Africa is predicted to experience a sustained funding slowdown in 2023

African tech start-ups had a strong start in 2022, with venture funding doubling from the previous year to reach $3 billion in the first half of the year. However, the VC market correction caught up with the continent in the second half of 2022, resulting in a decline in overall venture funding for Africa. Despite this, 2022 was still a successful year for venture capital funding in Africa’s tech ecosystem, with an 8% increase from the previous year, totalling $6.5 billion according to global investment platform Partech a venture capital firm.

However, recent data released by Disrupt Africa shows that African tech start-ups experienced a significant decline in capital raised in Q1 of 2023 compared to the same period last year. In Q1 of 2023, African start-ups raised $649 million, while in the same period in 2022, start-ups raised $1.5 billion. The number of African start-ups that raised capital has also significantly declined by over 100%, from 175 to only 87. This is particularly concerning because funding in Q1 last year made up more than half of the total capital raised by African startups in 2022.

There are concerns that venture capital firms may slow down their funding for scaling start-ups in Africa this year, and layoffs, closures, and bridge rounds may increase in the African start-up ecosystem, making it difficult for new and existing start-ups to raise capital. This slowdown is attributed to the global economic slowdown and recent tight money policies and inflation, and investors on the continent will be cautious in their investment approach due to these economic pressures.

Despite the scarcity of capital, efficient growth and capital efficiency are becoming the new norm for start-ups. Start-ups need to focus on free cash flow and profitability to secure further funding from venture capitalists. Shrewd selection of growth strategies is also crucial, with a focus on testing one or two workable strategies, rather than launching many experiments simultaneously. Those that fail to grow efficiently will face challenging times and may go bust.

Portfolio companies should have a minimum of 24 months runway to weather the current economic downturn. While the African start-up ecosystem space may not return to the pre-2023 boom days, good companies will still be able to raise funds at good valuations. The better-funded ventures may face bigger challenges, as it is harder to find larger funding rounds from the continent alone.