Bamidele Famoofo
Startups from four strategic African countries- Egypt, South Africa, Kenya and Nigeria are fast becoming the toast of foreign investors as they are perceived most developed among their peers on the continent.
A report released by the International Finance Corporation, the investment arm of the World Bank, recently, revealed that African startups are finding it increasingly difficult to attract foreign investors because they are perceived highly risky.
IFC says one of the biggest challenges for Africa’s tech startups is a missing domestic equity financing market, which forces them to rely on foreign investors.
Africa’s startup ecosystem grew rapidly until 2022 when rising inflation, interest rates, and economic uncertainty caused funding to dry up.
Venture capital deals in Africa fell around 52 per cent between 2022 and 2024, more than in any other region, according to Pitchbook. To be sure, the VC collapse was global. But the stakes are particularly high in Africa, where the startup ecosystem was still in its early stages when funding went into reverse.
An ongoing IFC study suggests entrepreneurs strongly prefer equity investments from investors with local experience. Yet roughly 80 per cent of African firms’ funding comes from abroad—much of it from Europe and North America—a higher share than in other emerging markets. That’s a problem because foreign investors are more likely to pull their money out during downturns.
Investors may also view African startups as riskier than those in other places, which make it harder for firms to grow.
The IFC study shows that only one-third of funded startups in Sub-Saharan Africa landed their first VC deal within their first five years. In contrast, more than half of similar firms in Latin America had reached that milestone within the same period.
The report noted that foreign investors are also more likely to work with firms in countries with which they share a colonial linkage or a common language, thereby limiting themselves to just a subset of possible investment opportunities.
That’s accelerating industry consolidation, capital concentration, and strategic realignments toward sectors perceived as lower risk. The downturn is disproportionately affecting women-led businesses. Companies with female founders received their lowest-ever share of investment in 2024, at 6.8 percent, according to Africa: The Big Deal, a database. The data only counts deals of at least $100,000.
If they weather the funding downturn, these companies could contribute to making Africa’s businesses more competitive. They could bridge skill and digital literacy gaps and enhance access to markets. According to IFC research, more than 600,000 formal firms and 40 million microbusinesses in Africa could digitize tasks such as accounting, supply chain management, or payments. A startup could help them do that, letting businesses focus on growth and job creation.
In another study, researchers gave a group of Rwandan entrepreneurs a marketing analytics app tracking their sales, products, and customers and compared their performance against a control group. Over time, entrepreneurs using the app were more likely to refine their business strategy by adjusting prices, improving their products, or monitoring inventory. They saw their monthly sales and profits rise 36.4 percent and 29.2 percent, respectively, over those without the app.
Investors and venture capitalists play an important role here by seeking out only the most promising startups and ensuring they have enough funding to get off the ground. These are likely to be the most innovative firms that could have the most significant impact on the overall economy. Only about 10 percent of young publicly listed firms in emerging markets (excluding China) are backed by venture capital but they account for almost half of all R&D spending in those countries, according to a 2024 study.
There have been some bright spots amid the funding downturn. The value of the median deal in Africa has continued to rise, suggesting its higher-quality companies getting money. There have also been early signs of recovery in Africa, with more funding raised in the second half of 2024 than in the first half of the year and the second half of 2023, according to Africa: The Big Deal. It’s unclear how viable the rebound will be considering the uncertain global economic outlook. Looking ahead, countries such as Ghana and Nigeria have recently allowed pension funds to invest more in private equity, a step toward building local funding sources.
According to IFC, finance institutions can help nurture home-grown capital markets by co-investing with pension funds and other investors. At the same time, instruments such as venture debt—a form of financing many African entrepreneurs would welcome but currently lack—could help startups scale up without relying solely on equity. Development finance institutions can also help by backing early-stage investments to make them less risky for private investors. Supporting regulatory reforms and helping establish infrastructure will also contribute to making the broader African startup ecosystem more resilient.
Roughly half of Africa’s tech firms provide information technology services such as data storage or software. These services offer affordable and flexible options that are accessible to smaller businesses facing financial constraints.
Other startups focus on logistics or e-commerce. These firms develop platforms allowing informal retailers to order products directly from manufacturers, bypassing the usual distribution methods and cutting intermediary costs. Roughly 90 percent of retail sales are from informal vendors, but existing supply chains are fragmented and not set up to properly serve these types of businesses. Direct online sales to consumers have yet to take off in Africa, however, partly because many households do not have formal mailing addresses, which limit their ability to receive packages.
Fintech services, such as mobile payments or banking, receive the most investment despite making up a relatively small share of the total ecosystem. In 2025, fintech firms account for eight of the nine African unicorns, companies less than 10 years old and valued at $1 billion or more by private investors or public markets.
Agriculture, which contributes 20 percent of Africa’s GDP and employs 50 percent of its workforce, remains a largely untapped sector. Some agtech firms provide information services, such as detailed weather reports. Some connect Africa’s smallholder farmers to new markets or offer them financial services, whereas others let farmers lease tractors and other machinery directly from owners. One estimate shows that the market potential for agtech firms exceeds $2 billion.
