In recent years, the venture capital industry has been awash in money. Billions of dollars have flowed into VC firms, driving up valuations and fueling a cycle of huge money inflows into Africa. 

‍

Now, that cycle appears to be slowing down. The global economic slowdown is causing investors to hesitate, and the flow of VC money into African tech companies is not as fast-paced as it was before.

‍

In 2021, African startups raised up to $5 billion. In the first quarter of 2022, the momentum went even stronger as startups raised up to $1.8 billion. However, the 2nd quarter of the year has brought quite a slowdown and even though the figures are yet to come in at the time of writing this article, we can expect a substantial drop in funding when compared to the first quarter of the year. 

‍

This slowdown is not unique to Africa; it is happening globally. The retreat of VC money is also a symptom of a broader problem: fears of a US recession. The US is the largest source of VC funding for African startups, and a recession there would have a ripple effect on the continent, especially as most startups are still in their early stages and rely heavily on western VC funding to raise series A, B, C.  

‍

The good news is that the slowdown in VC funding doesn't mean the end of Africa's tech startup ecosystem. There are still a number of African startups that will be able to raise money in the coming months, albeit at lower valuations. 

‍

This pullback however is a reality check for the African tech industry. The current situation presents a major challenge for African startups. In the short term, it will be painful for many startups. The days of easy money are over, and African tech companies will be forced to focus on fundamentals and build sustainable businesses. On the other hand, it could also lead to a wave of startup failures as cash-strapped companies run out of runway.

‍

At Ajim Capital, we think that these are a few areas which African founders need to take note of in the coming times.

‍

1.  Your 5 - 10 year exit ≠ Today's market condition: Startups should not be so bothered about today's market condition when their exit is still 5-10 years away. Instead, focus on building a strong business so that your startup will be able to withstand any market volatility. Also, always remember that your investors are in it for the long haul, so you should not be too worried about short-term market fluctuations.

‍

2.  Persist! Persist!! Persist!!!: This is perhaps the most important advice for startups in Africa. African founders are among the most persistent in the world. Building in the midst of problems like power supply fluctuations, little to no infrastructure and an emerging ecosystem, is enough to show how resilient they are. A downturn is almost no match for the hurdles they encounter daily on the way to creating great products.  

‍

3. Fair valuations: Now more than ever,  it's important for startups to focus on fair valuations. Even though there is a downturn, African investors and angels are still deploying capital to startups raising money at reasonable valuations. Startups will also need to be very careful about how they raise money so that they are not too dilutive. They should only raise money when they have a clear plan for how to use it and a solid track record of execution. In other words, build, scale and create valuable products and you have nothing to worry about.

‍

4. Revenue growth: With limited resources, startups will need to grow their revenues as quickly as possible to scale their businesses. Also, as they scale, they need to make sure that their unit economics are in line.  This means ensuring that they are making more money from each customer than it costs to acquire that customer. 

‍

Customer acquisition costs (CAC) > Lifetime value of a customer (LTV) =  Startup bleeding money.

‍

Also, expand your product offerings so that you are not too reliant on any one customer or product.

‍

On the flip side, for us at Ajim Capital, this is what investing in the coming months would look like: Making investments that are more aligned with our long-term success; It would also mean being more hands-on with portfolio companies and providing them with the resources and support they need to succeed, after all when they succeed, we succeed; And lastly, working more closely with other stakeholders in the startup ecosystem, from incubators and accelerators to corporate partners and government agencies.

‍

The African startup ecosystem is still in its early stages, but it’s already clear that the traditional VC model needs to be adapted to fit the unique challenges and opportunities of this continent, especially at this time.

‍

As Africa looks to build its own tech ecosystem, it’s important that we learn from the mistakes of other mature markets and build a more sustainable and inclusive ecosystem that can drive long-term economic growth.

‍

At the end of the day,  it’s all about building an ecosystem that can collectively improve Africa's GDP, create jobs, solve problems and make money. And that’s something we can all get behind.

‍