Between 2014 and 2019, 44% of venture capital deals recorded in African tech ecosystems included participation from at least one impact investor, data from Africa Private Equity and Venture Capital Association show.
With a slump in venture capital investment expected in African tech ecosystems this year, the role of impact investment firms and institutions will become vital. Essentially, it could prove a crucial lifeline for startups in Africa’s fledgling ecosystems given the expected economic crunch triggered by the Covid-19 pandemic.
Impact investing usually means the venture capital or private equity investor is putting funds into a business with the intention of generating measurable, beneficial social or environmental impacts, such as job creation or lower CO2 emissions, alongside a financial return. Impact investing has become increasingly influential as more large funds integrate ESG targets (environmental, social and governance) into their investment philosophies.
It’s worth noting a sizable portion of impact funding on the continent is driven by development finance institutions and government agencies including the UK’s DfID and CDC Group, Germany’s GiZ and more recently the United States’ International Development Finance Corp. The UK’s CDC in particular has been one of the more influential backers of African venture capital and private equity funds.
As the twin health and economic crises have worsened on the continent, impact investment players are likely to double down on backing companies solving primary problems and, five months into the year, there’s already evidence of increasing focus on healthcare and agriculture.
Recent impact investments in African startups
The funding is crucial for startups in those two sectors given key roles they could yet play during—and after—the pandemic. With public health systems stretched, healthtech businesses on the continent have assumed roles of increasingly greater importance. Lifebank, which sources and delivers blood and medical products to patients in Nigeria, created a national register to track hospitals with working ventilators and respirators and partnered with the Nigerian Institute of Medical Research to ease access to testing. For its part, 54gene also launched a $500,000 fund to boost local testing capacity.
Agriculture-focused startups working to optimize crop yield and improve access to market for farmers will also play key roles in maintaining food supply in key pockets across the continent, especially given disrupted supply chains. “The momentum has been building for some time now but when Covid-19 happened, agriculture became a very essential sector,” says Alloysius Attah, CEO of Famerline, a Ghana-based agriculture social enterprise which uses digital tools to provide tech solutions to farmers.
With impact funders’ decisions driven more by different metrics compared to traditional VC players, the potential developmental benefits of health and agriculture startups will hold extra appeal for development finance institutions (DFIs) whose mandates includes investing in companies that can impact large populations, says Tara Sabre Collier, social entrepreneur-in-residence at Oxford University where she also lectures on impact investment.
That urgency is already being reflected: with Farmerline currently fundraising, Attah says there’s a markedly faster pace of investment-related conversations and due diligence, particularly from DFIs. Such increased focus is a clear boon these sectors which have been historically under-funded.
The wider benefit for African ecosystems is a sustenance in incoming investment amid an expected drop-off in funding. Cape Town-based startup accelerator AfricArena estimates total funding in African startups this year could drop by as much as 40% in its worst case scenario projections. But while traditional venture capital firms might default to being cautious, the current circumstances mean impact funders will maintain momentum. “A lot of these organizations have made commitments for the year,” Collier says. “Even though the priorities with which ventures may receive funding may shift around due to Covid-19, the total amount committed should not change.”
June 26, 2020