Investors are failing African entrepreneurs — it’s time for a change

Despite the global economic slowdown caused by COVID-19, the case for investing in Africa is stronger than ever. Africa will remain a competitive investment destination for decades to come because of its improving relative risk profiles, regional integration and strong economic fundamentals.

However, many challenges remain for local founders despite the record-breaking fundraising year African startups had in 2019. This is especially the case when it comes to women-led companies.

The energy sector will be critical for Africa’s post-COVID economic recovery and will be one of the most attractive investment sectors in 2021. Stakeholders ranging from the African Development Bank to large-scale private funds recognize the need cost-efficient industrial energy access as well as universal household electricity. To expand the impact of their investments in the energy sector, development finance institutions (DFIs) and private investors should pay more attention to empowering African-led energy firms by adjusting their risk analyses and to closing gaps for off-grid solar project financing.

Representation of local African founders, and female founders, remains a challenge in the African startup funding space. While it is a positive sign that African companies are attracting international investors’ attention, only 20 percent of private investment into African startups and companies came from Africa-based investors during the last five years. Further, eight of the top 10 African startups that attracted the most capital in 2019 were led by foreigners.

These figures get more concerning when considering the number of women-led or co-founded startups in Africa. Although 25 percent of all sub-Saharan African women are engaged in early-stage entrepreneurial activity, women-led startups receive a fraction of the investments compared with their man-led counterparts. This year’s projected drop in funding for African startups is a perfect opportunity for the investment community to reflect on these trends and make changes for the coming surge of financing needed for the post-COVID recovery.

The economic recoveries of African economies are underway, and investors can take advantage of strong positive economic trends that existed pre-COVID to invest in strategic sectors such as energy. Investing in African markets always has been associated with risk, but now the COVID-19 pandemic has made safe markets risky, and traditionally risky markets look attractive.

From China to the U.S., geopolitical crises already were stressing major economies, and COVID accelerated this trend. Now, investors are increasingly looking elsewhere for stable returns and reassessing their risk profiles.

Compared to traditional markets, Africa is young, connected, entrepreneurial and poised for immense growth through regional integration via the African Continental Free Trade Agreement (AfCFTA), which will create the world’s largest free trade area. Renewable energy is a priority sector for Africa’s post-COVID recovery because small and midsize enterprises need reliable and clean energy to get back to business and continue growing.

Over $200 million in funding last year went to energy sector startups. Off-grid solar projects in Africa consistently have outraised their competitors in other countries, making Africa the leading global destination for off-grid solar investment. The importance of off-grid and mini-grid projects will only grow as they are the most cost-effective way to bring hundreds of millions of Africans without electricity online and reinforce power supplies for businesses.

DFIs and investors should prioritize supporting African-led renewable energy companies to achieve stable returns, close the energy access gap and elevate African founders. Despite expanding programs for solar energy financing, outdated risk analyses keep critical funding out of the hands of African entrepreneurs. Some of the largest off-grid solar companies in Africa are co-founded and backed by Western CEOs and investors. Thinking that local African firms with market expertise cannot deliver the same returns with the same, if not better, risk profiles are outdated. More developed economies do not have a monopoly on talent either. African talent, combined with recruited international talent, can result in world-class teams to lead companies capitalizing on the African solar opportunity.

Africa’s off-grid solar sector represents a $24 billion annual opportunity, and the continent faces a significant energy gap. DFIs can serve as bridges between the private sector and governments by expanding credit enhancement services to hedge against project risk. These institutions already have several tools at their disposal to help investors hedge against risk, including credit and political risk guarantees, and serving as lenders of record for project financing to secure favorable loans using their preferred credit status. Promoting technology transfer and local content is a stated priority of DFIs. The best way to accomplish these objectives is by supporting African companies in securing investment.

The golden age of African investment is just beginning. However, real developmental impact in critical sectors such as solar energy cannot occur without local empowerment and African firms taking a leading role. Investors are running out of excuses: African companies can be competitive, profitable and world-class when given the support they merit from capital markets and DFIs.