African tech startups have collectively raised $1.4 billion in the first nine months of 2023, with $492,418,000 raised in Q3 alone.

Despite these impressive figures, that total is down 48% on the corresponding period in 2022, according to Disrupt Africa’s annual African Tech Startups Funding Report.

The company says 2023 is set to be regressive, but in line with global trends in investments, it is regarded as the “reset” after tremendous growth.

A total of 186 African startups secured $1.4 billion in 2023 to date, when compared to the 633 that raised a combined $3,333,071,000 in 2022.

Tom Jackson, co-founder of Disrupt Africa, tells CNBC Africa that the pandemic didn’t impact the continent funding-wise, but only in terms of uptake.

“All sorts of sectors – fintech, e-health – took a boost in users, and the tech space got a kickstart; funding was increasing anyway, Covid had no impact,” says Jackson.

Cities like Lagos, Nairobi and Cape Town attracts the most funding in Africa. Jackson says they are “startup capitals” because they are essentially the capitals of the three main markets, with Cairo and Johannesburg ranking close.

“The bigger the city, the better the infrastructure, the more universities, the better the standard of living, the more likely it is to be a ‘startup capital’, hence London, New York, San Francisco, Paris, etc.,” says Jackson.

Fintech receives the lion’s share of funding, with 205 startups representing the 633 African total for 2022. Disrupt Africa says it remains Africa’s most powerful force, driven primarily by Nigeria, which accounted for almost 40% of funds received.

Ultimately, fintech is at the route of everything, adds Jackson. “Payments, and the ability to make them, is key to all sorts of things. So once those rails are in place, commerce, health, agri-trading, whatever it is – can work.”

Nigeria: a fertile ground for innovation

Akinbode Roberts, CEO of DataLeum, based in Nigeria, tells CNBC Africa that Lagos has always been a fertile ground for innovation, driven by the need to address local financial challenges, with Nigeria’s youthful population playing a critical role in this trend.

“The rapid adoption of smartphones has enabled the proliferation of mobile apps and USSD-based financial services – these technologies make it easier for people to access and use financial services,” says Roberts.

Nigeria has a demographic advantage due to its population of over 200 million people, which offers tremendous opportunities for startups thanks to a vast domestic market, he says.

The country has fostered a supportive ecosystem, says Roberts. “We have co-working spaces, incubators, accelerators, and various networking events that offer invaluable support to emerging businesses.”

While Nigeria is thriving, Roberts says their biggest challenge is access to funding. “Securing capital, especially in the early stages, can be a hurdle for many startups, and the shortage of skilled tech talent is also a concern.”

There is a need for more qualified professionals in areas like software development and data science, and the competition for these individuals is fierce, says Roberts.

Dataleum, an award-winning edu-tech startup is an AI-driven job matching platform aims to fill a gap in the market. “The demand for data-driven and enabled professionals has been steadily increasing across the continent as organizations recognize the value of data-driven decision-making,” says Roberts.

“There’s certainly a need for more skilled data scientists, data engineers, analysts and more data professionals to meet this growing demand.”

The company’s operation is based in Nigeria, but recently launched an office in the United Kingdom. “Our goal is to leverage our expertise and solutions to contribute to the growth of data analytics and business intelligence in multiple African countries,” says Roberts.

Kenya, the ‘Silicon Savannah’ of Africa

Meanwhile in Kenya, dubbed the ‘Silicon Savannah’ of Africa, and home to M-Pesa, has been a pioneer in the tech startup scene.

Jit Bhattacharya, CEO and co-founder of e-mobility startup BasiGo in Kenya, says the entrepreneurship ecosystem in Kenya is driven in large part by the fintech sector but with well-known, high-growth technology ventures in energy and climate, health, and education.

He acknowledges that Kenyan’s tech ecosystem has faced a difficult period in 2023, which saw several high-profile startups in the Kenyan ecosystem downsize, restructure, or shut down.

“While these challenges are real, Kenya remains a hub in Africa’s overall tech ecosystem and a preferred place to launch a technology venture in Africa,” says Bhattacharya.

“Tech hubs are an excellent meeting place for startups, investors, and the supporting ecosystem that helps these technology companies get off the ground,” he says.

And like Nigeria, the key challenge Kenyan tech startups face is getting access to funding. He believes the challenge for funding globally is more pronounced in Africa because funding comes from overseas investors.

BasiGo, founded in 2021, received a total of $10.9 million in funding to date, according to Crunchbase.

“What has attracted investment to BasiGo is the potential climate impact of our Electric Bus solution, says Bhattacharya. East Africa is home to some of the cleanest electricity in the world, with over 90% of Kenya’s electricity already generated from renewables.”

“As a result, replacing a single diesel bus in Kenya with an electric bus mitigates over 50 tonnes of CO2 per year, more than almost anywhere else in the world. Our bus market is entirely private sector, which makes it an attractive market for climate venture capital investors, adds Bhattacharya.

From South Africa to the world

South Africa’s startup funding grew from $50 million in 2015 to near $350 million in 2021, according to Disrupt Africa. Though Cape Town is referred to as the “startup capital” of South Africa, Johannesburg is a close second.

The company says while other countries like Kenya, Nigeria and Egypt often surpass it for funded ventures or total funding, South African startups are by far the most successful when it comes to successful exits.

Knife Capital, a venture capital investment firm in Cape Town that focuses on accelerating international expansion of African innovation-driven businesses, tells CNBC Africa it does this by leveraging knowledge, networks and funding.

Keet van Zyl, co-founder and partner at Knife Capital, says early stage ventures looks for three main things: an amazing product or service; a large addressable market for it; and an entrepreneurial team that can execute an ambitious business plan.

“The magic happens when these three things lead to visible traction and a path to positive unit economics,” says van Zyl.

“Knife Capital assists in accelerating the international expansion of African entrepreneurial businesses that achieved a product/market fit in a beachhead market,” he says.

“The common appeal for startups that successfully expand out of Africa is access to new markets that diversifies the client base and offers hard currency revenue off a lower cost base,” explains van Zyl.

“International clients embrace the advanced technology and unique approach to overcoming user challenges that some African startups offer.”

“Africa is a great investment frontier based on the fundamentals of a rapidly expanding population, a rising middle class, a young urban citizenry entering the workforce and increased digital penetration that provides access to new technologies,” says van Zyl.

“Investment is all about calculated risk and probability of returns, and Africa offers good value for the savvy investor. With more investors getting exposed to amazing start-ups across the continent, more capital will flow.”