Mirroring the global downturn in venture funding, 2023 was an extremely challenging year for the venture ecosystem in Africa and even the strongest venture-backed companies had to brace against cold, blustery macroeconomic headwinds. Novastar’s investment team offered some reflections on 2023 and insights on what the year ahead holds for venture in Africa:
How do you think 2024 will shape up for African VC?
Steve Beck: Unfortunately, our predictions for 2023 proved to be true: things did get worse before getting better. While we already see signs of renewed growth in global venture markets, western-based VCs will stay close to home, remaining cautious toward opportunities in Africa. Don’t get me wrong; they will be back. The fundamental growth story in Africa will prove irresistible in the long run. But unless partnered alongside local VCs I don’t see many foreign VCs leading funding rounds on the continent in 2024.
The good news is that several new Africa-focused VC funds were capitalized during 2023. Fresh, smart capital is actively looking to back innovative businesses across venture stages from seed to growth. It’s a fantastic time to capitalize a new fund. There is of course no shortage of large-scale opportunities, and economic downturns have a history of spawning battle-hardened entrepreneurs building businesses that solve real-world problems for everyday people. VCs will be more deliberate in their diligence than they were during the heydays of 2021 and early 2022 so funding rounds will take time. The market will continue to favor capital efficient businesses that don’t burn a lot of cash searching for product-market and business-model fit.
How did Novastar’s investment strategy evolve in 2023 and what will be the focus for 2024?
Andrew Carruthers: As we expected, 2023 produced more climate derived systemic shocks for Africa. According to Carbon Brief, at least 15,700 people have died due to extreme weather on the continent in the period Jan-Nov 2023, and this is likely to be under-reported. Whilst the bulk were in Libya during Storm Daniel, it was also the flash floods in the DRC and Rwanda, and the floods and mudslides caused by Tropical Cyclone Freddy that affected Madagascar, Mozambique, Mauritus, Malawi and Zimbabwe. Meanwhile, more than 29 million people continue to face unrelenting drought conditions across Ethiopia, Somalia, Kenya, Djibouti, Mauritania and Niger, with southern African countries also enduring a months-long winter heatwave.
Anticipating this trend, Novastar spent 2023 looking for entrepreneurs using planet-positive technologies to increase the climate resilience and productivity of African consumers and producers, thereby harnessing the biggest growth muscle on the planet to alter the trajectory of climate change.
We found hundreds of them and are proud to have added KOKO Networks to our portfolio this year. KOKO is accessing the global compliance carbon markets to subsidise a clean cooking fuel for the Global South — replacing charcoal with bio-ethanol, thereby reducing 5m tons of emissions per household per year, reducing health risks, as well as the cost of living. In just a few short years, KOKO has grown to serve a third of households in Nairobi.
Our learnings from 2023 about how to use these carbon markets to deliver benefits to Africa’s young, growing, urbanising population and enable them to leap-frog the polluting development path of the Global North will be our focus for 2024.
What’s your advice for African entrepreneurs building businesses and looking to fundraise in 2024?
Sapna Shah: It’s likely still going to a tough fundraising environment in the first half of the year. The more you’re able to ‘cut the fat’, extend runway, conserve cash and focus on the fundamentals, the better positioned you’ll be to get through what may be a longer fundraising cycle than you expect.
That being said, the challenge of a much tighter fundraising environment is also an opportunity. Entrepreneurs addressing latent demand in vast markets, charting lean paths to growth and paying more attention to unit economics will continue to attract capital — creating wider social, environmental and economic benefits while doing so.
What other markets should African VC and entrepreneurs look to for partnership in 2024?
Riki Yamauchi: The capital, technology and long-term mindset offered by mature economies, like Japan, make for compelling partnerships with African entrepreneurs.
In 2023, Novastar announced a landmark strategic partnership with SBI Investments, one of Japan’s largest venture groups, to build a new, trusted bridge between Japan and Africa for financial and strategic investment, knowledge transfer and innovation learnings.
In 2024, we will continue to back transformative businesses creating lasting value for people and planet while leveraging our network of strategic Japanese investors.
