Funding Disparities with African Fintech.
By GITTEL AYUK Esq.
Introduction
The flow of Capital from Funders to Founders has exponentially transformed the status of African Fintech Start-ups in recent years. Having leaped across the $ 1 billion mark, seven African Start-ups have now acquired the Unicorn status – five of which are Fintech Start-ups. Meanwhile, the trajectory has always been to engage in as many funding rounds as possible, an unequivocal reality is the difficulty faced by most African Fintech Start-ups to attract as little as a pre-seed fund. This difficulty speaks not just to the funding gap that exist between thriving and struggling Fintech Start-ups, but it questions the missing element needed to pass the funding test of Venture Capitalists in Africa.
How wide is the Fintech Funding Disparity in Africa?
Fintech Funding in Africa reached an All-time High (ATH) in 2021. Up to $5.2 billion was raised in funding by 604 start-ups, according to the Venture Capital in Africa Report, 2021. Meanwhile some start-ups like Opay raised as much as $400 Million in a Series C Funding, much funding inequality still exists at different level in the African Fintech Space, ranging from Start-up-to-Start-up funding inequality, Product-Category inequality and Country-to-country funding inequality.
Start-Up-to-Start-up Funding Inequality
Even though Africa has attracted much in Fintech Funding, the dominant funding deals in African are mostly seed deals, according to The State of Fintech in Emerging Markets Report by Catalyst Fund and Brighter Bridges. Data from Venture Capital in Africa Report, 2021 reveals that a total number of 245 seed deals were sealed in 2021 as compared to 109 in 2020. Although higher in volume, seed deals tend to be lower in value in Africa as compared with later round deals. According to data by same reports, while the value of seed deals in Africa in 2021 experienced just a modest increase in value, later round deals like Round C increased by 39x YoY and deals of D-F by 13.6x. Still on value, Catalyst Fund and Brighter Bridges reveal that the average size for Pre-seed and Seed fund raised by African Fintech Start-Ups is $1 million, which is comparatively lower than that of other regions like Latin America and India which stands at $3Million.
Country-to-Country funding Gap
Another disparity is the wide country-to-Country funding Gap in the African Fintech Space. Africa is made up of 54 countries but Fintech Funding is disproportionately shared between these countries. The lion share of these Funding is always swallowed by less than 3% of the total number of Countries in the Continent. According to the Fintech Times, Venture Capital Funding of Fintech has been concentrated only on five out of the fifty-four African Countries. Of the total funding received by African Fintech Start-ups in 2021, 93.2% went to just four countries, notably; Nigeria, South Africa, Egypt and Kenya while the remaining 6.8% to the other 50 countries of Africa[1].
Sector-to-Sector funding Gap
Funding disparity is also evident at the level of sectors or products. Payment Fintechs, for example stand among the most funded Fintech Products in Africa. The Financial Sector Fintech according to the Venture Capital in Africa Report, 2021, was the “most active sector by volume (32%) and attracted the largest share of deal value (60%)”. In a panel discussion on closing the funding gap for African tech Start-ups, held by Tony Blair Institute of Global Change, the panellists suggested that to close the funding gap in the Tech Space in Africa, “More participation of Africans and African sources of funding in the tech” The dominant VC funders in the African Fintech space are invertedly international VC firms. In 2021 which is the year where African Fintech ecosystem experienced it’s ATH in funding, the ACVA reveals that only 25% of funds came in from African funders meanwhile 75% came in from international Funders, according to Venture Capital in Africa Report, 2021. The dominance of foreign VC in the African Fintech space is alleged by some to even be a bigger part of the problem on the inequalities in Fintech funding in Africa. Alexandre Onukwue, of Techcabal phrases the inequality as the “Bias for the White Pitch”. According to him, Founder-origin-preference is a pattern often adopted by Venture Capitalists when it comes to funding African Fintech Start-ups.[2] That is to say, Africa Fintechs Founders of International Origin get more funding than African Fintechs with Africa Founders.
[1] 50% of African tech’s $2bn funding pot went to fintech startups in 2021 – Disrupt Africa (disrupt-africa.com)
[2] Nudges and shoves: Tackling venture capital bias in Africa (techcabal.com)
Conclusion
Without contradiction, Fintech Funding in Africa has witnessed a tremendous boost in recent years, howbeit that much gap still exists. While few start-ups have become unicorns, the gap between thriving and struggling Fintech start-ups is so wide. These disparities translates itself into different levels mainly; disparity by funding category, the country-to-country and sectoral based disparity. Experts have suggested ways to curb this gap including but not limited to increasing the number of African Venture Capitalists.