Venture Capital (VC) has been widely recognized as a popular funding option for high-growth startups. However, many African founders face challenges in securing this type of funding. In the year 2024, African startups collectively raised $3.2 billion through over 182 equity and debt funding deals. The majority of these funds were directed to a select few tech-focused startups in countries like Kenya, Nigeria, South Africa, and Egypt, leaving numerous promising businesses without financial support. In a landscape where VC funding is often viewed as crucial for success, is it possible for African startups to achieve scalability without relying on it?
The limits of VC cheques in Africa
Sectors with high growth potential and minimal assets, such as e-commerce and fintech, typically favor traditional VC models that rely on high valuations and the possibility of quick exits through acquisitions or IPOs. Between 2019 and 2023, fintech and e-commerce companies accounted for 75% of total funding to African founders. Despite growing interest from Africa-focused VCs in critical sectors like agritech and health tech, these areas often do not align with investors’ expectations for rapid growth and speedy exits.
Furthermore, systemic and cultural factors create barriers for many African founders to access VC funding. In certain countries, investors show preference towards startups owned by expatriates or Western-educated individuals, leaving local entrepreneurs without the same opportunities. The focus on tech-driven scalability has marginalized businesses that support key sectors of African economies such as agriculture, manufacturing, logistics, and local commerce.
VC firms typically aim for exits within five to seven years, a timeframe that may not be compatible with the realities of African markets. While some venture-backed startups manage to exit within as little as two years, most take around six years and go through five funding rounds before reaching an Initial Public Offering (IPO).
Unlike more homogeneous markets like those in the US or Europe, Africa’s 54 countries have fragmented markets with varying regulations and inefficient regional economic blocs like EAC, ECOWAS, and SADC. This fragmentation makes scaling across borders a cumbersome and costly process, making startups less appealing to VCs seeking rapid expansion.
The prevalence of low income levels in many African nations results in limited consumer spending, leading to lower profit margins for local businesses. This poses a challenge for startups targeting mass-market consumers. Around 35% of Africa’s population of over 1.4 billion people live below the global extreme poverty line of $1.90 per day.
Another obstacle faced by African founders is the lack of robust local investor networks. The VC landscape in the continent is dominated by foreign investors, with few local investors present. This disconnect between investor expectations and the operational realities of regional economies can hinder the growth of startups, despite some investors having an understanding of the African market.
Given these challenges, African founders are encouraged to explore alternative funding avenues that align with the unique conditions of the continent. From revenue-based financing to grants from development agencies, these alternative approaches could offer a solution to the funding gap in Africa’s startup ecosystem, addressing the sometimes unrealistic demands imposed by VCs. These alternative models prioritize sustainability, allowing founders to grow their businesses at a pace that reflects market realities.
Thriving without VC backing
Contrary to the prevailing belief that startups cannot succeed without VC funding, companies like Kenya’s BitPesa (now AZA Finance) and Pesapal have demonstrated otherwise. Pesapal, a payment service provider, has grown its business through strategic partnerships with banks and mobile money platforms, focusing on sustainable revenue growth instead of relying on external funding. In an industry where VC-backed fintech companies have faced challenges,