continent expanded at a compound annual rate of 32% between 2014 and 2021. In the first half of 2022, the cumulative value of VC deals in Africa reached $3.5 billion, an increase of 133% from the same period in 2021.
Despite the boom times of the past few years, VC-backed start-ups in Africa may have to contend with a more challenging funding environment. This was one of the takeaways from a panel discussion on private equity at the recent Africa Financial Industry Summit in Lomé, Togo.
The current global economic situation has contributed to a slowdown in global VC funding. In the recent past, low interest rates and a sluggish world economy had driven investors to search for growth opportunities, and VC was one of the few places where they could potentially find double-digit returns. However, with the recent rise in inflation and interest rates, investors have been able to find higher returns in other more conservative investments, such as government bonds, and may not be as willing to take on the risk of investing in start-ups. Additionally, the value of publicly traded companies has declined, which has made it more challenging for privately held start-ups that are planning to go public to achieve high valuations.
The Africa Financial Industry Summit yielded valuable insights on the current state and future outlook of the VC industry in Africa. These are the three most important points that were made:
- There is going to be less VC money available for African start-ups.
- In the recent past, African start-ups had access to more capital and were able to invest heavily in hiring developers and other staff to grow top line revenues and transaction volumes. However, the current investment environment is characterised by a stronger focus on unit economics and the ability of start-ups to control and manage their cash burn. Investors now require clear visibility on when a start-up will break even and be profitable in a sustainable way, with a maximum time frame of 18 months. This shift in focus means that start-ups must now be more strategic in their use of capital and may need to adjust their business models to achieve profitability within a shorter time frame.
- Entrepreneurs will need to be prepared to make difficult decisions to secure the capital needed to support and grow their businesses in this challenging environment. This includes accepting down rounds – a funding round in which the valuation of a company is lower than it was in the previous funding round.