Africa’s VC funding drops 57% in h1 2024 amid global, macroeconomic pressures

Africa's venture capital funding experienced a significant decline in the first half of 2024, dropping to $393 million. This marked a 57% decrease from the previous year and the lowest first-half financing since 2019. To shed light on the factors contributing to this decline and identify promising trends in the venture capital landscape, CNBC Africa interviewed Farah El Nahlawi, Research Lead at MAGNiTT. MAGNiTT specializes in covering emerging venture markets, including the Middle East, Africa, Southeast Asia, Pakistan, and Turkey. The decline in venture capital activity was widespread across all the markets MAGNiTT monitors, with Africa experiencing the most substantial drop at 57%. However, this trend was not exclusive to the continent, as global venture capital funding saw a year-on-year decline of approximately 7% in H1 2024. The primary reasons behind this decline, according to El Nahlawi, are tighter monetary policies and macroeconomic challenges. Tighter monetary policies have led investors to adopt a more cautious approach, favoring safer assets like bonds over riskier venture capital investments. These factors have collectively contributed to dampening investor sentiment and impacting the venture capital ecosystem globally, including in emerging markets. Despite the reduction in deal volume by 50%, there are strategies that African startups and investors can employ to adapt to the changing environment. Over the past five years, a significant portion of investors in African startups were international, deploying the majority of capital invested. However, with tighter liquidity and a focus on local portfolios, international investors have been less active in African ventures. El Nahlawi suggests that a potential return of interest as a result of anticipated rate cuts could reignite international investors' participation in the African market. Notable recent fund announcements, such as the Partek fund and Riga's seed fund, indicate a resurgence of interest and capital in the African market, though tangible effects are yet to be realized. FinTech stood out as a dominant sector amidst the downturn, attracting investors due to specific characteristics that make it appealing in challenging times. African FinTech companies have been recipients of significant funding in recent years, with lending and payment solutions garnering the most interest. Mega deals closed by players like MNC HALA and Nigerian startup move Africa further bolstered investor confidence in the sector. Despite a 34% drop in investor participation in Africa, El Nahlawi believes that restoring confidence among investors is achievable with the right measures. If interest rates decrease, geopolitical conditions stabilize, and investors return to riskier investments, confidence could be revitalized, leading to increased investment activity in African markets. Looking forward to the second half of 2024, several sectors show promise for recovery and growth in Africa's venture capital landscape. While FinTech is expected to maintain its lead, industries like enterprise software, transport and logistics, e-commerce, retail, and agriculture are emerging as potential areas of interest for investors.