The big funding squeeze: Can African startups survive?

Startup businesses from across Africa convened in Marrakech in April for GITEX Africa, one of the tech industry’s biggest gatherings on the continent. In the cavernous exhibition spaces of the city’s exhibition centre firms demonstrated their technology, learned from like-minded peers and attempted to persuade funders to get out their chequebooks. This was the third year of the continent’s spin-off event from the Gulf Information Technology Exhibition held in Dubai.

Following US President Donald Trump’s global trade war and reduced expectations of global economic growth, the mood at this year’s gathering was somewhat muted, and the data shows why.

African startups attracted an estimated $2.8bn in new investments across 750 reported deals in 2024. This marks a sharp deceleration from 2023, when startups raised $3.9bn across 930 disclosed transactions, according to a report by Briter, a market intelligence and research firm focused on emerging markets. The value of deals fell by 28% year-on-year while the total number of transactions decreased by 19%, the report reveals.

Given the tight funding environment, startups have to do ever more to stand out from the crowd, offer attractive investment terms and prove their worth to investors in double-quick time. The days of hoovering up speculative capital based on the promises of future windfalls appear to be drawing to a close.

Raising capital by offering equity stakes to investors has become an increasingly uphill task for founders and their management teams, compelling many startups on the continent to explore other strategies of funding their growth ambitions.

Turning to debt

One sign of investors feeling less inclined to provide risk capital to startups is the increasing popularity of debt funding, a major topic of conversation among the firms seeking capital at GITEX.

Previously reluctant to take on debt, startups looking out on a constrained funding environment are now opening their minds to the asset class and taking the plunge.

According to a new report by the African Private Capital Association (AVCA), the value of venture debt utilised in tech deals edged higher by 3% year-on-year to account for 37% of total venture capital (VC) deal value in 2024. Venture debt deals representing just 12% of all transactions, highlighting the outsized role that debt is playing in supporting Africa’s tech ecosystem.

“There is a growing demand for debt as an asset class,” says Dario Giuliani, managing director of Briter, on the sidelines of GITEX.

It is not just venture debt lenders who are helping startups bridge the funding gap; commercial banks, too, are playing an ever more crucial role.

“We’re seeing a growing number of startups raising debt for things like asset finance,” he tells African Business. “This points to the growing role of traditional lenders such as commercial banks.”

However, early-stage companies that are yet to attain meaningful revenues or build an operational track record have found themselves at a distinct disadvantage. This is because lenders typically steer clear of unproven business ventures with limited assets and earnings.

The upside to this is that many startups have intensified efforts to tighten internal controls and formalise their businesses in order to qualify for much-needed credit facilities.

Blended finance is another opportunity that early-stage startups can tap into, says Giuliani, with grants offered alongside equity and debt financing becoming more mainstream in recent years.

However, he admits that recent moves by major donor nations to slash development aid has dampened spirits.

“Sentiment has certainly taken a hit, though we’re still waiting to see how this will play out in terms of the volume of grant funding available to startups,” he says.

Don’t try to replicate Silicon Valley

Joojo Ocran, the strategic partnerships director for Africa at Startupbootcamp AfriTech – a multi-corporate-backed accelerator programme – sees a silver lining in the current downturn in VC funding. He tells African Business that the funding squeeze provides an opportunity for large corporations on the continent to step in and play a more prominent role in Africa’s tech ecosystem.

Africa, he argues, is overly focused on trying to replicate the Silicon Valley VC model, in which vibrant capital markets have created a strong incentive for VC funds to close as many deals as possible, in the shortest timeline conceivable – often at stretched valuations.

“The Silicon Valley VC model may be inspiring, but the reality is that it is not well suited to the African context. Our capital markets are far less mature than those in the US, which means that startups here must seek alternatives to traditional venture capital funding if they want to innovate at scale,” Ocran explains.

Startupbootcamp AfriTech champions a model in which, instead of startups relying too much on investments from traditional VCs, they partner with select corporates in the programme to achieve scale in a sustainable fashion.

Some of the programme’s corporate partners include Telecel, Google, BNP Paribas and RCS Group, a major payments company in South Africa.

“We’re focused on creating an ecosystem where startups and corporate partners can build symbiotic relationships,” Ocran says.

“Corporations benefit from access to innovation, commercial solutions, and even opportunities to expand their M&A [merger and acquisition] pipelines,” he adds.

Ocran argues that this model has led to more of its investee companies growing healthily over the long-term compared with traditional VC models, where he says failure rates are much higher.

Startupbootcamp AfriTech has, Ocran tells African Business, helped more than 60 startups raise over $145m in funding; this “portfolio” of companies is, he says, currently worth slightly north of $850m.

He stresses that it all comes down to finding the right fit between a startup and corporates. The two need to be in complementary markets, and there is a great deal of vetting that takes place before a startup is matched with a corporate sponsor, he says.

“We identify startups that fit the mandates of our partners, and help them to de-risk and refine their value proposition. The goal is to help them create compelling proof of concept projects that provide tangible ROI [return on investment] to partners and help the startups drive sustainable growth,” he says.

“African startups must prioritise profitable, sustainable growth. That’s the message we emphasise.”

Investing when others are afraid

For Uwemakpan Uwemedimo, head of investments of Fund II at Launch Africa Ventures – a pan-African early-stage investment firm established in 2020 – the prevailing pessimism that has engulfed the African tech scene presents an opportunity to capitalise on discounted valuations.

“Warren Buffett usually says to invest when everyone is afraid of investing,” he recalls, arguing that there is a critical need for pan-African funds such as Launch Africa Ventures to continue backing promising founders who are making a significant difference to the ecosystem.

