The Venture Capital industry has been a major driver of innovation. Emerging startups have experienced a massive inflow of VC funding and sky-high valuations in recent times.
However, there have been reports of a major reduction in the number of venture investment deals and total cash raised in 2022.
Venture capital deployment has significantly decreased and there is a steep decline in the number of deals being recorded.
Why is this happening?
You might have heard about the global economic downturn, which will significantly impact the Venture Capital economy. Okay, Let’s try to break it down, shall we?
Origin of the Economic Downturn
The economic downturn is a direct result of inflation, geopolitical tensions, and a declining public market. This has led to valuation cuts, a slowdown in funding, and a general downturn in the private market.
Investors are being cautious and slowing down their deal-making pace. The current economic downturn is being likened to the dot com crash of the 2000s.
The dot-com crash?
The dot-com bubble started with the launch of the World Wide Web and the establishment of internet-based companies.
Investors focused on the wrong metrics and startups did not adopt viable business models.
Extremely high valuations and high share prices led to a market crash, which inevitably burst the bubble of the new internet companies.
Are we going to experience another dot-com crash?
The answer is most likely NO.
New technology almost invariably creates a bubble. There is usually a new high and excitement in the air, on the part of investors and founders alike.
The economic downturn is timely and will help investors make sound decisions, which may lead to major valuation cuts and a reduction in deal sizes.
Venture Capital is unlikely to slow down completely because there is a sizable fund in place and a lot of money left to be circulated. The economic downturn will stand to prevent investors from making frivolous investments. However, there will be funding for companies with excellent business models, real unit economics, and growth margins.
Significant bumps in the road are expected but the seismic changes wrought by the venture capital economy will continue.
How will this impact Venture Investments in Africa?
It is noteworthy that a major part of the total amount invested in African startups comes from outside the continent.
Local investments barely impact the overall size of investments in African Startups. African startups are heavily reliant on foreign investment, therefore a global economic downturn will affect the African startup scene.
The real question is how much will this impact African startups?
According to Africa: the big deal, In the context of a global VC slowdown, Africa maintained impressive YoY growth in Q1 2022, and Investments in African Startups grew significantly. It was also reported that start-ups in Africa had raised $861m in April and May, compared to the $582m raised in Q2 2021.
However, there is a possibility that the YoY growth in the second quarter of 2022 could be lower than in the previous quarters.
This slowdown is not unexpected, however, it will not halt investments in African startups.
The African startup economy is still in its growing stage as there have been very few exits and IPOs.
The startup scene in Africa is new and budding with great potential. We are at the cusp of innovation and there is a lot to be done.
This is a crucial time for African founders to build. The African startup economy will soar irrespective of the downturn.
What’s the verdict?
While investors are preparing for rough times ahead, this is the best time to capitalize on building alternative investment strategies.
There is a need to break down the conventional venture investment process and explore new funding options.
Essentially, in a bid to bridge the gap that will be created by the economic downturn and increase deal flow, we need to create tools that will help new, unconventional, and prospective investors access investment opportunities.
To the founders, great companies can be built in difficult times. Companies like Amazon and eBay were built in the runup to the dot com bubble crash. Likewise, Twitter, Uber, Airbnb, and other great companies were founded during the financial crisis of 2008.
This is the time for resilient founders to build exceptional companies.
We cannot afford to foster frivolous companies created solely to partake in investors’ money.
Let’s keep building !!!!!!
