Energy-led startups brought power to the industry, becoming the second-most funded sector in the startup ecosystem, only after fintech.

The outlook is contained in the latest findings from funding tracker, Africa: The Big Deal, which, among others, shows that energy emerged as the leaderboard for the African tech ecosystem for more than seven months in 2023.

According to the findings, African startups secured a total funding of $2.9 billion, marking the lowest amount since 2020's $2.1 billion.

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This, authors of the report said, represents a 39 percent decrease from the around $4.6 billion total recorded in 2022.

The funding landscape for African startups also witnessed a quarter-on-quarter decline throughout 2023.

Figures indicate that it started with $1.2 billion raised in the first quarter, followed by $877.8 million in the second quarter and a further drop to $492.7 million in the third quarter.

However, there was a slight increase in the fourth quarter, where startups raised $551.2 million.

According to the report, the decline in venture funding is not unique to Africa but rather aligns with a global trend.

The flow of venture capital funding has been consistently decreasing since January 2022, which was the last time global tech funding exceeded $60 billion per month.

According to the breakdown of the report, several fresh startups made big flashes including Kigali-based Norrsken, which stormed into the year with a $250 million debut fund.

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Other players to join the continent’s party with their maiden Africa-focused funds include Black Ostrich Ventures and Seedstars Capital.

Shift from equity to debt

Beyond the total number, the report noted that many startups in Africa have turned to debt to finance their growth.

It observed that the amount of debt raised reached $1.1 billion, a 47percentage growth year-on-year, while equity funding fell by 57 percent during the same period.

"In 2022, start-ups in Africa had raised 19 cents of debt for every $1 of equity they had secured. In 2023, this number went up to 65 cents, and debt made up 38 percent of all funding raised (against 16 percent in 2022),” the report stated.

But the African startups’ shift to debt did not just start in 2023. According to a recent report by Briter Bridges, a research and market intelligence firm focusing on emerging economies, African startups in general borrowed a total of $2.1 billion between 2014 and 2023.

The report also noted that debt financing in the African startup ecosystem had grown over the last five years due to a decline in equity funding.

"While debt is certainly playing a role in Africa’s startup ecosystem and innovations on the financing side making it more accessible, one of the biggest drivers of debt’s rise in Africa’s startup ecosystems may be the dramatic fall in equity funding, which fell from $2.6 billion in 2022 to $1.4bn in 2023.”

"Over the past ten years, more than $2 billion in disclosed debt funding has been raised by digital, technology-enabled, and green companies in Africa from more than 140 funders for a total of more than 200 deals,” Briter Bridges stated in an earlier report.

"Little” hope for 2024

The outlook for 2024 in the startup and tech investment landscape suggests a more cautious and frugal approach from investors, according to the report.

Forecasts indicate that investors are likely to be more discerning in choosing where to allocate their funds.

According to insights from TechCabal, a pan-African publication chronicling innovation and technology developments across the continent, at least 10 out of 23 tech leaders shared the expectation of encountering more cautious investors, leaner startups, and challenging economic conditions, particularly in the first half of the year.

The sentiment, according to reports, is not limited to the African tech ecosystem; global funds such as Thomvest Ventures and QED have also expressed similar predictions.

The overall trend suggests a more prudent and selective approach from investors, possibly leading to increased scrutiny of startup business models and a focus on sustainable growth.

The anticipated caution and frugality may pose challenges for startups seeking funding in 2024.