According to African Development Bank, 11 African countries are currently among the 20 fastest growing global economies. The last of the organization Outlook report estimates that real GDP (gross domestic product) growth for the continent is expected to average 3.8 and 4.2 percent in 2024 and 2025 respectively. This compares favorably with projected global averages of just 2.9 and 3.2 percent over the same time periods.
By actively seeking out and supporting startups from Africa, investors can tap into the region’s enormous potential while contributing to the long-term growth and development of this dynamic continent.
Slow to invest
The big question is whether Africans have fully embraced the potential of venture capital (VC) investment. Existing evidence suggests a positive upward trend. In 2024 Africa Venture Capital Association (AVCA) report. showed that the continent attracted US$4.5 billion of VC investment in 2023, with a 23 percent year-on-year increase in investors participating in VC funding in Africa between 2014 and 2023.
However, despite these positive signs, 2023 saw a decline in investment, reaching US$2 billion less than the previous year. While this slowdown reflects global investment trends, the US$4.5 billion invested in 603 deals on the continent is still small compared to the US$78.1 billion invested in Asia or the US$144.3 billion invested in in more than 11,000 deals in North America during the same period.
It is clear that more work is needed to overcome barriers and fully unlock the potential of VC investment in specific regions and business sectors within Africa. Indeed, the reality is that the VC model is still somewhat of an unknown entity in many African business ecosystems, which are still based on fundamentals and practices. Traditional business models dominate and have been perfected over decades of refinement and adaptation. For many, they offer stability, predictability and a proven track record of success.
The Central Bank of Kenya MSME Access to Bank Credit 2022 Survey Report found that banks were by far the largest financiers of small and medium enterprises (SMEs) in Kenya, reflecting the dominant model in most African countries. For example, leading African banks, such as Nigeria’s Access bank and South Africa Absa Groupthey often try to work closely with SMEs by actively facilitating credit and training.
Context and local expertise
While VC investments often target innovative models, the current investment ecosystem may not fully support the form of innovation native to Africa. Around the world, innovation comes from a variety of sources. However, in Africa, necessity often serves as the primary catalyst, inspiring Africans to invent inventive solutions that are uniquely suited to their continent or the context and culture of an individual country.
From innovative agricultural practices to resourceful methods of addressing health care challenges, African entrepreneurs have shown remarkable ingenuity in finding solutions tailored to the specific needs of their communities. These solutions can be highly effective and impactful in their local contexts but it may not resonate with investors from the United States or Europe, who have traditionally been the majority source of funding in Africa’s startup scene.
I get Access denied, a Kenyan start-up that has developed a creative solution for small-scale dairy farmers. Traditionally, farmers used bicycles or donkey carts to deliver fresh milk to collection centers, but had trouble keeping the product cool. Drop Access developed solar coolers that could be mounted on motorcycles, allowing for a faster and healthier delivery method. Their innovative solution addresses a very important need and offers potentially huge supply chain benefits that are also relevant and scalable across the continent. However, it is a need that may not be obvious to an overseas investor. It’s also a relatively low-tech solution that may seem less “sexy” to investors fixated on the latest technological breakthroughs.
The point is not that only Africans can solve African problems. Instead, it is necessary to understand and embrace local behavior and perspectives in order to find truly relevant and effective solutions. Foreign investors may prioritize innovations that align with their own experiences and perspectives, which may lead them to overlook the potential of African or African-focused startups.
Lack of relevance can create barriers to funding and hinder the development and scalability of sustainable innovations. Equally important, it can stifle the development of solutions that could be truly transformative in the African context.
Lack of networks
An additional challenge is that the majority of VC money still goes to European and American founders. Local references show that a significant number of VC-invested startups are led by white male founders of American or European descent, such as the leading funding app Branch and solar energy company Sun King.
One driver of this is the over-reliance on established networks connecting US and European investors and startup founders. In turn, investors may have a limited understanding of the unique challenges and dynamics of the African market, which can hinder effective decision-making and resource allocation. Ultimately, this affects the success path of startups led by founders from diverse backgrounds.
The good news is that this is changing with the creation of new networks designed to connect African innovators with investors. A notable example is the African Business Angel Network, which plays a central role in facilitating connections between angel investors and promising startups across Africa. Nigeria is an example of a country where investments in unicorns such as the payment platform Flutterwave, are beginning to come from within its own borders.
Another option for developing these networks is to take advantage of existing partnerships, such as current MoUs between international and African universities and business schools. Alumni communities and the exchange of research and knowledge between global institutions can be leveraged to help bridge network gaps. For example, the INSEAD Africa Initiative (IAI) seeks to partner with African universities to develop and disseminate the best in business thinking, leadership, teaching and research. IAI also leverages INSEAD’s well-placed alumni community in the African VC space who have rich experience and connections across the continent.
Leveling the playing field
Africa is an extremely diverse continent, consisting of 54 countries. At present, only a handful of nations attract the majority of investment, with the AVCA Report identifying South Africa, Kenya, Egypt, Nigeria and Seychelles as the top five investment countries by value. The good news is that increased investment means we’re starting to see startups expand their operations. Nigeria’s food technology platform Orda Africa is making inroads into other countries. The Uganda Equestrian Company Safeboda Just relaunched in Kenya. and e-commerce site Jumiafounded in Nigeria, now operates in 10 African countries.
One challenge startups face is that each country has vastly different regulatory environments and economic conditions. One possible solution could be to negotiate a continent-wide legal structure for African VC investment. If this approach proves overly optimistic, then it would be possible to explore legal implementation structures through existing regional blocs such as the East African Community (EAC) and the Southern African Development Community.
For example, in the EAC, Kiswahili is the dominant language. ONE SAFE Note (Simple Agreement for Future Equity). Pricing in a common currency to standardize investments could help unlock investment opportunities while reducing the risks of currency fluctuations.
Education of local investors
To further drive African engagement with VC, it is also imperative for local investors to appreciate the potential opportunities this asset class presents for high returns and long-term growth.
Encouraging companies in Africa to commit capital to invest in startups and support the early-stage ecosystem is another avenue to explore. An example of how this works elsewhere is Singapore’s EDB (Economic Development Board), which has a team that matches corporate dollars allocated to “build” ventures internally on the ground in the city-state.
As local investors become more familiar with this asset class, they will be in a better position to identify investment opportunities that align with their own goals and risk appetite. By actively participating in VC funding rounds, local investors can contribute to the development of a strong startup ecosystem and fuel the growth of innovative businesses in various sectors. This also opens up the possibility for African VC syndicates to partner with Western investors, bringing much-needed local expertise to the partnerships.
Learn from experiences
Investors should also learn from the past mistakes of failed VC-funded startups in Africa. With this knowledge, they can build a stronger system based on experiences, networks, familiarity and trust.
To further support development in this area, individual governments in Africa could look to follow his model Public Investment Fund in Saudi Arabia and develop their own sovereign wealth funds with opportunities for VC investment in local startups and SMEs.
These funds can provide significant financial resources and strategic support to emerging startups, boosting innovation and economic growth across the continent. They can help bridge the funding gap that many African startups face today, thereby accelerating their growth and scaling potential.
Offering such startups VC funding at an early stage can help improve their success trajectory. This not only helps the startup – it also allows local investors to develop their knowledge of VC investments, highlights the value of local expertise and strengthens the all-important network ties between local and international investors.