Why Africa had no unicorns last year despite record fundraising haul

The African tech scene was met with fanfare in 2021: Venture capital investments in the region totaled between $4 billion and $5 billion and produced five unicorns. In my piece detailing this progress, I predicted there would be more unicorns in 2022. Those predictions proved to be way off the mark by year’s end.

Data from market insights trackers Briter Bridges and The Big Deal reveal that funding raised by African startups exceeded $5 billion (including undisclosed deals) in 2022 — a slight percentage increase from the figures reported in 2021 despite a global pullback in VC funding. And yet, no unicorns popped up throughout the year, compared to five in 2021.

That fact may appear insignificant because, at the end of the day, private valuations don’t pass an actual test till startups go public. However, producing no unicorns despite raising more venture capital suggests it’s perhaps too early to assume African markets are mature enough to consistently pop out private billion-dollar companies like their Global South counterparts: India, Southeast Asia and Latin America.

That said, 2022 was peculiar. The global economic downturn and venture capital crunch ensured that every region produced fewer billion-dollar companies than the previous year. Globally, 216 unicorns were minted in 2022, per Tracxn, compared to 541 in the previous year. In India, 22 companies became unicorns last year, compared to 46 in 2021. While 18 companies in Latin America got their horns in 2021, that figure fell to just eight last year.

Unlike Africa, these regions raised way less venture capital in 2022 than in 2021, so it makes sense that their unicorn numbers dropped. For example, in India, the number of unicorns dropped by more than half as VC activity dropped by 33%. Latin America and Southeast Asia also witnessed a double-digit decline in VC funding last year compared to 2021, though the drop in unicorns indicates more damage.

So what happened in Africa in 2022 that made it so … weird?

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Pullback from mega-check writers

Africa’s lack of unicorns in 2022 could be attributed to less involvement from growth investors such as Tiger Global, Sequoia Capital and SoftBank from the continent’s markets.

After a long hiatus, Tiger Global backed five African startups in 2021, including the unicorn Series C round of African payments company Flutterwave. Except for a follow-on in Flutterwave’s Series D, Tiger Global — which made another five investments in Africa in 2022 — didn’t back any startup past the Series B stage (Wasoko’s $625 million round) last year.

While these deals fit into Tiger Global’s strategy of investing in Series A and B deals and buying larger stakes for less, they were all announced before the end of Q2. That was when the global investor announced it was set for its worst year ever in accumulated losses and sold several of its public stakes. As such, the crossover fund’s concerning performance caused it to retreat from conducting more deals.

Tiger Global is earning its stripes in Africa

It’s not farfetched to assume that at least one unicorn would’ve popped up if the hedge fund carried on with business as usual. The same can be said with SoftBank and Sequoia, which made two deals between them last year in Africa: Afriex and Apollo Agriculture. In 2021, these growth investors were notable for funding mega-rounds at insanely high valuations in companies across emerging markets (in Africa, for example, they backed four out of the five unicorns minted).

The bottom line is that in a year where VCs put money to work in record amounts, thus generating a record number of unicorn companies, Africa, just like other regions, profited from it. However, in a more stringent market, fewer mega-rounds mean fewer unicorns, and that’s what we got in 2022. African tech had 11 mega-rounds in 2021 and produced five unicorns; in 2022, it had seven — Sun King, Flutterwave (a sequel to its unicorn round), Wasoko, Interswitch, InstaDeep, MFS Africa and Yassir — and failed to birth a single billion-dollar startup.

Pipeline is limited

Three African unicorns minted in 2021 — Chipper Cash, Wave and OPay — got their billion-dollar status two to three years into their startup journeys, outlier experiences even by global standards. According to various reports, a startup takes five to 10 years to reach a $1 billion valuation.

We should remember that the unicorn rounds mentioned above were fueled by money and tech from Silicon Valley and China in venture capital’s best-ever year and that it takes much longer to hit $1 billion in valuation for an African startup — Interswitch had to wait 17 years.

To back this point: Of the 30 companies that have crossed the Series C stage (where unicorns typically start to emerge) in the last two decades, per data from Briter Bridges, more than half launched operations 10 years ago and have yet to earn their horn. This also showcases that Africa didn’t have a large enough pool of growth-stage startups that late-stage private investors like Tiger Global, Sequoia and SoftBank believed could generate massive returns.

However, this pipeline may improve due to the emergence of younger upstarts that raised multiple rounds in the last few years at valuations slightly short of $1 billion. Wasoko, Kuda, TymeBank, TeamApt, Yoco, JUMO and Yassir are some examples of these so-called soonicorns. MFS Africa, MNT-Halan and Cellulant are older companies that could be unicorns in the next two to five years.

Stricter conditions to be a unicorn

Thanks to a 13-year bull run and abundant capital in the global venture ecosystem, private valuation multiples skyrocketed to as much as 30x in 2021 or 300x in some cases. For companies that raised while money was cheap, now that the fun is over, only a handful can justify their billion-dollar valuation marks.

Unicorns face 5-1 odds as they wait for public markets to warm

As The Exchange noted in this piece: “Unicorns, many of which raised capital during the 2021 boom at valuations that no longer square with market norms, are holding off raising capital until conditions improve. The bet they are taking is that they can survive off their last cash haul long enough to make it through a valuation trough and raise on the other side, when prices improve.”

Those who can’t hold off raising capital will do so at flat or down rounds, which have become the norm of late. As startups scramble to justify their valuations, investors are looking to public markets to determine what new valuations to settle on. Most startups would need roughly $150 million to $200 million of annual revenue for a unicorn valuation to be justifiable based on today’s public market multiples.

Not many African startups can boast such numbers, which may make it insanely hard for the continent to mint new unicorns in this latest fundraising environment. As a matter of fact, the unicorns produced in 2021, like their counterparts globally, could see their valuations revised — internally or in a newly priced round — this year, just as FTX, before its bankruptcy, did with cross-border payments Chipper Cash.

A record fundraising haul for two consecutive years is no fluke. But most deals happen at the early stage due to local VC firms pulling their weight and global investors attracted to new opportunities on the continent (of the more than 900 deals executed on the continent last year, over 40% of them fell in Series A rounds and below, per data from funding trackers).

Thus, the shortage of deals around growth-stage investments means not enough investors are helping startups move up from the Series C stage, which is where billion-dollar companies are formed. Before African tech can be on par with other emerging markets in the formation of unicorns, late-stage investment deals need to increase, and this is something we’ll be tracking.