African Start-ups In Dilemma Despite Growing Fundraising Market – Survey
In the face of the growing fundraising market in Africa new start-ups are increasingly facing difficulties, analysis of the current African market by DAI Magister, a boutique investment bank, has shown.
According to the bank, just half the number of accelerator deals are taking place in the second quarter of this year, compared to Q2 2021. It said, “Just 16 per cent of deals in Q2 2022 were accelerator, compared with 32 per cent in Q2 2021.”
DAI Magister has analysed the African market over the past four to six weeks in anticipation of the upcoming fundraising season, to assess the challenges and requirements for key finance functions through the lens of fundraising, while the overall global investment market has declined with many investors treading cautiously.
But Africa’s ecosystem has experienced two very strong quarters in the first half of this year, it said. “June 2022 was the market’s strongest June yet, while Q2 and H1 2022 were also the strongest performing Q2 and H1 on record.
“The ‘big four’ venture capital markets in particular have seen capital flow into their regions, particularly Kenya, Egypt and Nigeria while South Africa has remained neutral,” the bank disclosed.
It noted that in Africa there are high structural growth rates compared to the rest of the world.
The Head of Africa at DAI Magister, Risana Zitha, was quoted as saying, “We’re building an interesting picture of the mindset of an investor looking to pool their resources into African businesses. There is an increased emphasis on compliance and capital efficiency, and many companies are exploring dual track mergers and acquisitions (M&A). In fact, all African M&A deals we’ve been a part of recently have been dual tracks.”
“We’re seeing that the rules have changed since last year. Restructuring to cut costs was not on the agenda in 2021, but now, businesses are being open about layoffs – and it’s being encouraged.
Zitha explained that investors have formed strong views on what they ‘like’ and ‘don’t like’, which is very different to even just a year ago and that it was important to remember that successfully raising even a smaller amount than originally anticipated has far more value in the current environment.
“Basically, a $ raised now is worth far more than a $ raised 12 months ago, because many competitors are seeing fundraisings delayed, and capital is always far more valuable when others do not have it..
“Flexibility is crucial to ensure that businesses are responding to the market so get that all-important ‘yes’ from investors,” he added.
According to Zitha, the significant decrease in accelerator deals in Q2 2022 relative to Q2 2021 was due partly to decrease in first time investors from the United States and Europe.
“Startups are likely to have less experience raising investment, so it’s essential that they’re able to take advantage of the growing market. This can only be done with the right guidance and resources to ensure they can make a success of their business and reap the benefits of the increased funding we’re seeing in later rounds.
“The same goes for businesses in Africa of all sizes. It’s a volatile time no matter what round you’re raising, and we’re seeing the need for leaders to begin to think differently about their business and approach to fundraising,” he added.
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