Despite a large youthful, digitally savvy population and growing mobile usage, Africa has lagged behind even its emerging market peers, like Latin America, when it comes to venture capital activity. But the African fintech market has been accelerating, with startups securing around $330.5 million in H1 2021, more than double the amount raised the entire year before, according to a report from Disrupt Africa, a tech-focused research and news organization based in the region.
“Africa is almost like a blank canvas that VCs and startups can build on,” Pierre Suhrcke, a partner at European growth investor TempoCap, said. “We’re going to see a quantum leap in the development of [its] ecosystem and there’s a great amount of opportunity for really strong returns.”
Higher geopolitical and currency-related risks, as well as the fragmented nature of the continent, have historically deterred non-African VCs from entering the region, according to Suhrcke, but the sheer size of the market and recent success stories like Nigeria-born payments startup Flutterwave—which achieved unicorn status in March with a $170 million round, according to PitchBook data—have made the continent more attractive.
“In the investment community, it’s always a case of success breeding success,” Johan Bosini, a partner at South Africa’s Quona Capital said. “There’s now real evidence of appetite from larger investors, which has led to more confidence in the ecosystem and unlocked a lot more local capital and expertise, further fueling growth.”
Valuations in Africa are another draw for foreign investors, as prices skyrocket in regions like the US and Europe. According to Suhrcke, Africa hasn’t been a priority because VCs have been able to make stellar returns in the West. But some smaller investors may find it more difficult to produce good returns based on current valuations, leading them to look further afield.
Foreign investors are more willing to deploy capital in the region, but Bosini believes that many startups may be undervalued due to the increased risks. Africa has only a few billion-dollar-plus startups, and most achieved unicorn status in the last couple of years—like Flutterwave and its payments peer, Interswitch, which was valued at $1 billion in 2019 after a partnership with Visa. But with high risk comes high reward, and firms entering the market earlier stand to make solid returns as the ecosystem matures.
Some recent examples of foreign investors in Africa include Japan’s Uncovered Fund, which reportedly launched a $15 million vehicle in February to back early-stage African startups, while US firms like Tiger Global are jumping into the fray with reported investments in companies like microfinance startup FairMoney. Earlier this week, Valar Ventures and existing investor Target Global led a $55 million round in challenger bank Kuda at a $500 million valuation, TechCrunch reported.
“Our first investment in Kuda last year really opened our eyes to the new wave of digital companies emerging across Africa,” Ricardo Schäfer, a partner at Target Global, said. “There’s a number of fantastic companies solving real pain points and addressing huge markets. It’s hard to predict the future, but I think we’ll see a similar inflection of successful startups in Africa that we saw in places like India and China 20 years ago.”
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