The Ice is Melting, and No it is not Global Warming

The venture capital (VC) winter may be at its peak in Africa, with only $780 million raised in the first half of 2024—a staggering 57% decline from the $1.8 billion raised in the same period in 2023. According to Partech Africa GP ’s VC funding report, African startups secured a total of $3.5 billion in 2023, reflecting a 46% decrease from the previous year. However, there is reason to believe that the ice may finally be melting, with a projected increase in global deal flow by Q3 2025 as inflationary pressures ease worldwide.

I recall watching Dr. Ola Brown, MFR ’s VC outlook for 2024 especially her outlook for monetary policy and it’s fair to say that she was spot on.

Global central banks have raised interest rates higher for longer to combat inflation, a consequence of the COVID-19 pandemic and the subsequent efforts to restart economies through near-zero interest rates and quantitative easing.

The Federal Reserve raised its benchmark interest rates to a range of 5.25%-5.50% in an effort to reduce the U.S. inflation rate, which peaked at 9.1% in 2022. These rate hikes have had the desired effect: the increased cost of capital has led investors to exercise greater caution in how they allocate funds. This acted as a tail wind for the VC winter blowing across US, Europe, ASPAC and Africa.

The increase in interest rate have helped calm inflation, alleviated shipping and maritime bottlenecks have also eased inflation pressures associated from energy cost. The U.S. Consumer Price Index (CPI) is now approaching the Federal Reserve’s benchmark target of 2%. This easing of inflationary pressures prompted Federal Reserve Chairman Jerome Powell to cut interest rates by 50 basis points in September, signaling the possibility of two more cuts before the year ends.

According to the CME FedWatch tool, markets are currently pricing in approximately 175 to 200 basis points (bps) of rate cuts by mid-2025. This would reduce the Federal Reserve’s benchmark interest rate to a range of approximately 3.25%-3.50%, driven by slowing inflation. This trend is not confined to the U.S.; global central banks are also adopting a similar approach.

With the U.S. elections approaching, both candidates favor an accommodating monetary policy environment to spur economic growth for American firms. However, a potential Trump presidency could usher in an era of lower interest rates, as he has suggested during his campaign.

As interest rates decline and inflationary pressures remain low—barring any significant escalation in global tensions or conflicts in the Middle East—the cost of capital is likely to decrease, facilitating an increase in deal flow. This flow may be delayed in Africa due to the ripple effects of its still-nascent market.

Yet, the winter hasn’t been entirely bleak. The lack of deal flow and capital has prompted VCs to shift their focus from “aggressive scaling” to seeking a “path to profitability.” This shift has encouraged founders to rethink their strategies and build more resilient companies. Additionally, investors are increasingly demanding better communication and reporting from founders. According to a 2024 investor relations report released by Wimbart in partnership with Ventures Platform Fund , 71.4% of respondents indicated they would not consider follow-on investments if founders consistently fail to provide updates. This emerging culture of accountability is likely to foster growth when the ice finally melts and deal flow resumes.