Navigating the African Tech Landscape: 2023 Lessons in Venture Capital

In the ever-evolving African tech landscape, taking a moment to observe the dynamics at play becomes essential. Our inaugural year at From Here Ventures (FHV) has been transformative, embodying growth and resilience as we navigate the intricacies of the African context, emphasizing local knowledge and sustainable growth.

2023 Context: Local Realities vs. Global Expectations

We have witnessed the venture capital ecosystem in Kenya correcting itself over the last couple of years. Several companies that fundraised with bloated valuations between 2019 and 2021 have experienced challenges raising follow-on funding. A significant proportion of the startups that we’re seeing shut down belong to this cohort of startups that were forced into the “valuations game”. What does this mean? VCs get money from people called Limited Partners or LPs, mostly foreign individuals and institutions. The average life of a fund is 10 years. VCs typically liquidate their positions and return capital towards the latter years of the fund, meaning that LPs assets remain illiquid for most of the fund’s tenure. Therefore, during this “illiquid” interim period before liquidation, VCs have to give some sort of indication to their LPs that the value of their investments is appreciating. This is usually done using a number of metrics such as IRR, TVPI and MOIC that measure the fund's performance. However, the common denominator upon which all these metrics are based on is the underlying “valuations” of the startups. As such, VCs have historically heaped pressure on startups to chase vanity metrics (ala regional expansion, vertical integration), so that the VCs can report higher valuations-based metrics to their LPs and be able to raise more capital for their second and third funds. 
 

Another poignant adjustment has centered around African startups that participated in esteemed accelerators like Y Combinator. While these programs offer invaluable resources, startups typically graduate from them having raised money at hyper-inflated valuations in the US. Resultantly, this creates a divide between the founders' expectations and outcomes once they return home to the reception of local venture capitalists who have been priced out. Aside from struggling to raise funds locally, these startups typically face operational challenges due to a misalignment between home-grown goals and globally skewed investor interests.

The allure of rapid expansion into new markets has seen startups stretched thin, prompting a recalibration to solidify home market share. At FHV, our emphasis is on startups mastering the basics—refining their core value propositions, fortifying their home base and identifying an optimal path to profitability
 

FHV's Approach: Grounded in Local Knowledge

Our maturation as a fund involves aligning with the ground truth of the African context. The absence of preconditions for a unicorn in Africa, coupled with heterogeneous markets and regulatory disparities, necessitates a discerning approach. We seek startups that have genuinely earned the right to fundraise, and we follow that up with in-depth due diligence so as to identify those with strong fundamentals and limited downside risk. 

Even in the midst of the current recalibration we are witnessing in the industry, we have realized that there are great opportunities to capitalize on. We have identified exceptional entrepreneurs in the early stages of building innovative solutions to African consumer pain points and we have backed them through long-term equity positions that give them time to generate and realize the kind of value we expect from them. Our portfolio comprises a diverse mix of startups in the sectors of health, human resources (HR), social commerce, insurance, education, fintech and most recently, expense management. You can find a full list on our website fromherevc.com

Venture Debt Opportunities and Sustainable Growth

Identifying venture debt opportunities for startups that have strong fundamentals (strong margins, revenues and line of sight to profitability) has been a crucial part of our strategy. These self-liquidating positions not only balance our longer-term equity holdings but also create avenues to recycle capital and reinforce our commitment to financial sustainability. 
 

Key Milestones and Standout Accomplishments
 

Our growth manifests in key milestones and standout accomplishments. The addition of Elevate HR, Ubuntu Life, Eden Care, Twiva, and Zemo to our portfolio in 2023 underscores our commitment to backing a diverse group of transformative African companies, regardless of the macroeconomic outlook that has forced some foreign VCs to adopt a “wait and see” approach to venture capital in Africa.  In 2023, our commitment to informed decision-making saw us invest in ourselves too. We strengthened our internal mechanisms for conducting due diligence and ensured that our investment process was robust enough to filter out the “posers”. 

Our investment process streamlines decision-making and reflects our dedication to staying at the forefront of industry best practices. The innovative use of technology and data enables us to adapt swiftly to the evolving landscape, ensuring our investments align with our mission, vision and most importantly, market trends in Africa.
 

Conclusion
 

Despite the challenges, our confidence in Africa's long tech runway, unique demographics, and structural gaps remains unwavering. These challenges present immense opportunities for startups to thrive, and our mission remains unchanged: to return investors' capital and support the next generation of African entrepreneurs.

As we celebrate the opportunities that our continent presents, we extend an invitation to join us on this exhilarating journey. 

For more information, please contact us at connect@fromherevc.com or visit our website fromherevc.com.