Funding for African startups set to reach record highs

FIFI PETERS: Good news. Funding for African startups is growing really fast. In fact, a lot faster than in other parts of the world where funding in the first six months of this year or so has actually declined. African startups received over $3 billion in funding, which was more than double [that] the same time a year ago, and that was according to research from research firm, Africa: The Big Deal.

Here to tell us why companies on the continent are defying funding trends that seem to be taking place elsewhere in the world, like in the US and Europe and Latin America, as well as Asia, is Natalie Kolbe, managing partner of Norrsken22. Natalie, thanks so much for your time.

[There’s] a whole lot of interest right now towards African companies. I think that this is a pretty positive, but what is driving it, in your view?

NATALIE KOLBE: Yes, Fifi. I think there’s a whole bunch of reasons. I think first of all there’s a structural issue within the funding world.

If you have a look at the funding that came into the African startup ecosystem last year, a difficult year in 2021, less than 1% of capital that flowed into startups globally came and made its way to the African continent. That was in a record year for Africa, and in a time where that funding has grown 10 times in five years. So it has literally grown from half a billion to over $5 billion in five years. But still, we are only getting less than less than half one percent.

I think what people are starting to see is that there is big opportunity on the continent. We have the youngest population globally, with the majority of our population below the age of 30 – and these are digitally savvy people who are entrepreneurial and really looking to find ways to build businesses that can solve real problems on the continent. And investors are waking up to that opportunity.

FIFI PETERS: Right. Thanks for raising that point in terms of providing the context. It is something that I did see; even though funding towards startups in the US was lower in the first six months of this year, they still raised or managed to raise $123 billion. Then compare that to [the] $3 billion that we have raised – although it’s on the up, it’s still pretty minuscule.

I’m wondering if what’s happening right now in terms of a whole lot more funds seemingly coming our way at a faster pace – whether that signals a change in the tide or a change in the fortunes in which pretty soon we could be unlocking a lot more of the global funding pie.

NATALIE KOLBE: Yes, Fifi, I would hope so. We can see it in the funds that we are raising. We’ve raised $110 million to date. We’re still on that funding path and capital is coming into the fund.

But 99.9% of the money coming in is all foreign. A very small percentage is coming from the African continent. That tells you about the level of interest. There are many funds on the continent that are funded by foreigners. There obviously has been a dislocation in the market and that hits the developed world quicker than it does Africa, particularly in a world where inflation is rising, interest rates are rising, and the indebted nations or indebted consumers are still pinched quicker than those that are not.

In the African continent consumers are not as indebted, relative to the developed world, so we don’t necessarily see that quick pullback in liquidity that you would see in the developed world. I think we are likely to see some pullback in the second half of the year given the market conditions, but overall the opportunity still stacks up.

FIFI PETERS: Okay. So some pullbacks. This pace of growth may or may not be repeated in the second half of this year if the worst-case scenarios that people are talking about, if the likes of recession in the US [eventuate], and if inflation still remains elevated. If those things pan out, we might see a deceleration. That’s what you’re saying.

NATALIE KOLBE: I wouldn’t be surprised if we do see a deceleration in the second half of the year, but I wouldn’t expect [to see] the dramatic decline that we’ve seen in the rest of the world happening on the continent. Certainly once these current kind of issues play out, that wall of capital, I think, will still find its way to the continent because of the opportunities being presented. And particularly in the tech-enabled space, where African industries are able to leapfrog right through a digital offering and kind of sort out some of the big problems that we’re experiencing on the continent.

FIFI PETERS: Leading to the next question, the money that is coming, we’ll take it – the money that is coming. What we have seen historically is a whole lot of interest in the tech space, financial services, education and healthcare. I’m wondering if those remain the areas of opportunity for investors – investors even like yourself and the companies that you are holding in your portfolio.

NATALIE KOLBE: Definitely, Fifi. And those sectors are exactly the sectors that we as a fund are focused on. It’s because of the opportunity that technology provides.

You mentioned education – we are failing our young people on the continent through education. Certainly the governments are not able to provide the level of education that is needed. Through technology you are able to bring the best maths teacher into a classroom in an online environment where you physically wouldn’t be able to do that in an offline kind of bricks-and-mortar world.

So the opportunity is vast [in being] able to relook some of the traditional ways of doing business and the traditional ways of providing services through the use of technology. Africa doesn’t have the barriers of having that kind of infrastructure in place, and we’re able to go straight to the finish line.

FIFI PETERS: Africa is also a continent of many countries – 54 or 55, depending on which list you’re looking at. The reason I’m making that distinction is because it looks like investors are making that distinction in terms of where they choose to put their money.

Since January the funding towards companies in Kenya [has] increased fourfold, according to this research firm Africa: The Big Deal. So Kenya got a whole lot more. Nigeria also got a whole lot more funding towards companies over there. [It] more than doubled whereas, if you look at South Africa according to the research, not much change. I’d like your sentiments on that. What does that mean? How do we interpret that?

NATALIE KOLBE: Fifi, just to take a step back, 80% to 90% of the capital that goes into the tech ecosystem goes into four countries, and those are the beacon economies of Africa – Egypt, Kenya, Nigeria and South Africa. That’s normal for the rest of the world; capital generally flows to tech hubs, so it goes to Silicon [Valley], goes to Stockholm, London. So that is normal – that the capital will flow to those kind of beacon economies and the tech hubs of Africa. And when it does, it will ebb and flow between different countries at different times.

What we do see that’s different, [comparing] South Africa to the rest of the continent, is quite a lot of opportunity in fintech outside South Africa. South Africa’s has a very developed financial services system and very big established banks, so the opportunity in fintech will be less than it would be in places like Kenya and Nigeria. There you are seeing a lot of startup companies in the fintech space.

So where there is more opportunity for a different way of doing business, that’s where startups really flourish.

FIFI PETERS: What you’re saying is then perhaps this is not an indictment or disapproval by foreign capital to put money in South Africa because of issues like [the] persistent load shedding that we have experienced in the first six months of the year because of maybe damage and all that, or the vulnerability to climate change, given the flooding situation in KZN earlier on in the year, and also the very fragile social fabric, just taking stock of what happened in July last year with the riots. So you’re saying it has less to do with that and more to do with the fact that South Africa’s market may be a lot more advanced than mature in the areas of financial services, as you just said.

NATALIE KOLBE: Exactly. All countries have their issues. I mean, South Africa has those issues that you recognise with other countries on the continent, and frankly in the developed world as well. Everyone has their bucket of issues that they have to carry around with them.

But it really comes down to where people see the opportunity. Certainly in the fintech world you’re seeing significant opportunity in places like Kenya and Nigeria; that opportunity doesn’t necessarily exist in South Africa because we already have the infrastructures in place.

FIFI PETERS: Ah, got you. Natalie, thanks so much for your time for joining us, giving us the insights there into your world. Natalie Kolbe is the managing partner of Norrsken22.