More Money is Going to African Climate Startups, but a Big Funding Gap Remains

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NAIROBI, Kenya (AP) — When Ademola Adesina founded a startup in 2015 to offer solar and battery power subscription packages to individuals and businesses in Nigeria, raising money was much harder than it is today.

Climate technology is new in Africa, the continent is a young destination for venture capital money, there are fewer funders to turn to and less money is available, he said.

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It took him a year of “running around and scouring” his networks to raise his first amount — just under $1 million — from VC firms and other sources. “Everything was a learning experience,” he said.

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But the ecosystem has changed since then, and Adesina’s Rensource Energy has raised about $30 million over the years, mostly from VC firms.

Private sector funding for climate technology startups in Africa is increasing, with companies raising more than $3.4 billion since 2019. But there is still a long way to go: the continent needs $277 billion annually to reach its 2030 climate goals.

Experts say African countries need to address risks such as currency instability, which they say is curbing investors’ appetite to unlock financing and fill this gap, while investors need to expand their interest to broader climate sectors such as flood mitigation, disaster management and heat management as well as various to use financing methods.

Still, the investment numbers for the climate tech sector — which includes companies in renewable energy, carbon removal, land restoration, and water and waste management — are compelling: Last year, climate tech startups on the continent raised $1.04 billion, an increase of 9% According to funding database Africa: The Big Deal, they have tripled year-on-year and tripled their 2019 revenue. This is despite a decline in the total amount of money raised by all startups on the continent over the past year.

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That’s important because climate technology requires experimentation, and VC firms that provide money to emerging companies play an essential role in providing venture capital to climate technology startups, Adesina said. “There are a lot of things uncertain in the climate space,” he said.

Money raised by climate tech startups last year accounted for more than a third of all funds raised by startups in Africa in 2023, putting climate tech second only to fintech, a more mature sector.

Venture capital is typically awarded to companies with significant risk but great long-term growth potential. Startups use it to expand into new markets and launch products and services.

Venture capitalists “can take risks that other people can’t take because our business model is designed for failure,” said Brian Odhiambo, a Lagos-based partner at Novastar Ventures, an Africa-focused investor. “Not everything has to be successful. But some will make it, and those who make it will achieve tremendous success.”

This was the case for Adetayo Bamiduro, co-founder of Metro Africa

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Adetayo said venture capitalists “play an extremely important catalytic role.”

“We all know that investments need to be made to truly decarbonise our economies. And it’s not a trivial investment,” he said.

The funds can also bridge the gap between traditional and non-traditional sectors, said Kidus Asfaw, co-founder and CEO of Kubik, a startup that converts hard-to-recycle plastic waste into durable, low-carbon building material. His company, which operates in Kenya and Ethiopia, has raised around $4.6 million since its inception in 2021.

He cites waste management and construction as examples of traditional sectors that can connect with startups like his.

“There is so much innovation in these spaces that can transform them over time,” he said. “VCs are accelerating this path to transformation.”

In addition to venture capital, other investments from private equity firms, syndicates, venture builders, grantmakers and other financial institutions are also actively funding climate initiatives on the continent.

But private sector funding generally lags far behind public funding, which includes funding from governments, multilateral organizations and development finance institutions.

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In 2019-20, private sector financing accounted for just 14% of Africa’s total climate finance, according to a Climate Policy Initiative report, much less than regions such as East Asia and the Pacific at 39% and Latin America and the Caribbean at 49%.

The low contribution in Africa is due to investors putting their money into areas they are more familiar with, such as renewable energy technology, while investing less money into more diverse initiatives, said Sandy Okoth, green finance capital markets specialist at FSD Africa, one of the commissioners of the CPI study.

“The private sector feels that this (renewable energy technology) is a more mature area,” he said. “They understand the financing models.”

The technology for adapting to climate change, however, is “more complex,” he said.

One renewable energy startup is Johannesburg-based Wetility, which last year secured $48 million in funding – mostly from private equity – to expand its operations.

The startup provides solar panels for homes and businesses, as well as a digital management system that allows users to remotely manage electricity consumption to solve the problems of energy access and reliability in Southern Africa.

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“Private sector funding is still rather low in the African climate,” said founder and CEO Vincent Maposa. “But there is visible growth. And I think over the next decade or so you’ll start to see those changes.”

Investors are also beginning to understand the economic benefits of climate change adaptation and solutions as they receive a return on investment, said Hetal Patel, Nairobi-based investment director at Mercy Corps Ventures, an early-stage VC fund focused on startups , which develop solutions for climate adaptation and financial resilience.

“We are starting to develop a very strong business model for adaptation investors and ensuring that private capital inflows begin,” he said.

Maelis Carraro, managing partner at Catalyst Fund, a Nairobi-based VC fund and accelerator that finances climate adaptation solutions, called for more diverse financing, such as a combination of private and public financing. The role of public financing, she believes, should be to reduce private sector risk and attract more private capital to finance climate initiatives.

“We won’t go far enough with public funding alone,” she said. “We need the private sector and the public sector to work together to release more funding. And especially beyond the boundaries of some industries where innovation is very important.”

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