Emerging venture markets outlook

Venture capital investment in emerging markets reached a staggering $7.2 billion, with a positive outlook for the African region highlighted. However, concerns loom as interest rate tightening could potentially lead to a reduction in investor spending. CNBC Africa's recent discussion with Philip Bahoshy from Dubai shed light on the current state of affairs in the venture capital landscape. The conversation touched upon several key points that provide valuable insights into the market trends and challenges ahead. As funding declined by 4.4% in 2022, the anticipation for 2023 suggests a continued subdued investment landscape. Factors such as interest rates and inflationary pressure are expected to keep investment activities slow in the initial quarters, with a potential pickup only in Q4 of the year. The economic phenomenon of a crowding-out effect due to interest rate hikes poses challenges for venture capital investments. As interest rates rise, the opportunity cost increases, making it harder for VCs to achieve the expected growth rates necessary to attract investors. This situation leads to heightened expectations from LPs and VC funds, creating a challenging fundraising environment. The prospect of declining interest rates has the potential to spur increased investment activity by lowering the opportunity cost of capital. Success in managing inflation could pave the way for a resurgence in venture capital investments. Amid the challenges, opportunities for consolidation emerge, where companies may seek mergers and acquisitions to enhance efficiency and attract investors. Industries such as fintech have emerged as bright spots in the investment landscape. Fintech investments have outpaced e-commerce and transportation/logistics, reflecting investor appetite for proven technologies with clear acquisition paths. While sectors like edtech, health tech, and gaming were in focus during the pandemic, the current environment favors industries with tangible growth prospects and clear paths to monetization. Deal sizes have seen a shift, with risk-averse investors limiting their investments to the $1 to $5 million range. Late-stage mega deals and early-stage investments face challenges, leading to a concentration of investments in companies with proven market fit and monetization strategies. Despite the risk-off sentiment in venture capital, companies in the $1 to $5 million bracket are increasingly attracting investor interest. The landscape of venture capital is witnessing a shift in the geographical spread of investors. While the U.S. remains a dominant player in VC investments, there is a rising interest from Southeast Asian investors in the emerging markets. The Middle East is becoming a bridge for East-West collaborations, with increased interactions between Asian and African markets. As restrictions ease, Southeast Asian investors are eyeing the region for growth opportunities. However, alongside the potential for growth, several risks loom large on the investor's radar. Inflationary pressures, funding challenges for companies, geopolitical uncertainties, and scaling difficulties pose significant challenges for venture capital investments. The ability of companies to navigate these risks and adapt to the evolving landscape will determine their success in the emerging venture markets. Despite the hurdles, there are pockets of opportunity for companies with a clear market fit and growth trajectory, paving the way for continued investment in the region.