Venture capital (VC) has long been heralded as a catalyst for innovation, providing the necessary funding for startups to transform bold ideas into market realities. However, the returns on these investments can vary significantly across different regions and fund sizes. For investors, understanding these nuances is crucial for making informed decisions.​

Global Averages:

Historically, VC investments have been associated with high returns, albeit accompanied by substantial risks. Research indicates that the mean return on VC investments is approximately 57% per year, though this figure can be influenced by various factors, including selection biases and market conditions.

Impact of Fund Size:

The size of a venture capital fund plays a pivotal role in determining its performance. Data reveals that smaller VC funds, particularly those under $400 million, tend to outperform their larger counterparts. Specifically, these smaller funds have reported average internal rates of return (IRRs) of 19-20%, whereas larger funds, ranging from $400 million to $1 billion, have averaged returns of just 7.2%. ​

The African Context:

Africa's venture capital scene has experienced notable fluctuations in recent years. In 2023, the continent attracted a combined $4.5 billion in venture capital and venture debt investments across 603 deals. However, this represented a 31% decrease in deal volume and a 30% decrease in value compared to 2022.  The decline continued into 2024, with VC funding dropping to $838 million in the first nine months, down from $1.4 billion during the same period in 2023—a 38% year-over-year decrease. ​‍

Despite these downturns, certain sectors and regions within Africa have shown resilience. FinTech, for instance, maintained its position as the top-funded industry, comprising 66% of total funding in the first nine months of 2024. Additionally, West Africa remained a significant hub for VC activity, with Nigeria emerging as the most active country by deal volume. ​

Misconceptions and Realities:

A common misconception is that all venture capital investments yield exceptionally high returns. While top-performing funds can deliver substantial gains, the average annual IRR for VC funds between 2005 and 2018 was 22%, compared to 16.6% for other private equity funds.  It's essential for investors to recognize that while VC offers the potential for high rewards, it also comes with heightened risks and variability.

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