What are the key sectors and regions you’ll be watching in 2024?
Dominic Michel: Climate tech is my sector to watch. Despite a 41% decrease in venture funding on the continent this year versus 2022, investment into climate tech ventures has shown strong resilience, only down 18%. A number of new African-focused climate venture funds have also been capitalised this year — e.g. Equator VC, Gaia Impact Fund, E3 Capital, Catalyst Fund — signalling confidence and interest in driving a more green, sustainable and resilient development pathway for the continent.
I’m particularly excited about what’s to come from climate innovations in Kenya; the country has recorded over 50% of all funding raised by climate tech startups this year, it hosted the inaugural Africa Climate Summit and President Ruto passed the Climate Change (Amendment) Act which lays important foundations for Kenya to become a leading supplier of Article 6 carbon credits to the global compliance markets.
What are some of your biggest learnings from 2023?
Olúwatóyìn Emmanuel-Olubake: Good governance is the skeleton a thriving business is built on. In this year I have seen businesses survive and thrive in difficult circumstances because entrepreneurs have actively leveraged the collective wisdom, networks, experiences, interests and even concerns represented at their boards. A good board is not just there for reporting or accountability. It requires intentionality, humility, commitment and generosity (amongst other things) from both the entrepreneurs and others around the table.
Resilient businesses deliver strong customer value propositions. It’s been a tough year for growth: currency devaluations across geographies, high inflation, limited funding available — ventures have had a lot to grapple with. The most customer centric businesses with strong value propositions are the ones customers will be reluctant to turn away from. Indeed, people may even use their services more because of the efficiencies and benefits they provide. It seems an obvious point, but it is very easy to get lost when companies are fighting for survival and that may be the time they need to be reminded of it the most.
Entrepreneurs can be superheros! Even in the best of years, this can be a challenging environment, and 2023 been the toughest year for ventures in recent times. Entrepreneurs in this environment should get a pat on the back (or a super cold chapman on a hot Lagos afternoon!) for even trying. It’s not easy and we admire the hard work being done for the people and planet. As you do your best to take care of your business, take care of yourself as well.
How will macroeconomic conditions in key African markets (e.g. currency devaluation in Nigeria and Kenya) impact businesses, and is there still opportunity in those markets?
Abel Boreto: 2023 has been a tough year for key venture capital markets in Africa, including Nigeria, Egypt, Kenya, Ghana and South Africa. We started 2023 with worsening macroeconomic conditions, including rising cost of living, disruptive load shedding, increasing taxation, acute dollar shortages, debt distress, and increasing unemployment. Going into 2024, these macroeconomic challenges don’t look to be quickly easing.
Such challenging conditions have radically reshaped venture-backed businesses across the continent. Successful businesses have undergone leaner routes to profitability and sustainability. At the same time, businesses that were slow or unwilling to adapt quickly have fallen by the wayside.
The silver lining in the current gloomy macroeconomic and fundraising outlook is that businesses providing affordable solutions and addressing latent demand such as BasiGo (electric mobility), KOKO Networks (clean cooking), Moniepoint (financial services) etc. are continuing to grow and attract capital. These resilient businesses are using challenging times to get leaner, unlock hidden opportunities and create more sustainable business models to not only survive but also thrive.
What is the outlook for exits in 2024?
Brian Waswani Odhiambo: 2024 will continue to be a slow year for exits — especially those that return capital to investors and founders. In 2023, many companies were forced to slow down growth and cut costs in order to survive the tough investment environment; this will continue in 2024 which makes it difficult to foresee any assets that will be ready for any M&A activity.
However, the tough capital markets will continue to present opportunities for distress sales of companies that are unable to raise capital and are short of runway. This might be an opportunity for well-capitalized or profitable companies to acquire on the cheap and perhaps with very small (if any) cash considerations. I believe that the current climate should force founders to strongly consider consolidation with other players in order to create greater efficiencies (increased margins), increase market share, improve top line revenues and as a result, present a more compelling case for investment.
