Why GCC investors should look at Africa

“African start-ups are in a funding winter,” a recent headline read.

Funding levels for African venture capitals in 2023 are down 30 per cent to 40 per cent from last year's record $3.3 billion, according to Disrupt Africa. But the continent accounted for less than 1 per cent of the $445 billion in global investments in venture capital in 2002.

In that light, Africa has yet to experience a funding spring.

To realise its potential, we believe asset allocators in the GCC, Asia and even Africa should lead the way for a variety of reasons, the key one being opportunity.

Whether a family office in Dubai or a pension fund in Geneva, future success is not about short-term market movements, but economic growth and technological developments. Strategic investors predict the future market environment or, even better, help shape it.

By 2050, Africa will have the largest working-age population in the world, bigger than Europe and North America combined. The UN data shows Africa will add about 800 million people to its working-age population (aged 16 to 64) by 2050.

A critical strategic play is raising the productivity of those new workers. Backing African ventures will ignite a productivity-led virtuous cycle to ensure workers deliver higher returns on global capital and stronger African economies – thus attracting more talent.

Venture capital creates jobs. New jobs via VC-backed African start-ups increased nearly 100 per cent in 2022 to more than 34,000 across Africa, according to Disrupt Africa.

The World Bank notes countries with 3G or 4G connectivity for at least three years saw labour force participation increase, by 3 per cent in Nigeria and 8 per cent in Tanzania, and poverty fell by 7 per cent. More jobs create consumers for producers in Africa, the GCC and Asia.

When a firm innovates, achieves product-market fit, and gains traction, it expands the market, or creates a new one. Technologists produce innovations, but venture managers identify and back teams bringing innovations to scale.

In Africa, the benefits go further. Start-ups deliver goods and services that traditional, state-led, or policy-constrained markets don’t – for instance, access to finance, transport, entertainment, education and telecommunications. African entrepreneurs unlock growth and create wealth that they will redeploy into society and reward their backers.

What about the risks?

For decades, venture investment was deemed too risky for institutions, but smart asset allocators saw returns compensated risks. Nearly 24 per cent of Yale’s endowment is in VC, helping it grow more than 40 per cent in 2021.

Africa has security and governance challenges and infrastructure deficits. Long-term, thriving competitive markets and broad-based ownership create societies that value security and demand better governance. Markets can reward governments for improving governance, investing in human capital and making wise public infrastructure investments.

The brief surge in VC capital led to some unrealistic expectations, weak business models that did not support high valuations and founders that were not ready for VC.

African ecosystems, like everywhere else, must improve. But these are global risks. Crypto exchange FTX lost three times more money than was invested in every start-up in Africa in 2022. SoftBank Group’s core Vision Fund's 2022 losses were five times higher.

Is the opportunity big enough?

Four African countries show exponential growth opportunity. Seventy per cent of that 1 per cent invested in African ventures went to Nigeria, Kenya, Egypt and South Africa.

In 2013, VC investment in Egypt was less than $2 million, South Africa $22 million, Nigeria $44 million, and Kenya $73 million, according to PitchBook data. In 2023, Kenya grew to $1.9 billion, and Nigeria $2.4 billion.

The asset class now exists, and is just getting started. Africa's integrated digital economy is expected to grow to $700 billion by 2050.

The most essential ingredient to unlock this growth is capital. In 2020, the largest external investors in the African venture ecosystem were in the US and UK, with 35 per cent and 9 per cent of investors in African VC, respectively.

As we advance, asset allocators in the Middle East and Asia will play a much more material role for three reasons.

Firstly, the economic opportunity. The natural complementarity of Africa’s resources with the GCC and Asia, such as fertile land, water, solar irradiation, and labour are well understood.

As China’s commitments have slowed, the GCC countries, including the UAE, Saudi Arabia and Qatar, are filling the gap. In 2022, GCC investment in Africa boomed to $8.3 billion – a firm sign of the GCC’s potential to be a valuable partner in Africa’s development.

As China’s lending commitments to Africa have slowed to around $1 billion per year in 2021 and 2022, the GCC countries, including the UAE, Saudi Arabia and Qatar, are filling the gap. In 2022, GCC investment in Africa boomed to $8.3 billion – a firm sign of the GCC’s potential to be a valuable partner in Africa’s development.

Secondly, geographical proximity and historical ties. Jeddah is closer to Addis Ababa (865 miles) than London is to Rome (892 miles). The UAE and Kenya are already negotiating an economic partnership to increase bilateral trade.

Historical and cultural ties have existed for centuries, and those deep ties influence risk perception. What happens in Africa is simply not on the radar screen in much of the US, and that lack of familiarity translates into risk perceptions that are higher than reality.

Third is relevant experience. The Middle East and Asia have experienced development phases that African countries face now. An investor that has succeeded in a similar market understands the opportunity space more intuitively, and is more ready to make it happen again.

The current downturn in funding will ultimately increase discipline and create more healthy African start-ups. Successful founders will themselves play a key role as Africa takes centre stage in global economic growth. But to realise Africa’s full potential for a technology-driven renaissance, visionary investors from the GCC and Asia should play a much larger role.

Magdi M. Amin is founder and general partner of African Renaissance Partners