Africa’s climate tech sector needs winners to justify recent funding jump

Funding from DFIs has grown Africa’s venture capital industry and now that funding seeks to create a market for climate tech in Africa but there needs to be clear winners soon. 

A venture capitalist has two jobs: funding companies with the potential for outsized returns and managing relationships with the limited partners (LPs) who provide the funds. In Africa, this relationship with LPs has increasingly leaned towards development finance institutions (DFIs), which are some of the largest sources of capital for VC firms. 

But this relationship gives DFIs significant sway over the direction of Africa’s VC landscape as firms receive impact metrics from DFIs. The institutions, backed by governments or international bodies, often deploy funds to align with their backers’ goals. As these governments focus on fostering a safer global climate, they have increasingly incentivised funding for climate technology in Africa.

This reliance on DFIs is unique to Africa. African VC firms, unlike their global counterparts, have limited access to funding sources like pension and endowment funds, leading them to DFIs, which has fuelled a surge in funding for VC firms. 

These institutions, like the IFC, which invested in Africa’s largest and second-largest VC fund, control billions of dollars and see VC firms as key custodians of capital that can leverage their local presence to drive innovation, job creation, and economic growth on the continent. 

“Limited partners will have an opinion and certain recommendations and requirements, but we often have healthy discussions and debates. It is a very collaborative approach,” Kola Aina, the general partner of Ventures Platform, told TechCabal. 

These recommendations and requirements have helped drive up funding into Africa’s climate tech sector in the past two years, despite a decline in VC funding. In 2023, climate tech became the second most funded sector in Africa, raising $1.04 billion—a 9% increase compared to the previous year.

“Part of [the recent growth in funding for climate tech] is driven by some of the priorities of the limited partners,” Aina said. His firm lists France’s Proparco, British International Investment, and the IFC as limited partners. 

This funding boom does not correlate with the commercial reality of most climate tech solutions on the continent. “It’s a policy driver. I would not look at it like a commercial industry,” the general partner of a $30 million fund who asked not to be named told TechCabal. 

“It hasn’t really come to the forefront of our commercial business case to do climate tech but there’s an incentive driven by VC funds, which is driven by the DFIs and the DFIs government, that trickles down entrepreneurs who do climate tech.”

Despite the rise in funding for climate tech in Africa—from $340 million in 2019 to over $1 billion in 2023—the high upfront cost of most climate products has created a barrier to scale. In the years that funding has flown to the sector, there are still no clear estimates of its total value despite the sector’s broad scope, including sub-sectors like electric vehicles, solar tech, and recycling. 

While climate tech holds immense potential for Africa, a continent disproportionately affected by climate change, the current solutions have not yet effectively addressed the region’s unique challenges. 

In contrast, the fintech sector’s funding boom in the early 2020s saw the rise of clear winners like Paystack and Flutterwave, whose success helped shape a thriving ecosystem. Similar transformative breakthroughs besides electric two-wheelers have yet to occur in climate tech, highlighting the gap between the sector’s potential and its current impact.

“We are not opposed to the rise in climate tech investment. I do agree that these investments have to be viewed very closely for viability,” Aina said.  

Funding from DFIs played a crucial role in launching Africa’s telecommunications sector, demonstrating the transformative power of patient capital. However, for this same impact to be mirrored in climate tech, the continent needs startups capable of delivering wide-reaching solutions soon. Without key players emerging to drive significant change, the potential of climate tech may remain untapped.

Moonshot by TechCabal is gathering Africa’s most audacious builders and thinkers in Lagos, Nigeria. You can get tickets here.

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