In this interview, Founding Partner at Ajim Capital, Eunice Ajim, speaks to Temitayo Jaiyeola about how rising issues in the global economy may impact investment into the start-up space in 2023
The first half of 2022 was good for African startups, but things started to slow down by the second half of the year. What do you think was the cause of this?
A lot of things caused this. A large percentage of venture capital funding is foreign. Right now, the US market is experiencing inflation, and interest rates are going up.
The public market has been bloody because of economic instability around the world. All of these affect how much money VCs can invest. In fact, there has been so much talk about a recession in the US. And when anyone hears recession, they would want to be sure that they have enough cash at hand, and a lot of time, investing in the private market means going illiquid for at least five to ten years.
If there are plans for a recession, you want to be sure you have enough cash to survive, to be able to go through the recession. I think that has been a big part. That is one thing. I think we speak a lot about founders. But just as VC funding is deployed to founders, I think a lot of money that VCs raise has been affected too.
I know a lot of African-focused managers, me included, who are still fundraising. Even though the beginning of last year started well, it has been affecting VCs as well. If we don’t have enough cash to be able to invest, it also affects the number of investments we can put into these companies.
Is this likely to be the norm this year?
I wish I knew. I am also learning from the experts, and I am getting two different opinions. Some of the experts, the likes of the founders of Y-combinator and a couple of big VC firms have compared the current market to the dot-com bubble.
They have mentioned how the dot-com bubble took roughly about two to three years to stabilise, compared to the 2008 recession which only lasted for about a year or two. And the reason why they are comparing this to the dot-com boom is that that was a start-up bubble versus a real estate bubble.
When the pandemic happened, a lot of people had so much dry powder, a lot of people held on to their money. In 2021, all that dry powder had to be deployed and people started investing a lot of money at high valuations. If you were raising in 2021, you probably would have raised a lot because VCs had money to deploy. But what happened with everything then was that things were growing fast and quickly, which was not scalable, in some instances. Some of the companies that were valued at billions of dollars were not worth that much. Some of them IPOed, some got acquired, and there were a lot of discrepancies in the market at the time. All these things happened, and now it is hard for people to easily deploy capital and invest without doing an extensive amount of due diligence. And investors are now sceptical of deals that sound too good to be true.
I am neutral about projections for 2023. I hope that things get better in 2023. Since the beginning of 2023, the US market has not turned out as bad as we thought it would. So, even though the government is still increasing interest rates to stabilise inflation, things are not as bad as we initially feared. But on the other hand, we have to be cautious because there is still a lot of scepticism around whether or not there would be a recession and if there is, things are going to be very difficult. And if there isn’t, a lot of VCs would have dry powder, and they would be willing to deploy capital.
The simple answer is we don’t know. I don’t want to be the one that says it is going to be great or not.
What are some of your expectations for the African startup ecosystem in 2023?
I think Africa has done a very good job. I like to tell people that Africans will push through even if it is challenging. Africans have a goal-getter, hustler, succeed or nothing mentality. And I see a lot of that in my Nigerian founders. I see a lot of that in African founders and I truly believe that we would probably raise a lot more money even though I am conservative.
I am pretty sure African startups would raise a lot more money than it did in 2022 despite the current market. The reason is that a lot of VCs are now interested in Africa. They want to know what is happening in Africa. Africa does not have to reinvent the wheel. We have seen what tech can do in the US, and it has been replicated, and it is doing well in China, Europe, and very recently, India. It is only a matter of time before Africa gets to that stage.
I keep reminding people that if they are not investing in Africa right now, they are losing. Africa has seven unicorns right now, maybe eight. I think there was an announcement recently. And this is where India was in 2014. So, India had six unicorns in 2014, and in 2022, they had over a hundred unicorns. That is within a span of eight years. This is the time for you to invest in Africa because on average, it takes six to 10 years for a company to attain unicorn status.
For some of the investors investing today, there is a very big chance that at least one or two of their portfolio companies are going to become unicorns over the next six to eight years. If you are not investing in Africa right now, you are losing. Just in the last couple of weeks, we’ve seen a couple of big announcements. 2023 is going to be a better year.
Fintech continues to attract the most capital on the continent. What subsectors do you expect to do well in 2023?
I am seeing a lot of logistics and mobility companies that are up and coming. I think the reason investment in this sector is growing is that the infrastructure in Africa is still a big challenge. A lot of founders are looking for ways to fix that using technology.
Another one that I think is going to be big, but sometimes I don’t think people who report categorise them well, are marketplaces. These are platforms that make it easy to connect the buyer and seller and help them transact, provide value, and build the platform. Asides from fintech, I think marketplaces are going to be big.
I think health tech start-ups are also up and coming. We have seen a lot of platforms that are built to make it easy to have access to quality healthcare. Whether it is the pharmaceutical industry or access to on-demand doctors, I am seeing a lot of that. I think Agritech is too.
There were a lot of issues around corporate governance on the continent in 2022. How important would it be to VCs in 2023?
There is only so much due diligence a VC can do to understand the culture and how things are being managed within an organisation, especially when it is a start-up. I think most VCs do their due diligence. We do due diligence on the financials, and the teams, to get a good sense of how the company operates, and what the culture is like. Maybe by speaking to employees or by mutual connections, it is still a tricky situation in Africa, especially for international investors.
We probably have to rely a lot on the local team to be able to do that level of due diligence when it comes to corporate governance.
How can more local VCs become involved in the start-up space?
There are a couple of local VCs doing that. We need a combination of both local VCs and international VCs.
One of the things I have realised about local VCs is that they do not give the best terms to the founders. I have seen some of these terms. But I also understand a lot of these founders do not have a choice. They need the local money to be able to get to the next stage for the international investor to be able to pay attention.
Local investors play a pivotal role in the ecosystem. I think what they do is super important. I have partnerships. I collaborate a lot with local accelerator programmes, local incubators, local VCs, angel groups and syndicates, just to make sure we have access to the right people. It is not scalable for people based outside the continent to fly to Nigeria, and Kenya, every time you have to close a deal.
If I was just writing two deals a year, it is easy. But if you are starting to write, 10, 20 or 30, you would rely a lot on your local partners to be able to do some extent of your due diligence. The local VCs play an important role in the ecosystem.
Governments and the private sector have to get comfortable investing too. They are more comfortable with real estate and real assets versus assets that have not been proven. I think it is time for them to get comfortable deploying capital to start-up founders. In the next six to 10 years, when these companies become unicorns, all of that money will go back to the US, and the local market loses.
This content was originally published here.
