Innovations are encouraged in the continent but African players are not growing fast enough. Fintech and E-Commerce are the hottest fields for venture investors.
Summary:
- African countries are recovering from economic downturn while volatility remains in the region.
- Demographic dividend brings enormous potential, but it will take a very long time for Africa.
- Innovations are encouraged in the continent but African players are not growing fast enough.
- Fintech and E-Commerce are the hottest fields for venture investors.
Macroeconomic Overview
Despite a large space to improve, Africa as a whole has been gradually recovering. The overall gross domestic product reached 3.5% growth rate in 2018, down from 3.6% in 2017 recovering from a 2.1% in 2016.
Central banks are embracing a loosened monetary policy. Governments of countries such as Egypt, Nigeria, and Ghana, all reduced key policy rate. Inflation pressure eased in some African countries, yet remained key challenges in many other countries.
Demographic dividend
Africa has a population of 1.3 billion with a median age of 19.4. According to The Economist, Africa will replace Asia to be the global population driver, with a large improvement in life expectancy due to better HIV treatment. Besides, the birth rate has been decreasing for decades. The age structure is showing a population pyramid, indicating a relatively high fertility rate of the continent and above sub-replacement fertility level.
Demographic dividend is brought on to African countries. With decreasing infants, the working-age population grows greater than the newborns, releasing some parenting burden from the working labor. Under this structure, more economic resources will be located in human resource investment and capital investment, boosting economic development.
China's rapid economic development in the past several decades was closely related to this population dividends, due to policy change and societal development. This is one reason that investments were gradually flowing into Africa.
Whether Africa could perform as good as China in the new era remains to be discovered. But the age distribution will definitely lay a foundation to businesses in internet and high tech related vertical markets. In the long run, a demand surge is expected in retail, mobility, and entertainment industry with the growing labor force and new consumption behaviors planted.
Regional Integration
"The special theme for Africa this year is a regional integration for Africa's economic prosperity – not just for trade and economic cooperation but also for the delivery of regional public goods," shows a document from African Development Bank Group.
The African Development Bank has five priorities to speed up Africa's economic transformation - the 'High 5s' including Light up and power Africa, Feed Africa, Industrialize Africa, Integrate Africa, and Improve the quality of life. Regional integration is the top goal this year. So far, infrastructure has been a priority to African countries with more than USD 15 billion invested by the bank in energy, transport and ICT. Better logistics and infrastructure will stimulate further improvement in employment, consumption, and industry productivity.
Regional integration initiative would create a large market. Effective May 2019, the African Continental Free Trade Agreement (AfCFTA) is working on constituting the world's largest free trade area, which will consolidate a market of 1.3 billion consumers.
Though with demographic dividends and regional integration agreement, to generate real economic output requires a better education system, solid infrastructure construction, more stable societies and stronger governments. Investors are expected to be more patient for Africa.
Overall trend of financing activities
The overall performance investment activities in the last four years remain relatively flat, considering a comprehensive scope of funding types including equity, debt financing and non-equity assistance, from early stages to post IPO period.
Total investment activities through the first half of 2019 have decreased compared to the same period last year, according to data collected from Crunchbase. The 187 investment activities reported from Jan.1 to June 30 was a 18% decline from the same period last year, with 230 activities.
88 Companies actively seek fundings for more than once from the beginning of 2018 to the first half year of 2019, with 11 companies raised money more than once in the first half of 2019, decreasing from 17 in the same period of last year.
With a peak in 2016, total number of investment activities doesn't change a lot during the past four years, while the total financing amount steadily increased.
Among countries in Africa, Nigeria (West Africa) and South Africa take the lead as the top two largest African economies with the number of deals of 503 and 427 making up 27% and 23% of the total financing activities. These two countries supply half of the financing transactions on the continent.
Egypt and Kenya account for 14% of total investment activities respectively, followed by Ghana, Uganda, Zambia, Mauritius, and other countries all below 5%.
African financing activities are concentrated on seed rounds, non-equity assistance (when office space and mentorship were provided), as well as grant (when capitals are provided to a company without taking equity stakes). Early venture investment makes a growing trend, while the number of private equity rounds, as a late stage round with fewer risks, is declining.
This distribution of funding type depicts a situation where innovations are encouraged in this continent by all means. However, the late stage situation is quite volatile and African players are not growing fast enough.
Overview of venture capital market in H1 2019
In H1 2019, 33 startups get USD129 millions venture financing amid African economic recovery. These investment transactions happened in 8 countries: nine happened in Egypt, eight in South Africa, seven in Nigeria; Ghana and Kenya saw three financing activities respectively and Mauritius, Senegal and Tanzania each have one transaction.
Based on products and services, the 33 companies are categorized into 10 categories. Financial services is the hottest areas, followed by E-commerce.
Detailed information about these 33 companies:
