Fintech startups have dominated Africa’s venture capital funding ecosystem, with Nigerian startups receiving bulk of the funding, but data from CB Insights suggests that investments in the sector have dropped significantly in Q3 2022.
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In 2021, fintech startups raised $2 billion in funding, according to a report. In a record-breaking year for funding in the continent, 198 fintech startups raised $2 billion, a whopping 88.45% increase from the $231 million raised in 2020.
Global Funding slowed down in the second quarter of 2022, all continents were affected, although it appeared that African startups were not feeling the pinch as much as their global counterparts. But as the year progressed, the numbers revealed that funding to African startups had decreased. CB Insights State of Fintech Q3 2022 report details the financing decline for African fintechs.
With $161 million raised in Q3 2022, fintechs in Africa raised significantly less than the previous two quarters, with $383 million in Q2 and $369 million in Q1. The number of deals has also dropped from 74 in Q1 2022 to 43 in Q3 2022; Q2 had 61 deals.
One thing hasn’t changed, though; early-stage fintech startups still raise the most money with 90% of deals announced so far, 2% more than 2021’s numbers. Furthermore, there haven’t been any mega-deals (defined as deals above $100 million). TeamApt’s $50 million round remains the highest raised by an African fintech and constitutes 30% of recorded fintech funding. Perhaps unsurprisingly, the number of mergers and acquisitions has increased, with 18 M&As so far.
As we move towards the end of 2022, data and analysis published by Africa the Big Deal suggest that fintech startups accounted for 32% of the venture capital financing secured in Africa. The segment has continued to be the main destination for investments targeting African startups but transaction volumes seem to demonstrate that investors’ interest is waning.
According to Ecofin Pro’s African Private Placement Log, despite a US$250 million deal for Nigerian fintech Flutterwave in February 2022, the sector attracted US$1.6 billion in VC financing this year.
In 2021, a US$400 million deal for Nigerian fintech Opay, and a US$200 million deal for Senegal-based Wave Mobile pulled funding for fintechs in the region to nearly US$2.5 billion. The decline in the volume of VC financing attracted by fintech companies may be cyclical.
But an analysis of sectoral dynamics shows that the companies that have benefited the most from the funding are those that offer payment solutions and compete directly with telecom operators’ mobile money services. According to Muriel Edjo, chief editor of We Are Tech Africa, at first, telecom operators were hit by the new entrants’ innovations but, they are now devising strategies to meet the competition from those fintechs.
Apart from telecom operators, commercial banks are also moving, not to directly compete with fintech startups, but to improve their digital services by adding new features and making them more user-friendly. In light of those developments, the investment community seems to be waiting for the next stage of growth in the African fintech segment.