One would be forgiven for hoping that the end of the pandemic meant some light at the end of the tunnel for the global economy, but inflation continues to be stubbornly high, driving governments around the world to tighten their monetary policies.

Amid record lay-offs by the titans of the tech sector, and a global slowdown in investment and venture capital, the burgeoning African tech sector has remained an enclave of growth. 

With global investment flows seeing declines, some figures show global venture capital sharply declining by 42% in 2022. Africa is the only region not to see this slowdown, and in fact increased investment in 2021 to a record-breaking $4.33-billion and again in 2022 to $5.4-billion. 

In absolute numbers, this achievement is still modest – if not weak – evidence of a major sea change, especially considering that Africa accounts for just 0.2% of the value of global start-ups. 

Nevertheless, growth has been increasingly consistent and enduring in recent years. This is good news for the 22% of the working-age population across Africa who own their own businesses. 

The 80/20 rule applies as always. This growth has been concentrated in the “Big Four” countries of Nigeria, Kenya, Egypt and South Africa, which captured 87% of all investment into the continent over the last decade. 

Of the nine unicorns in Africa, eight were based in Nigeria and most were in fintech. Indeed, fintech remains the largest sector by a significant margin, while clean tech, logistics, mobility and e-commerce are other sectors of note. 

Mastercard’s study of the state of fintech in Africa revealed that in 2021, African fintech start-ups recorded 894% year-on-year growth. 

However, other sources show that, on balance, few start-ups transition to Series A, with most that have received funding remaining in pre-seed or seed stage. 

According to venture capital firm Double Feather Partners, the average rate of scale-up for African start-ups was decreasing from 12 to 17 years to only four years in 2022. This may suggest that start-up and investor market knowledge is maturing.

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For African start-ups, despite the good news, ecosystem weaknesses persist. On a macroeconomic level, investors remain deterred by information asymmetries, volatile exchange rates and high costs of doing business.

Furthermore, venture capital is not the only source of funding, nor is it necessarily the most appropriate source of funding for most businesses in the region. Markets lack angel investment networks and strong domestic institutional investors.

Between 2014 and 2020, 57% of investment came from venture capital and private equity investors, while just 1% came from institutional investors and 10% from corporates. This is increasingly resulting in debt financing as a means to fuel growth. 

Partech, an investment research firm, suggests a new role for debt fund managers, but currently there is limited applicability due to low economies of scale. This suggests that there is still a critical mass to aim for to optimise available financing. 

Given the fact that the digital economy will contribute an estimated $300-billion to African GDP by 2025 – a figure which represents nearly the entire South African economy – it should be a priority to be proactive in accelerating entrepreneurship and private sector growth in this space. 

In addition, it might be necessary to consider new forms of targeted industrial policy to support businesses and innovation to solve the unique problems that face African countries and to create additional stability in the market, allowing more balanced growth across sectors. 

Further, there is certainly a need for more funding for climate and green innovation as climate change poses an existential threat to most countries. 

There remains a further need for investment into infrastructure, education and digital skills, as well as a cohesive strategy to attract international tech talent. 

Thus, the slowdown in global investment flows should not deter the growth found across Africa. 

Investors on the continent will find a return on foreign direct investment of 11.4%, above the global average of 7.1%. For start-ups, there are optimistic investors looking to learn.

Long-term growth is assured if governments continue to support market development. DM/MC

Emma Ruiters is a technology and public policy analyst at the Tony Blair Institute for Global Change.