Despite a stark decrease in venture capital funding raised by African startups in the first half of 2023, a recently released report found that South Africa – with a total of $290 million – is second in terms of the amount of capital raised.
Released by startup data platform Magnitt last week, the H1 2023 Africa Venture Investment Premium Report placed Egypt first ($305m) and Nigeria ($161m) third.
Citing global monetary tightening and “ongoing sluggishness of the global economy amidst declining yet sticky inflation rates”, the report found that venture capital funding raised by African startups had decreased by 54% in the first half of 2023 compared to the same period of the previous year. This translates to a total of nearly $950m raised in the first six months of 2023 compared to almost $2 billion in the same period in 2022.
Of the total funds raised, $540m went to the fintech industry. The energy and healthcare industries ranked second and third, attracting a total of $139m combined, the report said.
Commenting on the report’s findings, online news platform Zawya said that since the beginning of the year, bank failures, coupled with the weak economic outlook, have jeopardised venture capital markets across the globe. The Magnitt report showed that Africa was no exception to other emerging markets.
In other words, the competition for startups out there is fierce – particularly in fintech.
According to start-up data platform Tracxn, there are 982 fintech startups in South Africa. As the pie of venture capital funding grows smaller, securing a sizeable slice seems nigh impossible. But as Naked Insurance this year showed, it can be done.
Recognising opportunities
In February, the South African insurtech company that helps consumers to insure their cars, homes and valuables raised $17m in Series B funding led by the International Finance Corporation. More recently, Startup Stash, an online directory of tools and resources for startups, named Naked Insurance second among their Top South African Startups to Watch in 2023.
Founded by three actuaries – Alex Thomson, Sumarie Greybe, and Ernest North – in 2016, the company was launched in 2018 with a team of 10 people. Today, that team has grown to more than 100.
Before starting Naked, the founders worked for and consulted leading insurance companies in South Africa. North shares that they started the business because they saw an opportunity to address the needs of a digital consumer who had less and less patience with paperwork and call centres.
“We launched our business with the aim of creating an insurance experience that people would actually love – one that isn’t a grudge purchase and that offers levels of convenience, transparency, fairness, and ease of use.”
Designing their system and services from scratch, it would take two years before making their services available to the public. North says they spent that time doing extensive user testing and refinement.
“We analysed what was going wrong with the traditional insurance experience and why none of the incumbents was offering a truly convenient digital experience. The answer is that most insurance companies have inflexible legacy systems, cumbersome manual and massive back-office infrastructure that holds them back.”
Adopting a fully digital model, Naked provides a complete customer self-service – from seeking a quote, signing up, claiming, changing a policy, or opting out – via their website or app with automation and AI replacing manual processes.
“This is different from the incumbents who onboard customers over the phone or via brokers. They need to manage a lot of complexity and cost in keeping journeys consistent across multiple channels whereas we benefit from the simplicity of a fully digital model,” he says.
Another benefit of their model, North says, is the quality of the data they generate.
“Which in turn allows us to fit models and generate value in pricing, marketing, fraud management, and other areas.”
When the going gets tough
But their journey wasn’t all sunshine and roses. Following the company’s launch in 2018, it would take another two to three years for Naked to “gain critical mass”, as North puts it.
“We knew that digital insurance would inevitably take off as consumers move from analogue experiences to the digital world. However, we also recognised that reinventing an industry with a whole new way of doing things would take passion, commitment, energy, and time.”
Interestingly, he adds, the pace of user adoption was accelerated during the Covid-19 pandemic.
“People suddenly started to do everything remotely and online and found that they loved the convenience of digital tools. Even more conservative customers who previously shied away from buying products like insurance online started to consider it.”
On getting and staying ahead in a competitive market, North says it is important to take the initiative and have the persistence to keep going, even when you encounter setbacks.
“One of the factors that we believe is core to our success is that the founders are hands-on with every element of the business, from the technology and user experience to HR, marketing and strategy.”
He says the fact that he, Thomson, and Greybe had worked together for many years before starting Naked counted in their favour.
“We knew we worked well together and shared values, passion, and vision. Trust and mutual respect have been key to our success in building this business together. Our skill sets are also complementary.”
That said, North adds that building a business that scales required the quick setup of a strong supporting team.
“This was especially important in our context of building all core services, especially technology, in-house. We’ve been fortunate to recruit a wide range of young, energetic people, ranging from specialist software engineers, data scientists and actuaries, designers, and operational and customer support staff.”
As to how Naked plans on spending the $17m raised, North says, for now, their key priorities are growing and scaling up their existing South African business in a sustainable manner.
“We’ll use the funding to grow our team, reach more customers, and enhance our product and customer experience. We will also explore opportunities for market and product expansion.”
So, while they are not planning on taking over the world just yet, North says they do have their ambitions set on becoming the default choice for car and home insurance in South Africa.
“To that end, we’re investing heavily in our technology stack across the insurance value chain, deepening our capabilities in data science and AI, and working on a range of product expansion opportunities,” he concludes.
