As we continue to map out the year ahead, we welcome you to an insider view on our thoughts and predictions, articulated through our Senior Partner, Vova (Vladimir) Dugin.
Over the past year, we witnessed one of the most challenging macroeconomic environments since the global financial crisis, marked by peak interest rates in Q4 2023. African markets continued to grapple with the aftermath of the C-19 pandemic, enduring the ripple effects of global economic instability, high inflation and regional conflicts. This scenario, compounded by growing national debt burdens and plummeting currencies, created an uncertain investment landscape for fund managers and entrepreneurs alike.
Despite these conditions, climate financing has sustained its considerable momentum attracting substantial interest from investors, with Africa in particular emerging as a leading destination for climate funding. As such, we achieved a successful initial close of our successor fund, the E3 Low Carbon Economy Fund I, securing commitments of US$48 million in May 2023. As we actively pursue the second close of the fund - targeting commitments totaling US$100 million - and concurrently assess the ecosystem for and deploy capital into investment opportunities, we’re sharing below our thoughts and predictions for the next 12 months:
1. We expect the macroeconomic environment to remain challenging, though with early indications of declining interest rates we anticipate some improvement by mid-year. This potential shift may positively impact the fundraising landscape for both entrepreneurs and fund managers. Nonetheless, we advise entrepreneurs to remain prudent as it relates to cash flow management, and budget for prolonged delays in funding rounds;
2. The trend for founders and investors to avoid pricing rounds will persist, given that the market has yet to reset to more realistic valuations. While many stakeholders are motivated to continue to benchmark funding rounds against valuations from two years ago, the prevailing conditions necessitate a shift towards accepting more conservative outlooks. However, we expect unpriced “bridging” to begin to decline towards H2 of this year, and anticipate an uptick in funds pushing to value deals at reset pricing levels. We expect to see clawbacks on many of the unpriced instruments Raised in 2022 / Early 2023 that will crystalize this year as priced rounds return;
3. Strong unit economics, coupled with clear paths to profitability, will play a pivotal role in defining the attractiveness of ventures in 2024. Revenue multiples and a “growth at all costs” approach will continue to lose prevalence, while strong, healthy margins will be instrumental in securing funding and providing adequate runway for closing rounds. This presents a significant opportunity for African start-ups to localize their cost bases as much as possible and leverage local talent more effectively;
4. Private capital dry powder reached record highs due to deployment delays stemming from factors including the inability to determine fair values for many companies. Consequently, where funds have been successful in raising, we expect considerable pressure for many managers to deploy in 2024. Capital under pressure to deploy will pool towards select winners, with many funds chasing the same deals and driving valuations accordingly;
5. In response to the fundraise environment, there has been a shift in the ecosystem in the source and type of capital available to founders. We have seen the emergence of specialist rather than generalist funds as the primary vehicles for deploying capital, and alongside this, alternative funding sources have gained significant traction. We anticipate an increase in alternative funding instruments such as revenue-based financing or carbon credit-linked funding for many climate-focused ventures in Africa.
In closing, macroeconomic events have triggered a noticeable shift in the approach to VC investing. The debate on what it means to create a scalable and sustainable asset class of venture investments in 2024 is challenging traditional thinking, questioning the efficiency of the "spray and pray" approach in Africa. Rather than doubling down on the potential for one "home run" in the portfolio, it might be more efficient to look for a smaller, healthier portfolio that can create a reasonable buffer against failure. As a climate sector specialist, we will continue to look for companies where reasonable valuations align with robust unit economics, sustainable business models and realistic growth prospects, focusing on building a portfolio of winners across sectors.
