Emerging local African VCs step in to address the shortcomings of foreign investors

The African startup landscape is developing beyond the conventional markets of Egypt, Kenya, Nigeria, and South Africa, with activity now accelerating in other areas throughout the continent. As the market evolves, there is a growing demand for more local fund managers to unlock additional capital and provide support to founders.

This demand stems from the fact that most deals in the continent have recently been dominated by foreign VC firms, accounting for 77% of total funding in 2022. The involvement of prominent global VC giants like SoftBank, Khosla Ventures, and a16z has undoubtedly had a significant impact on the overall ecosystem. It has drawn global attention to the region and set a valuable precedent that others have followed.

However, foreign investment has been somewhat of a mixed blessing for African tech. A major disadvantage is that when the market tightens, foreign interest tends to dissipate, leaving startups that rely on them vulnerable. This situation emphasizes the need for the industry to establish its own pool of fund managers for sustainability.

Preliminary reports suggest that the number of the most active investors in Africa dropped significantly last year, with only seven (mostly Africa-focused firms) participating in deals exceeding $100,000 every month. This is a decrease from 20 (primarily foreign VCs) in 2022 and 17 in 2021, highlighting the dramatic dip in funding.

Gradually, this vacuum is being filled by an increasing number of local fund managers.

Organizations like Dream VC, the Obuntu Foundation, the French Development Finance Institution (DFI) Proparco, and the Africa Venture Philanthropy Alliance are stepping in to address the local VC deficit. They are doing this through customized programs aiming to nurture the next wave of fund managers in Africa.

Dream VC’s flagship investor accelerator program is designed for seasoned professionals looking to establish funds, become angel investors, or play a role in the African startup ecosystem. This program’s mission echoes that of Obuntu’s three-month long Launchpad program, which seeks to develop homegrown first-time fund managers and provide them with the “resources, tools, and community” required to launch funds.

The Timing of these Programs is Apt

Dream VC co-founder Cindy Ai reiterated that she and Mark Kleyner launched the program in 2021 to bridge the knowledge and network access gaps within the innovation value chain. This was due to the limited resources addressing the nuances of investing in, building, and scaling startups in Africa.

“Dream VC was truly a serendipitous opportunity that was born out of demand — as the African ecosystem matured, individuals across the continent and beyond were looking for ways to learn more about the space and contribute to it, especially on the capital allocation front,” she said of the organization, which also runs the Launch into VC crash-course that prepares young professionals to launch careers in venture capital.

Aaron Fu, co-founder of the Obuntu Foundation, stated that their platform and similar ones across the continent play a critical role in democratizing venture capital. This allows locals, who bring a wealth of experience and are instrumental in deal-making, to participate more fully. The Obuntu program offers instruction on establishing a fund’s thesis, structure, flow of funds, and interaction with limited partners.

“I don’t think we want to have everyone going through eight years (he took) to learn the same. That is why we are short-circuiting the process by condensing all the learning into a three-month period,” he said.

Fu stated that their fellows pursue a range of opportunities, which may include establishing their own funds, associating with existing platforms, or collaborating with special purpose vehicles (SPVs) that realistically align with their purpose or the needs of the African market.

“We want to really be sure that at the end of it, they know what they’re getting themselves into, because it’s like a 10-year or 20-year commitment,” said Fu, who co-founded the Obuntu Foundation with Wambui Kinya (also general manager at Google Search Africa) and Asta Diabaté, open innovation analyst at Novo Nordisk.

Dream VC’s five-month investor accelerator program goes beyond simply teaching the fundamental skills of venture capital. It incorporates diverse skills such as portfolio management and deal structuring, as well as considerations for launching a VC fund. Ai explained that the paid program also includes “mock investment committees where fellows mirror the complete process, from identifying startup opportunities to presenting them for investment consideration.”

The programs also conduct sessions with potential limited partners, including DFIs.

Creating Significant Impact

Despite the brief period these programs have been in operation, their effects are already showing. Ai revealed that Dream VC’s alumni base, consisting of over 170 Africa-focused investors — predominantly Africans, including people from regions such as Somaliland and Algeria, as well as the African diaspora — are now poised to make a substantial impact. This is as they initiate funds or participate in investment firms that are significantly influencing the continent.

She stated that Dream VC’s fellows are directly engaged in the management of Africa-focused investment firms managing assets over $6.6 billion. The inclusive list of fellows features Christine Namara, who recently assumed the role of partner for the $95 million Africa Seed Fund at MENA’s Flat6Labs, to aid its extension of investment efforts to the Eastern and Western regions of Africa.

Obuntu’s fellows are also on a fundraising streak, with Fu mentioning that those from the first two cohorts are on course to raise over $500 million to back African startups. The 24 fellows include Emmanuel Adegboye of Madica, a pan-African investment venture by Flourish Ventures.

The expectation is that these new fund managers will draw in new funding from both local and foreign supporters into a continent where startups still receive the smallest amount of VC funding. Data from Briter Bridges 2023 shows that African startups attracted $4 billion last year, while The Big Deal estimates the figure at $2.9 billion, marking a substantial drop after record funding in the two preceding years.

Egypt, Kenya, Nigeria, and South Africa have been the leading VC markets in Africa. Recently, however, emerging markets, several from the African Francophone nexus, are also becoming attractive to VCs. This underscores the need for increased resource investment from local sources, including existing Africa-focused firms like Novastar Ventures, Founders Factory Africa, Saviu Ventures, Seedstars Africa Ventures, Norrsken22 and Launch Africa. This would complement the funding from foreign firms.

“I feel that the current VC landscape is pretty fragmented and there’s less collaboration. We’re trying to get people to build relationships and trust with each other, when they’re all just starting out,” said Fu. “We’ve all got to come together to build together.”

In the meantime, while the fellows endeavour to unlock domestic capital for the African market, there’s a common agreement that they can be leveraged by international VCs seeking to establish or expand operations in the continent. They also present significant potential in policy and venture development.

“Even with the continuous intervention of foreign VCs, many such funds are increasingly cognizant of the limitations of working within Africa without local partnerships and local talent, or at the very least talent that is intimately familiar with the local business and cultural nuances,” said Ai. “So, the demand for smart, passionate and connected individuals remains.”