Here is why SA startups saw an uptick in average valuations in 2023

South Africa was the only ecosystem in sub-Saharan Africa to see an increase in average valuations in 2023, according to data by MAGNiTT. Experts explain how the country managed to go against the grain.

While valuations of tech startups in Sub-Saharan African countries broadly declined in 2023, South African tech startups were the exception, with an average increase of 21% in their valuation, according to data from MAGNiTT, a data research firm.

The tenacity of South African startups is further reiterated by Partech, who stated: “Despite a -34% YoY decline in total equity funding in 2023, South Africa has been the most resilient ecosystem in the top 4, emerging as the new leader of the African tech funding landscape.”

According to three VC firm managing partners who spoke to TechCabal, tougher competition for deal flow at early-stage startup investment drove up valuations in the South African tech ecosystem.

“The global fundraising slowdown affected fund managers looking to raise funds, leading to delays in closing new funds,” said Naeem Sayes, senior research associate at MAGNiTT. ”This correlated with an adjustment in their strategies, favouring early-stage investments with a longer horizon to exit.”

The shift in priorities to early-stage startups led to tougher competition among local funds in earlier stages, driving up round sizes and valuations from Seed to Series A.

South Africa also saw a best-of-the-worst decline in seed investments, decreasing by 44%, while the rest of the continent averaged a 77% decline. On a per-deal basis, seed-stage deals increased by as much as 40%, according to data from Partech.

The tenacity of some South African entrepreneurs and business models might also explain the trend, said Keet van Zyl, managing partner at Knife Capital.” When the heat of cash burn got too much in some other markets, SA startups suddenly became more attractive,” van Zyl told TechCabal

However, despite this increase in valuations, van Zyl cautioned startups to focus on building resilient business models instead of being blinded by paper valuations. Instead of the hype, build a capital-efficient [business] with a recurring revenue model that consistently outperforms the ‘Rule of 40’ (revenue growth rate plus profit margin exceeding 40%),” van Zyl concluded. “Strive for a local cost base and hard currency revenue.”