Startups

Is global startup funding drying up? Implications for Africa’s startup ecosystem

Is global startup funding drying up? Implications for Africa's startup ecosystem - Startup Lagos

The 2021 funding deluge

Crunchbase reports that startup funding in 2021 hit all-time highs at over $643 billion. Investment into the global startup ecosystem reached over 10x of what it was a decade before. In 2020, the investment numbers had grown from $335 billion, representing a 92 percent growth. Of these stats, growth stage startups raised the bulk of capital, with over $196 billion more than in the preceding year, followed by early-stage startups and finally, seed-stage startups, each at increases of $100 billion and $10 billion respectively from 2020. The rank of the unicorns also grew well above 1,000, in what has become an oxymoron for what has become a sobriquet for a few elite startups succeeding beyond the $1 billion mark.

For Africa, a similar trend of remarkable growth is evident, with even more superlatives. The African startup ecosystem, according to Maxime Bayen and Max Cuvellier, at the end of the magical 2021, was growing over 40 percent faster than the global ecosystem. Last year, the continent had attracted over $4.3 billion in investment, across various sectors, with a near-even distribution of funding across the different stages of startup growth. This year, these successes, have not paled, as startups have still recorded phenomenal growth, rising above $2 billion already within the first four months of this year, with pundits predicting that venture funding on the continent is on track to hit a record $7 billion.

In spite of the recent issues on employee treatment and the Flutterwave debacle, that seemed to stir the waters of the ecosystem, particularly in Nigeria, Africa’s startup scene has been majorly characteristic of jubilations and successes.

Startup funding is slowing down globally

There is generally the assumption that private markets lag behind public markets. As such, what this means is that private companies experience valuation increases or decreases soon after it is observed in public markets. Particularly for startups, this is even more visible. The valuations of a number of tech companies have been corrected, with significant examples like Robinhood (from $12 billion in the private market to $9 billion), Coinbase (from $68 billion to $28 billion), SoFi (From around $9 billion to $5 billion), and Root (from around $4 billion to less than $500 million). In fact, it is reported that major technology firms have lost more than $1 trillion in combined market value over the past three trading sessions, as market value trickles down for tech.

The question of valuations is quite a dicey one, as they are subjectively dependent on the connivance of factors such as the background and pedigree of the founder(s), the potential sizes of the problem that the startup is addressing, what is happening with the sector that the startup plays, and investor demand in that sector. Many aver that this is to bring rationality back to tech valuations and avoid the circumstances of over-exaggeration.

Jason Pressman, MD of Shasta Ventures had echoed these challenges when he opined that,

I think there’s overfunding and overhype in many sectors; many more unicorn startups will go bankrupt.

While this may seem very pessimistic, the reality is quite shocking. He highlights that there would be more startup unicorns, like Fast, closing shop under the heat.

It could be possible that the shocks in the public markets are only reverberating in private markets just now. However, it is clear that there is a shortage of investment for startups this year, with economic forces hitting in heavily. These challenging times come on the back of stock market plunges, effects of the Russian-Ukraine invasion, and rising inflation rates globally. In response to all these challenges, many startups are cutting costs and laying off employees. People are also reacting to these pullbacks in the market by dumping their stocks. The number of persons dumping their shares has doubled so far in the first three months of the year as against last year, as Phil Haslett, Founder of EquityZen points out. Share prices of unicorns, the beautiful poster-children of startups globally, also have had their share prices downvalued from 44 percent to 22 percent within recent months.

In big startup ecosystems like the United States, Europe, Asia, and Latin America layoffs have become the order of the day. We have had at least 55 companies that have announced job cuts since the beginning of this year, as against around 25 last year. Startup companies that had blossomed during the pandemic and increased their employee strength rapidly, are seriously shrinking their workforce, even amidst a high unemployment rate in the US. Top companies in the US as well, such as Meta and Google are in a hiring freeze for some positions for the rest of the year. In India, more than 1,700 people have been reported to have lost their jobs in what is said to be a great downsizing fever for startups globally. This number represents significant layoffs by startups like Unacademy, Meesho, Furlenco, Lido Learning, and Trell.

The last time there was a global startup investment dry-up in 2016/2017, a number of companies were hard hit, and had to rely on lay-offs to keep afloat. This seems to represent a bigger shake-up for the global ecosystem, with many VC-backed companies finding that they need to restructure their businesses to survive in the absence of investment support. The startup growth strategy focuses heavily on investors’ money to keep afloat, as there is less concern about increasing the bottom line and more interest in the topline.

Startups focus on topline growth so that they can scale fast. As such, they rely heavily on investments to fund their operations, while growing the topline - Startup Lagos
Startups focus on topline growth so that they can scale fast. As such, they rely heavily on investments to fund their operations, while growing the topline.

Where does Africa stand?

Without a doubt, these issues have a foreboding cloud over African tech. In Africa, the biggest investment firms have been Tiger Global and Softbank, leading and participating in a significant majority of investment rounds on the continent. These investment firms are not spared the harrowing storm of the markets. Tiger Global is set to record its worst year since its founding, with an over 44 percent decline. The company has lost over $16 billion in assets under management (AUM) this year, Bloomberg reports. These have come due to the macroeconomic challenges that the markets have been grappling with, causing rising inflation and interest rates.

While Africa’s ecosystem is still on its growth trajectory, it is important that stakeholders begin to brace up for these storms. It is possible that investors would focus more on the early stages. Africa is still brimming with huge investment potential with the continent’s middle class growing even faster than the population under the support of greater investments in the service sector. Countries within the continent also suffer infrastructural gaps that when solved, would vastly enhance the impact of solutions that businesses bring. Still, startups, especially at the growth stages have to start to structure their businesses to cater to a dearth of investments and stand resilient on the back of profitability.

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