Start-ups in Africa have increasingly been accessing more financing in seed, early-stage and late-stage capital, signalling an improving investment landscape on the continent’s budding companies. However, start-ups in the most crucial sectors are still lagging behind.
Latest reports indicate that last year, African start-ups attracted unprecedented amounts of funding from venture capitals, hubs and accelerators among other investors, defying the difficult economic times that saw investors retreat from African financial markets.
According to the African Private Equity and Venture Capital Association (AVCA), the continent’s start-ups raised a total of $3.5 billion in the first half of 2022, a 133 percent growth compared with the same period in 2021.
Based on the latest AVCA Report, majority of the financing raised went to start-ups in Financial Technology (FinTech), Information Technology, industrials, energy and utilities and e-commerce sectors.
In the same period, start-ups in the education, health and agricultural sectors raised the least amount of financing, albeit some growth, indicating investors’ reluctance to finance these areas which have been touted as the most crucial for Africa’s prosperity right now when multiple shocks are compounding on the continent.
The African Development Bank said in its African Economic Outlook Report released in January that strong agricultural performance remains key to buoying economic prosperity and resilience, especially after the Ukraine crisis shook the globe’s food supply chains.
Health and education sectors have also been touted as crucial sectors in reducing the growing inequality gap on the continent, with organisations such as Oxfam advocating for more investments in these ‘pro-poor’ areas to tackle widespread poverty and inequality.
Nonetheless, start-ups in these sectors have consistently been outpaced by their peers in the FinTech, e-commerce and IT sectors, in the race to raise funding for their business operations, thwarting innovation in the areas deemed most critical to Africa.
Last year, financing deals closed by health care and education start-ups jointly accounted for just about 15 percent of all the 300 deals closed on the continent in the six months to June 2022, the report says.
FinTechs, e-commerce and industrial start-ups on the other hand, accounted for 48 percent, 24 percent, and 23 percent of all the deals closed in the same period.
Experts at a forum convened by Friedrich Naumann Foundation in Nairobi last week to discuss challenges in the Kenya start-up ecosystem, were of the view that for start-ups in these sectors to thrive, they might need more of “patient capital” or concessional financing which many investors are not willing to give.
“Commercial Venture Capitals have their obligations to meet by make sure the sectors they invest have positive returns to their investors,” said Esther Ndeti, Investment Principal at Nairobi-based Unconventional Capital.
According to Ms Ndeti, although start-ups in these sectors lag behind others in raising capital, they have started to pick up pace, especially because the Covid-19 pandemic highlighted the importance of innovation in these fields.
“I think it’s only now that that real grasp of the potential of these businesses has come to light and we’re seeing funding now moving towards that,” she said.
Matthias von Bismark-Osten, Impact Banking Advisor at Germany-based Greenwich Capital Partners, posits that while it is important to invest in sectors most crucial to an economy, it is unclear whether it is really possible to steer the start-up scenery towards the problems of a country.
“When you see a sector that is really needed for further development of the economy and the society, you should attach it to the sectors of priority. It’s better to be strong in certain fields than to be looking after too many sectors without deep research and development base,” he said.
“In Germany, we had a good experience when the government held a roundtable with universities, start-up enablers, hubs, and industry federations to see where we had potential and then they decided to heavily support these sectors.”