Recently, there has been a notable increase in funding from Development Finance Institutions (DFIs) aimed at boosting Africa’s venture capital space and fostering a climate tech market on the continent. However, to make this funding justifiable, there is a pressing need for clear leaders to emerge quickly.
Venture capitalists fulfill two main responsibilities: investing in companies with high potential returns and maintaining relationships with their investors, known as limited partners (LPs). In Africa, the influence of DFIs is becoming more pronounced as they account for a substantial portion of the capital for VC firms. Consequently, this relationship gives DFIs considerable influence over the direction of the VC landscape in Africa, as the firms they fund are often tasked with achieving specific impact metrics aligned with the objectives of their governmental or institutional backers. With an increasing focus on climate resilience, these governments are channeling their efforts towards funding climate technology initiatives throughout Africa.
This dependence on DFIs is distinctly characteristic of Africa’s venture capital environment. African firms have limited access to traditional funding avenues, such as pension funds, compelling them to turn to DFIs for support. This has resulted in a significant inflow of capital into venture capital firms tackling regional challenges. Major players like the International Finance Corporation (IFC) control billions and view VC firms as essential partners that can tap into local expertise to fuel innovation and stimulate job creation.
Kola Aina from Ventures Platform noted that while LPs often provide guidance and set expectations, they engage in collaborative discussions with VC firms. In the past two years, these directives have led to increased funding in Africa’s climate tech sector, even as overall VC funding has dipped. In fact, climate tech attracted $1.04 billion in 2023—a 9% growth from the year prior, making it the second most funded sector on the continent.
However, a significant disconnect exists between the growth in funding and the commercial viability of many climate tech initiatives in Africa. One anonymous general partner of a $30 million fund cautioned that the current landscape is more influenced by policy objectives rather than emerging commercial interests, suggesting that the momentum driven by VC funds and DFIs may not adequately translate into sustainable business practices for entrepreneurs.
Despite the considerable rise in climate tech investments—growing from 340millionin2019toover1 billion in 2023—the sector continues to grapple with the high initial costs associated with many climate solutions. This steep financial barrier hampers scaling efforts. Furthermore, while the climate tech landscape spans various domains, including renewable energy and recycling, its comprehensive market valuation remains elusive.
In contrast, the fintech sector enjoyed a surge in funding in the early 2020s, resulting in notable successes like Paystack and Flutterwave. These companies have played pivotal roles in developing a vibrant ecosystem. Conversely, breakthroughs in climate tech have been minimal, aside from advancements in electric two-wheelers, signifying a gap between the sector’s considerable potential and its tangible impact.
Aina affirmed that there is no opposition to the rise in climate tech investments; however, he emphasizes that a careful examination of their viability is crucial. Reflecting on the transformative effect of DFIs’ patient investment in Africa’s telecommunications sector, he argued that a similar approach is necessary for climate tech to thrive. To tap into this potential, the continent requires startups capable of providing meaningful and scalable solutions promptly. Without the emergence of key innovators, the promise of climate technology in Africa risks remaining unfulfilled.
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