Paystack investor, Lauren Cochran talks about the evolution of Africa’s VC ecosystem in the last 5 years
Paystack investor, Lauren Cochran talks about the evolution of Africa’s VC ecosystem in the last 5 years
Africa's venture capital industry has grown significantly in recent years. According to Partech Africa, the total funding raised by African startups increased from $400 million in 2015 to around $2 billion in 2019.
Similarly, Weetracker reported that Africa's startup funding increased from less than $200 million in 2015 to more than $1.3 billion in 2019.
To illustrate the growth, consider that between 2015 and 2019, the startup scene raised record-breaking amounts, with the exception of last year's pandemic.
The impressive growth reflects the rapid emergence and growth of technology ecosystems across the continent, which has resulted in an unprecedented influx of capital from domestic and international investors.
Lauren Cochran, Managing Director at Blue Haven Initiative, a venture capital firm that has invested in several African startups including Twiga Foods, M-Kopa, and the now-acquired Paystack, discusses how the African venture capital ecosystem has evolved over the years in an interview with Technext.
Africa is the new VC magnet
Lauren reiterated the visible influx of venture capitalists into the African startup space, revealing that there were only a few seed investors on the continent in 2015.
“At the time, almost no funds existed except for a few seed managers such as ourselves and Savannah funds. There were a few in South Africa, and Microtraction was probably just getting started.”
However, investments by indigenous peoples and foreign investors based in Silicon Valley have significantly increased funding in Africa over the years.
More funding = more startups
Lauren added that the increase in funding has resulted in an increase in startup activity on the continent. “Previously, there were few businesses due to a scarcity of funding. There are more investors now, but I believe there are also more businesses and a bit more infrastructure.”
According to Partech, only 55 startups raised capital in 2015, but 347 startups will close 359 deals by 2020. This demonstrates how much the ecosystem has evolved over time. Africa now has over 2,000 startups, with Nigeria having the most — over 750.
According to Lauren, this increase in the number of startups has also increased competition in the technology sector. There are now numerous startups vying for the same market, as opposed to earlier years, when the few startups that existed were largely pioneers in their fields.
More people are now interested in building startups
Apart from funding, young graduates and experts' interest in entrepreneurship and the startup ecosystem has increased over the years.
Historically, the Blue Haven Managing Director explained, entrepreneurship was not something that people aspired to do. She added that success stories from the broader tech ecosystem have altered that perception.
“Because there were not nearly as many success stories as there are now, entrepreneurship was not viewed as an aspirational endeavor. In the early days, I spent a lot of time convincing people to leave their jobs at KPMG or another large accounting firm and join one of the startups we invested in. And, I believe that has changed significantly now that people have earned real money and seen exits.”
Effects of Covid-19 – What happened in 2020
The Covid-19 pandemic that ravaged 2020 had one of the most profound effects on the African venture capital scene in the last five years. Foreign direct investment (FDI) in Africa was significantly impacted, with flows falling by 16% to $40 billion from $47 billion in 2019.
According to UNCTAD's World Investment Report 2021, the economic decline and health challenges caused by the pandemic weighed heavily on foreign investments into the continent.
Lauren confirmed UNCTAD's findings, stating that investments had undoubtedly slowed in the preceding year.
According to her, venture capitalists are not always willing to work with companies with which they are unable to interact physically.
“The concept of working remotely with a company was still relatively new, and the inability to visit someone's office, meet the team, and really get out into the markets they were working in was something we weren't prepared to do.”
Remote funding is possible but it won’t take over physical investment process anytime soon
Lauren revealed, however, that while it is still difficult for VCs like her to conduct an entirely remote due diligence process, they have become more receptive to remote due diligence.
She explained that they have completed an almost entirely remote funding transaction and that another similar transaction is in the works.
“We invested in Kenyan seed companies almost entirely remotely. We met the team just before we were about to fund, but it was on a much smaller scale. It was a cheque for less than a million dollars. We're also working on a transaction in Tunisia that, at this point, may require an entirely remote process.”
However, she added that if the funding round is significant, such as a series A, it will be difficult to avoid physical interaction with the business.
“If it's a Series A investment and we're going to sit on the board and invest more than a million dollars, it's going to be difficult for us not to meet them in person and spend time with the business,” she explained.
How the pandemic affected companies – an investors perspective
Apart from deciding which new startups to invest in, venture capitalists had to consider the pandemic's impact on existing investments.
Lauren revealed, based on her experience with Blue Haven's portfolio companies, that the pandemic forced businesses to rethink their spending practices.
She added that they needed to determine what was truly critical and skinny down in ways that they would not have needed to had things continued as they were prior to COVID.
“Prior to COVID, startups were aware of the source of their next funding round. They could travel and network with potential investors. They weren't as concerned with keeping costs as low as possible.”
In retrospect, she believes that the decisions made during the pandemic benefited businesses in normal times.
“I believe it was a little frightening. We had no idea how the lockdowns would affect business models, but people made some difficult choices that, I believe, have made these businesses better off in normal times,” she explained.
Remote working and hiring
Speaking about the significant changes the pandemic wrought on businesses, the Blue Haven MD explained that startups are now reevaluating their need for the massive office space and infrastructure they relied on prior to the pandemic.
Additionally, she added that startups are now hiring remote workers in the belief that talent can be found globally, regardless of the location of the business.
“We have one team that has grown to include an entirely remote technical team. Thus, you have some contacts in Nairobi. They have several in Eastern Europe, one in Australia, and possibly one in Latin America.”
Has the 2020 health investment boom slowed down?
The health industry was one of the major beneficiaries of last year's pandemic. According to Partech and Weetracker reports, health technology was one of the top five sectors to raise capital last year.
Similarly, according to data from the Africa Venture Capital Association, the sector saw a 24 percent increase in venture capital funding in the first half of 2020, the highest rate of any sector during the period. This is an increase from the 4% recorded in 2018 and the 12% recorded in 2019.
Lauran believes the 2020 health technology boom is still underway. “I mean, we began investing in health prior to COVID, and I believe that a couple of trends associated with COVID created beneficial tailwinds.
“People are willing to spend more money on their health, and there is clearly a need for guidance on how to do so. However, the public desires more technical technological solutions.”
She added that because people are more receptive to remote solutions, health systems have been able to expand their capacity to care for people as well.
“Before COVID, the health systems were already under strain; it was already difficult to obtain timely care. As a result of this comfort with remote, health systems have been able to expand their capacity to care for people.”
In conclusion
Each market presents unique challenges to investors. In Africa, it could be the rainy season, or the delay in government cooperative payments to cocoa farmers in Cote d'Ivoire, with the resulting ripple effects.
Lauren notes that despite the difficulties, the ecosystem has grown and improved significantly since she first entered the space in 2015.
Courses and Certification
Fintech - Financial Technology Course and Certificate
Advanced Excel Course and Certificate
Digital Communication Course and Certificate
QuickBooks Course and Certificate
