Africa is losing US development funding, just at the time it is also losing international venture capital funding, at least in short-term. This is not good. But a long-term gain could be that the African tech sector learns to stand on its own two feet, as local capital steps up to the plate.
In February, President Trump issued an executive order to shut down USAID, which over the past decade has, through its Development Innovation Ventures (DIV), invested more than US$100 million in, for example, Kenyan startups, such as Pula Advisors, BasiGo, and Maisha Meds.
Then, the US Africa Development Foundation (USADF), which has supported over 1,000 businesses across 22 African countries, slashed US$51 million in funding for African SMEs and startups. Who knows what might yet await the International Development Finance Corporation (DFC), which has provided grants and loans to African startups like M-KOPA, Twiga Foods, and Ilara Health.
To compound all this, it comes at a time when global venture funding is down. Total investment into the African tech startup ecosystem fell by more than 50 per cent to US$1.1 billion in 2024 as the impacts of the global capital shortage continued to make themselves felt on the continent. This is according to the 10th edition of Disrupt Africa’s annual African Tech Startups Funding Report.
A total of 200 startups raised a combined total of US$1.1 billion over the course of the year, down by more than 100 per cent on 406 startups and over 50 per cent on US$2.4 billion in 2023. This is the second consecutive year of decline as the sector feels the effects of the global capital shortage.
However, these falling numbers, both in terms of US grant funding and primarily-international VC, could be an opportunity for Africa to wean itself off foreign and DFI capital in the long-run, in spite of the short-term pain.
The continent’s startup space is remarkably resilient, and not facing the same deep structural challenges as in developed markets. In Silicon Valley, the bubble really has burst, with business models that were not sustainable in the long run exposed. This is not the case in Africa, where businesses are typically serving markets where there is no shortage of demand, and the drop in valuations is driven by more external factors. African startups are used to doing more with less, and are much more capital efficient than their peers in developed markets.
So all that is needed, then, is money. And given the global slowdown, and the end of US development finance capital, that increasingly needs to be local capital.
Zachariah George, managing partner of pan-African early-stage VC firm Launch Africa Ventures, told a recent episode of “the month in VC”, Disrupt Africa’s regular podcast on the African venture capital space, that as international capital dries up, Africa-based investors are playing a greater role than ever before within the ecosystem, a sign of growing maturity.
“One of the important benchmarks is the fact that there’s been a much higher percentage of African family offices and African investors investing in tech startups in Africa, versus investors from the US, Europe, and Asia. I think for the very first time last year, if I’m not mistaken, the percentage of Africa-based funds investing in Series A and pre-Series A startups was higher than investors from outside of the continent, which is usually the hallmark of the start of a maturity cycle in the VC industry,” George said.
“You had more Africa-based VCs, on the ground, like ourselves, Enza Capital, LoftyInc, 4Di Capital, Knife Capital, et cetera, investing in African startups versus having to depend on US, European, and Asian VCs investing. So that was quite a big moment.”
We are also starting to see successful African founders give back by making investments in the space.
“You are now looking at the end of year seven, year eight, year nine of the first real tech success stories in Africa. So the founders of tech startups like Flutterwave, Paystack, Andela, Chipper Cash, Kuda, and OPay are now at a point where they’ve had either full or partial exits of their own equity in these companies, and they’re putting that money back to use either as angels, or LPs in funds, or setting up their own family offices,” said George.
“Which is fantastic for the ecosystem because this is smart capital from operators that can add a lot of value outside of just their money. And that is something that is very positive for the African ecosystem, the fact that we have former founders that are investing in the next generation of African tech innovation, it augurs really well for the future of tech in Africa.”
One gap that remains, however, is non-DFI institutional capital.
“What I would love to see more of is more institutional money in Africa going into both VC funds and startups, that are not DFIs. DFIs are institutions, but they’re not the only institutions out there. The vast majority of VC funds in Africa are heavily focused on DFI funding. But where are the asset managers? Where are the pension funds? Where are the mutual funds? Where are the insurance companies? You have close to zero allocation from these big institutions. And that’s something I’d like to see change.”
More success stories, to change the mind of the allocators within these institutions, would help, while fund of funds initiatives, such as the one recently rolled out by the SA SME Fund and the Technology Innovation Agency in South Africa are a step in the right direction.
Disrupt Africa reported recently on predictions that the amount of venture capital available within the South African tech ecosystem is set to increase in the coming years as innovative de-risking models, like funds of funds, attract more institutional investment into the space.
“I’m very happy with what the SA SME Fund has done. And we’ve got similar funds in Rwanda, in Egypt, the Moroccan government fund of funds, Smart Capital in Tunisia. But it’s still, as a percentage of GDP, a drop in the drop in the ocean.”
The conclusion, basically, is that African tech needs to fend for itself, and though baby steps have been made, we need to work harder.
