Africa’s VC industry logs record number of deals in first half of 2022
This article is an excerpt from the African Private Equity and Venture Capital Association’s 2022 H1 African Venture Capital Activity Report.
Africa’s innovation ecosystem has seen a highly eventful start to the year. Riding high from a record breaking 2021 on multiple fronts, gloomy predictions ringing from every corner only a few months into 2022 of a global macroeconomic downturn featuring protracted periods of feeble growth and elevated inflation have raised questions of whether the industry is running on borrowed time, and if its inflection point is imminent.
AVCA’s 2022 Venture Capital in Africa report predicted an economic revival for the continent in 2022, following the double-digit growth the industry witnessed in 2021. While the head and tailwinds of the final quarter of 2022 remain to be seen, the rising tide of venture capital in Africa in 2022 H1 affirmed this optimism for the industry at the start of the year.
The first half of 2022 saw 445 VC deals (to 300 unique companies) take place in Africa’s venture ecosystem, in yet another record for the industry. This corresponds to a year-on-year (YoY) growth of 72% from 2021 H1. Despite the historic tendency for increased deal activity in the tail end of the year, the first six months of 2022 demonstrated strong annual growth in a muted global macroeconomic environment where contractions rather than expansions were the norm.
Assuming all else remains unchanged and a similar compound annual growth rate carries forward into 2022 H2, we can expect the total volume of VC deals to reach approximately 900 deals by the close of 20225 – a 38% YoY increase from the 650 deals that took place in 2021.
The value of VC deals reported in Africa in the first six months of 2022 also echo this growth story. The cumulative value of VC deals reached $3.5 billion in 2022 H1, raised by 300 unique start-ups. This equates to a 133% YoY increase from 2021 H1 – far outstripping the global average and establishing Africa as the only market to register more than single digit growth for the period. This impressive growth in start-up funding, which goes against the grain of global trends this year, demonstrates the depth of opportunity as well as the potential the continent has to offer. It is also the result of a concerted effort by African governments in recent years to nurture vibrant and supportive ecosystems, enabling entrepreneurship and investment to thrive. Recent examples of this include the Zambian government’s bid to transform the country into a regional start-up hub and “the Singapore of Africa”. Likewise, the launch of Silicon Zanzibar further exemplifies this commitment to creating enabling environments for African start-ups to thrive, remain competitive, and attract commercial capital. Therefore, although Africa’s venture ecosystem is comparatively less advanced than its continental counterparts (representing just 1% of global venture funding in 2022 H1), we can undoubtedly anticipate more growth for the industry in the future.
Looking forward, given a historic concentration of deal activity and value towards the end of the year, we can expect the value of VC deals in 2022 H2 to at least equal, but more likely moderately exceed, those of 2022 H1.
Assuming all else remains unchanged and a similar compound annual growth rate carries forward into 2022 H2, we can expect the value of capital generated by African start-ups to reach $7 billion by the close of 2022 – a 35% YoY increase from the $5.2 billion raised in 2021.
Investment stage focus
The industry’s impressive pace of investment acceleration is also visible from a more micro-focused lens, where every investment stage recorded double-digit growth in 2022 H1.
Seed stage deals, which continually comprise the largest proportion of VC deal volume in Africa, demonstrated a robust 97% YoY increase from the previous year. The median value of seed deals also showed significant growth in this period, rising from $0.6 million in 2021 H1 to $1.8 million in 2022 H1. With the volume of seed-stage deals almost doubling year-on-year, this growing sample also illustrates how start-ups have concurrently been raising larger seed funding rounds. Notable seed deals that took place in the first half of 2022 include the $19 million seed round in Egyptian infrastructure management platform Pylon, as well as the $23 million seed round in MARA, a pan-African cryptocurrency start-up.
On the opposite side of the spectrum, late-stage deals (which more than doubled in the last year) are appearing with increasing frequency in Africa’s start-up ecosystem. Curiously, only three of the nine super-sized deals (deals with a value of $100 million or more) that took place in 2022 H1 fell in the late-stage category. This suggests that start-ups are raising larger, high-profile funding rounds earlier in their funding lifecycle. A selection of late stage deals that occurred in this period include Flutterwave’s $250 million series D round and the $91 million series C round in South African chat commerce provider Clickatell.
Geographic spotlight: Multi-region deals
While multi-region deals typically account for a small proportion of VC deal volume each year, they routinely comprise the largest share of deal value, and 2022 H1 was no exception. Multi-region deals commanded an average of 14% of VC deal volume but a significant 45% of VC deal value between 2016 and 2021. More specifically, multi-region deals grew from 17 deals with a cumulative value of $0.5 billion in 2016, to 44 deals with a cumulative value of $1.8 billion in 2021. Worth noting, the volume (42) and value ($1.5 billion) of multi-region deals that took place in 2022 H1 nearly equals those that took place in 2021.
