By JAMES ANYANZWA

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Africa recorded a $1.4 billion decline in venture capital deals in the first six months of this year as global investors pulled out of big-ticket funding rounds.

The latest report by the African Private Capital Association (AVCA) shows that every investment stage suffered severe contractions by both volume and value, with only 263 VC deals completed in the continent’s venture ecosystem, allocating a total of $2.1 billion worth of capital to 258 unique companies.

This translates to a 40 percent drop by both volume and value, compared with the $3.5 billion raised in the same period last year.

The report titled Africa in the Global Context: Another Lean Year for Venture Capital, shows investors are now applying a more judicious approach to investment in Africa, although they are still actively allocating capital to start-ups with strong fundamentals.

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Venture capital (VC) is a form of private equity that funds start-ups and early-stage, emerging companies with significant potential for growth.

According to the report, VC investors shied away from big-ticket funding rounds between January and June, with only five super-sized deals raising just over $1 billion.

This compares unfavourably with last year when nine such deals were completed, raising $1.3 billion.

The report, however, notes that although the number of start-ups concluding deals with a value of $100 million or more fell, the proportion of overall funding assumed by these high-profile funding rounds in each quarter remained largely consistent with the historical average.

The “funding winter,” started in the third quarter (July-September) of 2022, mainly as result of the global macroeconomic downturn.

“The funding dips of Q1 2023 and Q2 2023 are better described as a funding plateau. When evaluated against the historical average for the period (2017-2022), industry activity in Africa’s venture capital ecosystem in 2023 compares favourably,” says the report.

Dominating sectors

West Africa attracted the highest overall volume of VC deals in Africa in the first half of 2023, taking up 31 percent of the deals, followed by East Africa (22 percent), North Africa (20 percent) and Southern Africa (20 percent).

On the other hand, the financial sector dominated the venture capital activities during the period, taking up 26 percent of the deals, followed by IT (20 percent), consumer discretionary (15 percent), industrials (nine percent), healthcare (nine percent) and communication services (six percent).

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Others were consumer staples (four percent), real estate (four percent) and materials (three percent).

Financial technology firms continued to drive deal activity on the continent, standing once again as the most dominant vertical among tech-enabled start-ups that successfully received funding.

Several of the largest deals for the period were also linked to the financial sector, including a $35 million Series B round in South African digital lender Lulalend, a $30 million pre-Series B funding round for Nigerian payment service provider Nomba, and three of the five super-sized deals the period saw, which account for a combined $615 million.

Cleantech is making waves in the global venture capital landscape, tying with fintech as the most popular vertical among the top 10 highest-funded start-ups internationally in Q1, 2023.

According to the report, cleantech, renewable energy and energy storage have garnered increasing interest and investment from European VCs, amid concerns over the availability and cost of energy amid Russia-Ukraine war.

The rising tide of cleantech globally was also visible in Africa’s early-stage ecosystem, where it was the second most active vertical among African VC-backed technology or tech-enabled companies in the first half of 2023.

Seed-stage deals assumed the largest proportion of VC deal activity, accounting for a colossal 71 percent of venture deal flow to start-ups on the continent in Q1 and 72 percent in Q2.

But deal counts in this category fell 55 percent compared with the same period last year, debunking, to some extent, early predictions that seed rounds would remain unaffected in 2023.

Late-stage deals

There were only two late-stage deals taking place in first quarter while three occurred in second quarter, accounting for a cumulative $500 million of venture capital.

Read: African startups face funding challenge

“Given the significant market uncertainty in developed markets, the fall of the later stages comes as no surprise as global VC investors (which disproportionately led the charge for these large, late-stage deals) continued to pull back from mega rounds,” said report.

But, even with this slowdown in late-stage funding, a number of high-profile deals took place in half one of 2023, including the $77.8 million pre-Series C round in South African digital bank TymeBank and the $330 million Series F in drone designer and manufacturer Zipline.

While super-sized deals routinely comprise both equity and debt, venture debt is assuming a larger component and consequently playing a more prominent role in these funding rounds.

According to the report, three of the continent’s five megadeals raised a substantial amount of debt financing as part of the investment round.

For instance, over $200 million of Kenyan asset financing platform M-Kopa’s fundraise was sustainability-linked debt financing, while South African car subscription start-up Planet 42’s fundraises included a $75 million credit facility.

Egyptian FinTech unicorn MNT-Halan raised $140 million through two securitised bond issuances to complement their $260 million equity raise.