Forget Tourist Capital: Why We’re Optimistic About the Future of VC in Africa

It was a difficult year for African startups. 

After a booming 2022 in which African startups raised $5 billion, the total last year raised on the continent fell by a third, according to data from Africa: The Big Deal. Some startups have closed. Many have been battling to survive. Others were forced into major cost-cutting or layoffs. Growth-stage startups were snapped up by competitors at discounted prices. Overcrowded sectors like fintech, logistics, and B2B ecommerce saw consolidation. Meanwhile, the investors that remained are tougher, demanding positive unit economics and a path to profitability.    

This tough landscape for startups set off a round of hand-wringing about the future of VC in Africa. Panels discussed ‘Is the venture capital model working for Africa?’ Investors worried publicly about stagnation and immaturity, and commentators highlighted the small size of local markets, macroeconomic conditions, and other challenges. 

Even though we remain positive, it is important to acknowledge just how hard the last few years have been for many African entrepreneurs. We witnessed this firsthand across the continent. Working to support the Endeavor Entrepreneurs in our network, we have also observed that some types of founders and businesses have been more impacted than others:

• There continues to be a large disparity between the amount of funding that goes to local founders versus expats in markets like East Africa.

• As in many other regions, female founders only attract approximately 2% of VC capital in Africa.  

• Growth-stage businesses too have been particularly hard hit. The international VC funds that have left were largely the ones writing the big checks for later funding rounds, meaning there is now limited growth-stage capital available. 

But at Endeavor we have a different, longer-term perspective on VC funding cycles. Having been deeply active in emerging markets for decades, we’ve observed bubbles inflate, pop, and inflate again many times. Staying in these markets through these ups and downs has been a key factor in our success. 

While there was a smattering of private deals and impact investing happening on the continent prior to 2018, VC in Africa in any real sense is only six years old. The first year more than $1 billion in VC money was invested on the continent was 2019. 

We remain confident that the venture capital model can work in Africa. Particularly due to our involvement in Latin America, where Endeavor has been for 27 years. We’ve seen this cycle before. 

Beware of tourist capital 

While Africa has not yet completed a single full funding cycle, Latin America has now been through several, and offers a template for how both the availability of capital and optimism go through periods of boom and bust in emerging markets, even as the underlying ecosystems grow and advance steadily. The Latin American example even suggests that short-term hardship can lead to long-term advantages. 

VC in Latin America kicked off around 2010 with a few exploratory funds set up by a handful of founders who had been through successful exits, such as Kaszek Ventures, established by Mercado Libre co-founder Hernan Kazah and former CFO Nicolas Szekasy, and Canary VC, established by Florian Hagenbuch and Mate Pencz, the co-founders of Brazilian startup Loft.

Excitement about opportunities in the region led to a small bubble around 2012, according to Igor Piquet, head of LATAM at Endeavor Catalyst. As VC spiked worldwide in 2020 and 2021, Latin America experienced another bigger boom followed by a steep crash.

Each downturn led to the flight of a lot of what Igor terms “tourist capital.” “It shows up on vacation, everything is awesome. And then they leave when things go bad,” he said. “That’s going to happen in every emerging market.” 

This exact scenario has just played out in the Africa VC space, where there was a 50% drop in the number of investors participating in funding rounds, with a major decline in investors based outside the continent. But even as foreign money sloshed in and out of Latin America over the last few years, fewer observers questioned whether the VC model was fit for the region long-term than are now expressing pessimism about Africa. Why is that?

Partly, that’s because local investors, such as Kaszek, Monashees, Redpoint eVentures, and Angel Ventures, fill in some of the gaps when foreign capital becomes scarcer. These funds were made possible by sizable exits years earlier. Africa is only six years into its journey with VC, so it is natural that it has yet to have many large exits. The local VC scene is consequently less developed, which has made the impact of the pullback in foreign capital appear more dramatic. 

What we at Endeavor term “the Multiplier Effect” — when successful founders go on to mentor and invest in younger entrepreneurs catalyzing further growth in the ecosystem — is only just getting started. 

A new African playbook

To overcome Africa’s challenges, we need to write our own playbook. By 2050, one in every four people will be African. Huge businesses will be created by building the infrastructure to serve this market. 

Today’s environment, challenging as it has been, is helping African entrepreneurs do just that. The downturn is beginning to forge founder-led ecosystems that are more committed and resilient than ever. It is also revealing which business models and sectors are most successful. Those that stick around through the hard times will benefit from this knowledge, as well as the old-fashioned power of persistence and compounding. 

“Investors leave frontier markets very quickly in tough times, and their return is always far slower,” said Dare Okoudjou, the founder and CEO of digital payment startup Onafriq (former MFS Africa), which raised a $200 million C round in 2022. 

At Endeavor, we’re committed to catalyzing the sharing of this hard-won knowledge across the complete startup journey, from scaleup to exit, by providing a platform for founders to pay it forward at every stage. The current struggles of African startups are painful. They are also valuable data. By helping founders connect and share their learnings, we hope to accelerate both the Multiplier Effect and the growth of African ecosystems. 

Moniepoint CEO and Endeavor Entrepreneur Tosin Eniolorunda has responded to VC volatility in Africa by focusing on building resilience.

“Moniepoint never benefited from the VC market hype, so we’ve needed to raise capital gradually in smaller amounts, and always on the basis of business fundamentals,” he reports. Moniepoint is a Nigerian fintech company that provides digital financial services, including mobile banking and payment processing, to underserved populations and small businesses. “I’ve always been focused on building a business that is profitable and does not rely on external funding to survive.” For Tosin, this means maintaining discipline around unit economics no matter what happens in the fundraising market. 

There are however green shoots of this founder-to-funder profile among emerging investors. Ken Njoroge, co-founder of pan-African fintech giant Cellulant, has recently shifted his focus to investing in the next generation of African entrepreneurs through his boutique investment firm PANI. Melvyn Lubega, co-founder of the South African unicorn Go1 is now an investor at Breega. 

“Tourist” capital may come and go. As Latin America proves, that’s a normal part of the development of any emerging startup ecosystem. It’s a sign that it’s still early days for Africa, not that Africa isn’t suitable for VC investment. But at Endeavor, we stick around. 

Why? Because we believe, for investors and founders who truly understand the continent’s challenges and potential, building in Africa offers the potential for both out-sized impact and out-sized returns.