African Startup Funding Landscape in 2023: A Closer Look at the $2.9 Billion Raised Despite a 39% Decline
In 2023, African startups faced a challenging funding landscape, experiencing a 39% year-on-year decline as they collectively raised $2.9 billion. This significant dip was reported by ‘Africa: The Big Deal,’ a platform that meticulously monitors startup deals across the continent.
The contrast with the previous year, where African startups secured $4.8 billion in 2022, highlighted the impact of the global slowdown in venture capital activity.
However, amidst the funding downturn, the report also revealed a silver lining for African startups, noting that the results were better than anticipated, considering the prevailing funding constraints during the year.
Analysis of Capital Raise Activities
The research platform offered a comprehensive analysis of capital raise activities by African startups in 2023. The report disclosed that startups on the continent secured a minimum of $2.9 billion through deals of $100,000 and above, encompassing various deal types such as equity, debt, and grants while excluding exits.
Notably, the report identified 19 exits in 2023, totaling over half a billion dollars, with standout success stories being InstaDeep’s acquisition by BioNTech and Expensya’s acquisition by Medius.
Despite the overall decline, the report highlighted that 500 startups managed to secure at least $100,000 in funding in 2023, a figure substantially lower than the 821 startups in 2022, representing another 39% year-on-year decrease.
However, it emphasized that the average deal size remained consistent between 2022 and 2023, a positive aspect considering the challenging global economic climate.
The Shift from Equity to Debt
An interesting trend identified in the report was the shift from equity to debt as a financing strategy for African startups. The report disclosed that startups increasingly turned to debt to fuel their growth, with the amount of debt raised reaching $1.1 billion, signifying a remarkable 47% year-on-year growth. In contrast, equity funding experienced a substantial decline of 57% during the same period.
A comparison between 2022 and 2023 indicated a significant change in the financing landscape. In 2022, startups in Africa had a debt-to-equity ratio of 19 cents of debt for every $1 of equity secured.
However, in 2023, this ratio surged to 65 cents, with debt constituting 38% of all funding raised, a substantial increase from the 16% reported in 2022.
Long-term Trend: Rise of Debt Financing
Interestingly, the shift towards debt financing among African startups did not emerge suddenly in 2023. According to a recent report by Briter Bridges, a research and market intelligence firm focusing on emerging economies, African startups had borrowed a cumulative total of $2.1 billion between 2014 and 2023. This indicates a growing reliance on debt as a financing strategy over the years.
The Briter Bridges report further highlighted that debt financing in the African startup ecosystem had experienced significant growth over the last five years, primarily driven by a decline in equity funding. From 2019 to H1 2023, the share of debt in the total funding volume to ventures in Africa surged from 4% to 26%.
Factors Driving the Shift to Debt
The report by Briter Bridges suggested that while debt is undoubtedly playing a vital role in Africa’s startup ecosystem, innovations on the financing side are making it more accessible. One of the most significant factors contributing to the rise of debt in Africa’s startup ecosystems is the notable fall in equity funding. The report cited a decline from $2.6 billion in 2022 to $1.4 billion in 2023, marking a substantial decrease over a single year.
Over the past decade, the Briter Bridges report revealed that digital, technology-enabled, and green companies in Africa had raised more than $2 billion in disclosed debt funding. This funding was sourced from a diverse pool of over 140 funders, involving more than 200 deals.
The Role of Debt in Africa’s Startup Ecosystem
Debt financing is emerging as a crucial component of Africa’s startup ecosystem, providing an alternative avenue for startups to secure the capital needed for growth and innovation. As equity funding faces challenges and experiences fluctuations, startups are exploring debt as a more stable and reliable source of financing.
The report also shed light on the fact that debt funding is not only becoming more prevalent but is also becoming more diversified in terms of the industries and sectors it supports.
Digital, technology-enabled, and green companies, in particular, have been major beneficiaries of debt financing in Africa, emphasizing the importance of these sectors in driving economic development and sustainability.
Regional Variations and Future Outlook
While the overall trend points towards a shift in funding strategies among African startups, it’s essential to consider regional variations. Different regions within Africa may exhibit varying levels of reliance on debt versus equity, influenced by local economic conditions, regulatory environments, and industry dynamics.
Looking ahead, the future outlook for African startup funding remains dynamic. As startups continue to navigate the evolving landscape, adaptability and innovative financing approaches, including debt financing, will likely play a pivotal role in sustaining growth and resilience.
In conclusion, despite the 39% decline in funding experienced by African startups in 2023, the ecosystem displayed resilience and adaptability. The shift towards debt financing, coupled with a consistent average deal size, underscores the dynamism of Africa’s startup landscape. As startups chart their course in the coming years, understanding and leveraging the changing funding dynamics will be crucial for sustained success and impact.
