The prevailing narrative over the global tech market has been around how a looming recession is causing a downturn. News about layoffs, valuation cuts, and slowed-down scaling operations have sent jitters around the ecosystem. But surprisingly, there has been a steady supply of unicorns in several markets this year.

Despite headwinds, the global unicorn population appears to be holding steady. Data from Tracxn’s Unicorn Club has tracked 212 unicorns this year, excluding exits through IPOs and mergers. While that is still far from last year’s record of 541, it has already surpassed the 150 we saw in 2020.

unicorn startups over the last ten years

However, Africa’s thriving tech ecosystem is absent from the 2022 unicorn scoreboard so far. And this stands out even more in light of last year’s record-breaking performance.

Five African startups (Flutterwave, Andela, OPay, Wave, and Chipper Cash) grandly earned their horns in 2021, fueling a train of sky-high predictions that 2022 would birth even more. But now, eight months into the year, the continent has not created any new unicorns.

On the other hand, funding rounds are showing impressive growth. African tech startups jointly raised $3.1 billion in the first half of this year. For context, funding for all of 2021 was $4.4 billion.

Africa venture funding since 2019

It’s important to note that this year, startups have raised concerns that raising money is becoming more challenging. But if tech startups are raising more money than ever, how is no one becoming a unicorn, and why is the hype around valuations losing steam?

Early-stage startups have the most attention

Most markets have more venture deals in early-stage companies, but this disparity is wider in Africa than elsewhere. The fastest growing segment in Africa involves funding deals between $1 million and $5 million, which typically occur in a pre-seed or seed funding round. 80% of the 681 funding deals raised were between $200,000 and $5 million for seed-stage startups. Then, at the higher end of the scale (over $50 million), there were fewer investments (21), but they were worth an average of $140 million. 

On the one hand, it’s understandable that investors are focusing on early-stage startups during this downturn. Middle-stage startups are often at a stage of product and market fit uncertainty. It is easier for an investor to risk small sums on very early-stage startups (or even ideas) than it is to risk large sums on stable, rapidly growing businesses. On the other hand, we’re less likely to see unicorns among early-stage startups. 

Investors are bullish but cautious

Despite the global downturn, investors are still optimistic about the potential of Africa’s digital economy. The Inflection Point, a report by Endeavour Nigeria, an entrepreneurial incubator, forecasts that the size of Africa’s digital economy will grow sixfold, to $712 billion by 2050, and insists that the continent “has barely scratched the surface of its potential relative to other regions.” Endeavour bases its claims on underlying factors such as how fast African countries grow in GDP and consumer spending, the accelerated use of digital services in many countries during the Covid-19 pandemic, and the growing digitally savvy young populations with an increased interest in tech jobs.

But while holding their optimism, Africa’s investors are now asking tough questions concerning valuations. Rest of World, a tech-focused media outlet, quoted Stone Atwine, founder of Eversend, saying, “The thing is, our valuations were getting crazy in Africa, in terms of the work some of these startups had done to deserve them… Now investors will want to see numbers: it’s all about unit economics again — not just ‘vibes.’”

Atwine’s sentiment is not difficult to agree with, especially when you realise that some of the most popular funding announcements this year involved investors taking relatively safer bets. For instance, MNT-Halan’s $150 million raise was a bond issuance, Wave’s $90 million was a syndicated loan, and 38 per cent of Moove’s $105 million raise came through debt. All these companies raised equity rounds last year, and Wave joined the unicorn club. But now, some companies that raised funds are already going through difficult times, forcing them to scale back operations and lay off workers.

Nevertheless, a valuation is not the most helpful way to measure a business. It’s their value to the market that matters. That’s why investors want to see sales, revenue, and cash flow today, while the market wants to feel their impact. Because when the hype declines, those are the only things that would matter. 

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