Last year represented the end of irrational money being invested in African businesses, and the beginning of a focus on value investing.
That is the view of Paul Cook, co-founder and managing director of South African investment firm Silvertree Capital, who says big players such as Jumia suffered in 2016, which has led to a trend away from investors willing to put cash into anything that tells an “African consumer” story.
“There is now much more focus on real economics and bottom line, and mid- to large-scale funding is now scarce for high loss business plans,” he said.
This is partly related to macro-economic headwinds.
“2016 was a tough year globally, for Africa, for oil prices, for tech, which meant that across most of the continent, and especially Nigeria, consumer online spending was under severe pressure,” Cook says.
Given the change in focus of investors, he says startups need to become even more serious about breakeven and profit earlier rather than later, with investors focusing on value over sentiment.
However, these developments have also created opportunities.
“There has been strong growth from “service provider”, companies that provide services to other online players, such as payments – Flutterwave and Paystack in Nigeria, SnapScan in South Africa, BitPesa Africa-wide – and logistics – Pargo in South Africa, as well as Takealot increasingly getting their MrD last mile asset to work very well; MAX in Nigeria; Sendy in Kenya,” Cook says.
A re-examination of the value add of hubs and incubators is also underway, led by Nairobi’s iHub.
“There’s starting to be a re-evaluation of models, focusing on financial sustainability for the hubs in the absence of easy exits and fading investor enthusiasm; and real value adds, rather than just hype, focusing not just on trying to encourage startups, but as a source of innovation for the sponsor company. This starts to address the fundamental gap after most incubators/hubs: follow-on support,” he says.
In 2017, Cook expects more pain for some of the big players, and possibly some rationalisation and mergers of some big names that have spent too hard and fast.