Africa’s Startups Balance Trade Off Between Lower Valuations and Larger Funding Rounds

African startups secured close to $5 billion in venture capital (VC) funding in 2021, twice as much as the previous year. But while doubling the funding figure year on year is worth celebrating, it pales in comparison to the $621 billion raised globally in 2021, half of which was injected into U.S. startups.

It’s the reason why Maurizio Caio, managing partner at Africa-focused VC firm TLcom Capital, told PYMNTS that the African startup landscape should be looking to get to the “real level that Africa deserves, which is much higher than $5 billion.”

Related: African FinTechs ‘Least Hit’ by Global Tech Funding Winter, but for How Long?

It is also why he is unfazed by industry experts who have hailed African FinTechs as being the least hit by the global tech funding winter, remarking, “Africa is maybe feeling less of a pinch so far, [but it’s only because] there’s less stuff to pinch.”

That said, Caio acknowledged that the first half of this year has still been encouraging despite growing investor concerns and a retracting investment landscape that has led to a dip in valuations of many global firms — a process he referred to as “corrections in the tech market.”

Read more: To Survive Funding Drought, Startups Must Think Like Camels, Not Unicorns

That correction has been causing “unjustified panic,” he noted while cautioning entrepreneurs against chasing valuations based on standards held in previous years. Instead, he recommended focusing on the value creation opportunity and considering the trade-off between lower valuations and larger funding rounds when a funding opportunity is on the table.

“If you get a bit more diluted, but the size of the [funding] pie is much bigger, it doesn’t matter. We always [discuss] whether we’re diluting 20% or 22%, but never on whether we’re creating a $1 billion or an $800 million company. [The latter] is a lot more relevant in terms of the wealth that you create,” he argued.

See also: As Traditional Funding Sees Headwinds, Venture Debt Investments Set to Rise

Caio further emphasized that the VC business is all about looking out for opportunities to get behind the next big startup. As such, while others in the industry are increasingly stressing on the importance of reaching profitability earlier, he said it is better “to absorb cash and grow fast as you build your profitable business model.”

‘Pan-African’ Is Actually Select Few

Since 1999, TLcom Capital has built a wealth of expertise in the African tech sector, supporting founders and growing startups across African markets.

“Our primary goal is to help entrepreneurs and to make a lot of money for investors. But the bigger goal is to show the world that Africa VC is a great investment opportunity that can deliver world-class returns,” Caio said.

Related: Global Startup Uncertainty Drives Mega Investments in Africa’s Burgeoning Tech Scene

He acknowledged, however, that until more liquidity is available in the market, some international venture capitalists may shy away from the continent altogether. Referring to them as “tourists” in the African VC ecosystem due to the minimal experience they have in supporting startups in the region, he said “those will be the first to go” if capital on the supply side dries up.

Unlike those firms, TLcom is in it for the long haul, and the firm will be looking to diversify its portfolio going forward, moving away from popular VC-directed countries in West and East sub-Saharan Africa and adopting a more regional investing strategy.

But truth be told, spreading investments across the region to include lesser-known markets rarely yields the intended business returns. That, Caio said, is a reality they will have to accept.

“It’s very difficult to create a unicorn in Chad or in the Central African Republic, so we need to accept the fact that when we say pan-African, what we really mean is Lagos, Cairo, Nairobi [and] Cape Town,” he said. “The best chances are in those places.”

He further singled out the Cairo market as one emerging market investors “don’t want to miss” because of the productive environment it offers entrepreneurs to thrive. It’s the reason why TLcom is aiming to familiarize itself with the North African market as part of its goal to help companies based in sub-Saharan Africa expand further north of the continent.

Read more: Africa’s VC Ecosystem: Lack Of Seed-Stage Funding, Tough Landscape For Female Tech Founders

Besides building pan-African businesses that bridge the north-south divide, the VC firm is also looking to fix the prominent gender bias in the Africa VC ecosystem and drive more investor dollars towards female-founded startups.

See also: Female Entrepreneurs Poised for Boost From New Tech, Regulation, Interest in ESG

To help make this a reality, TLcom Capital has partnered with FirstCheck Africa, a female-led angel fund that backs underfunded female entrepreneurs in Africa, and has hired its co-founder, Eloho Omame, as a partner at TLcom to help drive their gender diversity agenda.

As Caio said: “The only way to have more women entrepreneurs funded is to help women entrepreneurs as investors.”

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