The moderate, but steady, surge in multi-region deal activity doesn’t necessarily indicate an investor preference for start-ups with a widespread geographic footprint, but is rather evidence of businesses raising follow-on funding over time earmarked for geographic expansion. African start-ups are establishing a multi-regional presence on the continent in two ways: either by direct, organic business expansion in new markets, or via the use of mergers and acquisitions (M&A) as a tool for their regional expansion over time. The larger ticket sizes that typically accompany multi-region deals enable recipient portfolio companies to not only accelerate customer acquisition in existing markets, but also enables them to scale regionally either by establishing their own brand’s presence or by using M&A as a tool for market entry across borders.
Of the 42 multi-region deals that took place in 2022 H1, 16 deals (38%) were in companies which have pursued geographic diversification via direct business expansion, while 15 deals (36%) were in companies that have leveraged M&A to facilitate their regional expansion, indicating the dynamism of this strategy.
Examples of start-ups that raised funding earmarked for geographic expansion in 2022 H1 include:
- Wasoko’s $125 million series B round that enabled the Kenyan e-commerce firm to launch in Côte d’Ivoire and Senegal, thereby officially expanding into West Africa.
- The $75 million funding round in Kenyan solar and financial technology firm M-Kopa in March 2022, which the company intends to use to cement its launch in Ghana and expand into additional countries, adding to its hubs in Kenya, Uganda and Nigeria.
- Nigerian digital bank Umba raised a $15 million series A round in April 2022 to expand into three new African markets, and recently announced the acquisition of Kenyan community microfinance bank Daraja in August 2022.
- Shortly after announcing a $100 million series C2 funding round, in June 2022 MFS Africa announced the acquisition of US-based Global Technology Partners, a prepaid cards processer in Africa which works with over 80 banks in 34 African countries. This follows on from another acquisition that took place in March 2022 where MFS Africa acquired Nigerian super-agent Baxi, facilitating their entry into the West African market.
When categorised from a sector-specific level, the distribution of early-stage financing in 2022 H1 reveals a familiar picture. Financials remains a titan of the ecosystem as the most active sector by both volume (32%) and value (44%), followed by consumer discretionary which drew 17% of deal volume. Overtaking information technology, the industrials sector emerged as the third most active sector by volume in 2022 H1, accounting for 16% of the total number of VC deals that took place in the period. It owes its increasing prominence in Africa’s venture landscape to a surge of deals in the transportation and commercial and professional services industries. Each sector carried forward a strong growth momentum into the first six months of 2022, maintaining a YoY growth of 60%-plus from 2021 H1.
Sectors emerging from the margins to the mainstream
Healthcare: The number of healthcare deals struck in the first half of the year have shown incremental year-on-year development between 2020 and 2022. While the sector only accounts for 7% of the cumulative volume of deals recorded in Africa at the start of 2022, it nevertheless remains a rising sector to watch. Early-stage companies offering traditional healthcare equipment and services routinely attract the bulk of deal activity in the sector. However, deals in the pharmaceuticals, biotechnology and life sciences industry have shown modest acceleration in the last three years – rising from one such deal in 2020 H1 to a dozen in 2022 H1. Examples of deals in this category that took place in 2022 H1 include the $3 million seed round in Ghanaian cancer research and diagnostics company Yemaachi Biotech, as well as BluePeak Private Capital’s $15 million seed round in Africure, a pan-African generic pharmaceuticals manufacturer.
Education: A lasting imprint of the Covid-19 pandemic which necessitated online, home-based learning for students has been a proliferation of start-ups using innovative technology to facilitate learning. There are now over 150 active edtech start-ups across 25 African countries bridging the gap in access to quality education, a significant proportion of which are less than three years old. Illustratively, the number of edtech start-ups that raised funding increased by 64% in the last year, from 14 in 2021 H1 to 23 in 2022 H1. Notable edtech deals that took place in 2022 H1 include the $8 million series A in Tunisian statup GoMyCode led by AfricInvest, as well as the $6 million series A in Kukua, a Kenyan educational entertainment company.
Utilities: AVCA’s 2021 African Private Capital Activity Report found that the utilities sector dominated infrastructure investments in 2021, accounting for 56% of deal volume therein. As the subject of modest increases in deal activity in recent years, this sector has also begun to gain traction in the venture ecosystem. Of note, all fifteen utilities deals struck in 2022 H1 were climate related investments. Funding recipients were a varied combination of independent power and renewable electricity producers, as well as cleantech start-ups leveraging technology to accelerate the renewable energy transition. Notable deals that took place in 2022 H1 include the $260 million series D in off-grid solar energy provider Sun King. This super-sized deal accounted for a significant 72% of funding allocated to the utilites sector in 2022 H1. Another is the $40 million series C round in GridX, a company building customised digital energy solutions for businesses in sub-Saharan Africa.