Did African tech live up to its hype?

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Investing is a leap of faith.

You spot an opportunity, weigh the risks, and place your bet, hoping for a big win.

In the past decade, Africa was pitched as the next big win.

We had the fastest-growing population, a bulging middle class, and a swarm of young people wielding smartphones.

For bold founders, the opportunity was massive.

And for investors who backed them, the payoffs could be huge.

Fast forward to 2024.

A few startups, like Instadeep and Paystack, made it to successful exits.

Others, like Copia, raised tons of cash but struggled to cope.

And a slew of others bit the dust, leaving investors holding empty bags.

But hey, there are lessons in the wins and the losses.

A month ago, we wrote about what founders can pick up from startup closures.

But what about investors?

What's been their biggest takeaway from investing in the continent over the last 10 years?

And did African tech live up to its hype?

1. A big population ≠ a big market

When a founder starts talking about market size, investors sit up.

For African founders, the market size slide is the ace in their deck.

Why?

Africa is on a fast and furious boom, with the youngest population in the world.

For the longest time, we used this big population to size up its consumer market.

• We’ll make up 1/4 of the planet by 2050

• The average African is only 19

• And African cities like Lagos will soon get bigger than Mumbai, Tokyo, and Beijing

The demographics hype train took off.

And western media, including The Economist and The Financial Times, jumped on it.

By 2021, foreign investors poured $83 billion into Africa, eyeing its booming population as the next consumer market.

But…

A market isn't just about the number of people.

Spending power needs to come into the equation too.

If income is low, you'll be fighting for your customers' money against basic needs like food and shelter.

That's how you end up backing a food delivery startup in a market where people can barely afford three meals a day.

Sure, some will use your product, but there aren't enough of them to beat the tough unit economics of the delivery space.

And remember, Africa isn't one big market.

Each country has its own market size.

This means a smaller country with higher spending power can be bigger than a larger one where people have less money to spend.

In Nigeria, Africa’s most populated country, 63% of people live in poverty.

And Nigerians are spending up to 70% of their income on food.

The country is facing its worst food inflation in decades.

And it's really cut down on what people can afford to spend on other things.

So how big is the Nigerian consumer market really?

2. Due Diligence is still due

Due diligence can take anywhere between weeks and months.

But at the height of the startup gold rush in 2021, deals were closing in days.

At this year’s Africa Tech Summit, Edmund Higgenbottam, managing director of Verdant Capital, said many valuations were "insane" back then.

“Some businesses that were funded during this time shouldn’t have been, if we were to be candid.”

And he’s right.

When Dash, one of Ghana's 'biggest' fintech companies, went under, it became clear we weren't grilling founders enough.

Dash kicked off in 2019, aiming to link mobile money wallets and bank accounts across Africa.

But in 2021, they started tossing around some wild growth numbers.

They claimed $1 billion in transactions and a million users from Ghana, Nigeria, and Kenya.

On the back of these figures, they raised a $32.8 million seed round in 2022, bringing their total funding to over $86 million.

But last year, the CEO got suspended for cooking up financials.

Eventually, they shut down, becoming one of Africa's biggest startup scandals.

There are many lessons to learn from Dash.

But the biggest lesson is that the value is in local VCs.

Cooking $1 billion in transaction volumes and getting away with it shouldn’t happen if you have your ear to the ground.

We need more local VCs who know the African market and can catch things that don’t add up.

Does anyone in Ghana know a friend of a friend who uses Dash? No? Then something’s up.

Aaron Fu, VP at DCG Expeditions, puts it this way:

“We certainly believe that many local VCs have an advantage when it comes to early-stage due diligence. They’re more in touch with their customers and broader value chain.”’

“Local VCs also have wider local networks to conduct team reference checks,” he adds.

3. Africa’s tech promise is still alive

Eric Osiakwan, Managing Partner at Chanzo Capital, predicted that 2023 would separate the strong from the weak.

And that companies with solid fundamentals would survive, while the rest failing or pivoting.

This is exactly what happened, and 2023 hit African startups hard.

Funding dropped by 31% to around $4.5 billion from the $6.5 billion raised in 2022.

And we saw big names shutting down or scaling back - affecting investor confidence.

But this year, investor confidence is coming back.

Last month, African startups raised $187 million in fresh funding- a jump from April's $75 million.

This was the second-highest month for fundraising in the past six months.

Founders need to prep for the new normal: tighter due diligence.

Sure, it can be a drag because founders want to raise quickly.

But thorough investor checks are great because they’ll make everyone focus on unit economics, profitability, and exits from the start.

Lexi Novitske, general partner at Norssken22, thinks companies that focus on these will become hot picks.

“It’ll give investors a lot more confidence in not only their numbers but their ability to handle fast growth.“

So, 2023 was a tough year.

But we’re calling it "the year of reset" because we needed the market correction.

We had to adjust from the crazy high valuations fuelled by hype to the reality of where Africa stands as a consumer market.

We got a peek at what doesn’t work, why pocket size beats population, and why having local investors can be more helpful in due diligence.

On future playbooks, the focus on revenue and profits is here to stay.

What else do you think African VCs will do differently after 2023?

Hit reply and let us know.

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