Local Investors in Africa Step Up to the Challenge

The investment landscape in Africa has shown significant growth and resilience, with aggregate startup funding surpassing the $20 billion mark in the first half of 2023 since the Global Financial Crisis, according to Briter Bridges*. Amidst the evolving trends in the landscape, one distinct trend has shaped up: the increased participation of local investors.

Local investment in African startups has traditionally been constrained by various factors, including limited domestic capital pools, high interest rates, a dearth of success stories, a lack clear regulatory frameworks, and an uncertain business environment, leading to foreign capital allocators dominating the startup funding scene. Nevertheless, recent years have witnessed a noteworthy trend of local (Africa-based) investors rising to the occasion.

According to Briter Bridges, local investors accounted for a substantial 46% of the total funding volume for African startups in H1 20232. This represents a significant increase from previous years, signaling the rapid expansion of the local fund manager community and growing confidence among local investors in the African startup ecosystem. Africa: The Big Deal reports that more than half of $1 million+ deals in Africa since 2019 have had at least one Africa-based investor as a major participant. This percentage has experienced substantial growth since 2019, surging from 36% to 58% in 20223. Similar participation rates are observed in larger $10 million+ deals. Africa: The Big Deal also highlights a growing trend of African investors taking the lead in funding African startups.

In 2023, for the first time, a majority (35%) of investors involved in deals over $100,000 were headquartered in Africa, surpassing North America (27%) which had previously held the top spot. The report also finds that investors making more than one deal, skew even more heavily towards local (39%)4. This data suggests a maturing African investment landscape with local actors playing an increasingly prominent role.

In recent years, local investors have developed a deeper appreciation for the investment potential of African startups. This shift is evidenced by an increase in African and African-based VC funds with majority African teams, marking a positive development for the African startup ecosystem. Local investors bring a unique advantage with their deeper understanding of the African market and culture, enabling them to effectively identify and support promising startups.

Several factors have contributed to this heightened awareness. Firstly, the success of African startups, both financially and in terms of impact, has raised their profile among local investors. Notable exits such as the Jumia IPO, Stripe’s acquisition of Paystack, BioNTech’s acquisition of InstaDeep and several M&A deals, as well as the massive influx of foreign venture capital funding have contributed to improved awareness of the opportunity African startups present. Secondly, the rapid growth of the African tech ecosystem, nurturing numerous startups, has simplified the process for local investors to identify and invest in promising ventures. Furthermore, the infusion of funding from successful African entrepreneurs who reinvest their wealth obtained from building and exiting successful ventures has significantly contributed to this trend. Moreover, the increasing availability of data and insights on African startups has played a pivotal role in illuminating their investment potential. Access to comprehensive information empowers local investors to make well-informed investment decisions. Lastly, the emergence of local investment vehicles, including VC firms and angel investor networks dedicated to African startups, has streamlined the process for local investors to access and invest in startups.

Also fueling this shift is the impact of rising global interest rates, which makes risky assets from developing markets less attractive to some foreign investors, due to the increased attractiveness of risk-free investment outlets such as fixed income. For context, as of March 2024, benchmark interest rates have risen significantly – the US Fed interest rate is now 5.5%, up from 0.25% in December 20234. Similar increases have occurred in the UK and EU. With a reduced risk appetite, foreign investors have significantly reduced their exposure to African startups and if they are investing, they are increasingly seeking local funding partners who possess on-the-ground experience and a deep understanding of the African market to lead deals and lead the due diligence process.

Aruwa’s Perspective

As a local investor with its entire team on the ground in Lagos, Aruwa Capital Management continues to actively deploy capital and remains significantly bullish on the long term African investment opportunity. As a local gender-lens growth equity and impact fund, Aruwa Capital staunchly believes in the investment potential offered by funding women-led or women-focused African businesses. We also celebrate the initiatives of local gender-lens investors such as FirstCheck Africa , Alitheia IDF , WIC CAPITAL , Chui Ventures , VestedWorld - Invest In Your World , Janngo.africa , and several others which have made significant contributions to fostering greater gender diversity in the investment landscape. Despite progress, a significant gender gap remains. According to Africa: The Big Deal, solo female-founded startups received less than 2.5% of venture capital inflows in 2023, and only 15% of funding went to startups with a solo female founder or a woman on the founding team.

We also acknowledge that Africa-based investors are actively championing inclusivity on the continent. Data from Africa: The Big Deal demonstrates their significant involvement in startups led by all-female founding teams, with their participation as major investors in over two-thirds (68%) of $1 million+ deals since 2019. The report also indicates a slightly higher level of participation in supporting female CEOs (59%) compared to male CEOs (53%) and startups with at least one female co-founder (58%) versus all-male founding teams (53%).

We believe the growing presence and active participation of local investors in Africa's VC & PE ecosystem represent encouraging signs of its maturation and potential for sustained growth. These developments are cultivating a dynamic investment environment with promising prospects for startups across the continent.

Sources:

• Briter Bridges
• Africa: The Big Deal
• Central Bank data

Written by Ayooluwa Aseweje

Investment Analyst, Aruwa Capital