He says the fund is willing to go into areas others are not. “We come in at the riskiest stage when others are not willing to invest,” he tells African Business.

The firm, which he says raised $33m for its first fund and invested in 133 companies, is currently in the midst of a capital raise targeting $75m for Fund II. “We’ve already started deploying proceeds from our Fund II raise across 20 companies,” Uwemedimo says.

Lina Kacyem, investment manager at the firm, tells African Business that the timing is right for capital raising. Valuations, she stresses, have come back down to earth, presenting an opportunity to snap up companies with promising upside potential.

“What we’re seeing right now, compared with during Covid, is more of a readjustment in terms of valuation. They are closer to where things should be,” she says.

With a portfolio spanning 150 startups across 22 countries between the two funds, the firm plans to deepen its focus rather than expand geographically. “We’ll leverage lessons from Fund I, zoning in on

high-potential economies while maintaining our first-mover culture,” Kacyem says.

“For example, when we talk about francophone Africa, most pan-African VC funds were not even present in francophone countries two years ago, while we have been making investments in those geographies for four to five years,” she says.

“Now people are understanding, because of the stability of the currency, because of how those economies are integrated, that those are interesting markets when you look at them as a bloc,” she adds.

For Fund II, Uwemedimo says the firm will back fewer companies than in Fund I, despite planning to raise more than double the capital. “We want to write bigger cheques and prioritise follow-on investments,” he says. “When our founders grow rapidly, we want to ensure we have the firepower to back them again, so they can focus on building rather than fundraising.”

The key sectors for Fund II will include healthcare, fintech, cybersecurity, agri-tech, electric mobility, and AI applications for African languages. “Our startups must serve consumers across borders, and AI for local languages is a priority,” Kacyem says.

Offering advice to founders keen on scaling up successfully, Kacyem stresses the importance of targeting the right investors.

“Do your homework,” she urges. “Understand investors’ priorities, study their portfolios, and talk to other founders who have received money from them about their experiences. Not everyone with a cheque is the right fit.”

Policymakers’ crucial role

While it is primarily startups and private sector investors that must challenge the status quo and take the risks needed to transform African tech, policymakers play an equally crucial role: they help establish a robust legal and regulatory framework that promotes innovation at scale and attracts long-term investments that lead to the creation of quality jobs.

Talkmore Chidede, a senior digital trade expert in the African Continental Free Trade Area (AfCFTA) secretariat, emphasises the importance of leveraging the AfCFTA to expand the reach of African tech startups and help them achieve a level of scale that domestic markets alone may not provide.

“Tech players in Africa’s private sector looking to expand their continental presence must familiarise themselves with the opportunities presented by the protocol on digital trade,” Chidede tells African Business on the sidelines of GITEX. “The protocol on digital trade is a legal framework that harmonises digital trade rules across all member states of the African Union.”

He notes that the protocol’s general framework, alongside its eight annexes, covers critical areas such as digital identities, interoperability of digital financial systems, and cross-border data transfers.

“In some African nations it is still impossible to transfer data across borders. Restrictions on cross-border data transfers need to be removed, but this must be executed through secure means that guarantee privacy and protection of personal data,” he stresses.

“The protocol on digital trade has provisions to support this process, fostering innovation while protecting Africa’s data.”

Although supporting the growth and success of local entrepreneurs is essential for Africa’s digital future, attracting investments from global tech giants is just as important. These firms can help African nations to develop much of the infrastructure that underpins modern digital economies, including building more data centres, improving connectivity, and closing the power access gap for individuals and businesses. To secure these investments from global tech titans, countries across the continent are engaging in novel forms of digital diplomacy.

“In recent years, technology has gained prominence in international diplomacy,” Philip Thigo, Kenya’s special envoy on technology, tells African Business.

“A dedicated envoy is crucial in bridging the gap between industry and government, ensuring effective negotiation on science, technology, and innovation in a world where geopolitics has gotten more complex.”

The dream hasn’t died

Still, despite the gaps in policymaking and the reduced appetites of investors, it’s not all doom and gloom. GITEX still offered a platform for vibrant, original startups offering solutions to Africa’s challenges, from fintech to health and agritech. Young, entrepreneurial founders refuse to be downcast by the funding environment which many see as but a passing phase.

Indeed, Briter’s Giuliani argues that early-stage startups need not panic about constrained access to financing or the slowdown in overall VC flows to Africa.

On the contrary, he says that the data shows that there is a steadily growing appetite from VCs and other investors for smaller deals involving younger, promising companies.

He contends that the widely reported headline figures on the funding landscape inadvertently mask this important nuance, attributing this to the disproportionate influence of mega-deals on aggregate transaction values.

“The ten largest deals every year for the past decade have consistently accounted for more than half of all funding raised, while representing only a tiny percentage of the number of total transactions reported,” he says.

“Most of the deal activity is around smaller deals, and we continue to witness a steady increase in the number of early-stage transactions in Africa, with ticket sizes ranging from $500,000 to $1m representing a larger proportion of all deals closed,” he says.

Abi Mustapha-Maduakor, CEO of AVCA, stresses that Africa had demonstrated “notable resilience”.

“While overall funding has contracted, we’re seeing strategic adaptations – higher quality deals, sector diversification beyond fintech, increased venture debt utilisation, and the strengthening role of African investors,” she says.

While acknowledging the gravity of the challenges faced by startups grappling with constrained access to capital, Giuliani argues that some of the pessimism surrounding the current funding environment has been overdone.

“If you zoom out and look at the bigger picture, we’re actually on a pretty solid trajectory over the past decade – the challenges of the past few years notwithstanding,” Giuliani says