Compelling evidence that season’s changing for African ventures
MEET NICOLE Dunn. This week’s TechTides Africa column gets a shake-up courtesy of Nicole Dunn.
Dunn, co-founder and chief operating officer at South African fintech start-up Revio, spearheads go-to-market strategies, corporate planning and operational tactics.
Prior to joining Revio, she honed her skills over several years at Elixirr, a global challenger consultancy, and Founders Factory Africa, where we crossed paths as colleagues.
These days, I’ve found the most insightful way to track Dunn’s instructive career moves is by tuning into her updates on LinkedIn.
There she shares a wealth of firsthand insights drawn from her background as a consultant-turned-investor-turned-start-up operator.
Also noteworthy is her collaboration on the Next Frontier Podcast with US start-up advocate Brian Kearney, offering listeners an in-depth look at the intricacies of African start-up ecosystems.
Amid ongoing discussions about whether Africa’s current venture capital landscape is experiencing a “winter”, “plateau” or “a reset”, Revio made headlines with the announcement of its $5.2 million (R97.3m) seed round.
The fund-raiser, led by QED Investors and supported by Partech Partners along with existing investors Speedinvest, RaliCap, and Everywhere VC, was an opportunity to tap into Dunn’s operational skills.
Let the hi-jack commence
Dunn’s insights, in her words:
Africa, like the rest of the world has felt the impact of the global “funding winter”, with venture capital inflows declining by 28% in 2023.
Global investors pulled back investment activity on the continent, causing many start-ups to shut down or significantly restructure their operations.
Combined with macroeconomic headwinds such as dogged inflation and currency devaluation, some investors have questioned the ability of African start-ups to generate returns.
African fintech beast-mode potential
Last week, I was fortunate to attend FT Partners’ “Fintech in Africa” event in New York, which brought together some of Africa’s most promising startups and investors. It coincided with the Northern Hemisphere’s spring equinox, spelling the end to winter.
Much has been written about the continent’s population growth and how the region will be home to the world’s largest, youngest working population by 2050.
But let’s face it – global investors aren’t going to invest in Africa because its population is growing … they’re going to invest if they can make compelling returns.
At “Fintech in Africa”, the opportunity was made clear. The companies presenting included multiple businesses with more than $100 million (R1.8 billion) in annual revenue, with many growing profitably.
If these case studies exist, why is there doubt about the potential of local ventures? Speaking to global investors, there are three primary concerns: market-size, currency risk, and liquidity.
Straightforward complexities
Africa is a continent made up of 54 fragmented markets, and consumers with low, unpredictable incomes.
These dynamics create scepticism about market-size: is there enough purchasing
power to support billion-dollar businesses?
Often, the problems that African start-ups are solving centre around access, inclusion and infrastructure.
Through combining new technologies and business models, these solutions can create markets and unlock purchasing power.
For example, M-Kopa, a smartphone-financing platform has enabled more than 4 million customers to increase their productivity and purchasing power.
M-Kopa does this by offering alternative credit-scoring models and flexible-payment options for devices with embedded financial services.
Fairmoney, a digital lender is now the third-largest lender in Nigeria (including commercial banks), disbursing about 300 000 loans per month.
These businesses have bypassed incumbents unable to serve most African consumers, because of the challenges cited as objections to market size.
Similarly, businesses such as Onafrique have created opportunities from market fragmentation.
Start-ups building in the cross-border commerce and payments sectors will likely experience tailwinds resulting from the African Continental Free Trade Area (AfCFTA).
But even if significant market opportunities exist, do they outweigh the risks?
To show real growth in dollar terms is extremely difficult in markets such as Nigeria, where the naira has depreciated 78% in the past two years.
When speaking to global funds, the optimists argue that currency volatility isn’t as meaningful when considering the seven to 10-year venture returns time horizon used as a hedge.
Others pointed out that the risk is concentrated in specific markets, while other economies offer more stability with pegged currencies, as in the CFAfranc zone.
Broadly, the sentiment seems to be that while the risk exists, it is known and quantifiable and is overpriced into company valuations.
Lastly, there is the question of liquidity. Risk-adjusted returns may be possible on paper, but can they be realised in a real-world exit?
It is important to qualify that most funds have only been investing in Africa for the past eight to 10 years. So, the question of exit track record is premature.
However, there are promising trends to suggest liquidity is increasing on the continent.
The first is the increase in M&A activity by global companies and local consolidation. There have been more than 100 exits in Africa in the past five years, 75 of these in fintech, representing $1.4bn in announced transaction value.
These exits, while smaller than the global venture capital benchmarks, need to be considered relative to the capital invested.
Moreover, because of the lack of growth capital on the continent, companies have often had to accept local acquisitions as a substitute for Series B+ rounds, which may have led to more significant outcomes.
Secondly, GCC countries represent new sources of wealth that may offer increased liquidity in Africa – both through private markets (including secondaries) and potentially through alternative stock exchanges.
It is too early to judge the role that public markets will play in Africa. Still, it was interesting to see both the New York Stock Exchange and the London Stock Exchange represented in a panel on African exits – a topic unthinkable just five years ago.
While the landscape continues to evolve, there is compelling evidence to suggest that seasons are changing for African ventures.
The words of American writer and journalist Hal Borland ring true, “No winter lasts forever, no spring skips its turn.”