Unlocking alternative funding streams for African startups

Venture Capital (VC) has long been hailed as the best funding model for high-growth startups. However, it is challenging for most African founders to secure funding. In 2024, African startups raised $3.2 billion across over 182 equity and debt funding deals. Most of these funds went to a few tech-heavy startups in key markets like Kenya, Nigeria, South Africa, and Egypt, leaving many promising businesses unfunded. In a world where VC funding is often seen as the only ticket to success, what if African startups can scale without it?

The limits of VC cheques in Africa

Asset-light and high-growth sectors like e-commerce and fintech favour traditional VC models, which rely on high valuations and potentially quick exits through acquisitions or IPOs. Between 2019 and 2023, fintechs and e-commerce companies accounted for 75% of total funding to African founders. Despite increasing interest from Africa-focused VCs in essential sectors like agritech and health tech, these sectors often clash with investors’ demand for rapid growth and fast exits.

Additionally, systemic and cultural factors make VC funding inaccessible to many African founders. In countries like Kenya, investors favour expatriate-owned startups or those founded by Western-educated Kenyans, while local entrepreneurs without patronage struggle. The emphasis on tech-driven scalability has further sidelined businesses supporting most African economies, such as agriculture, manufacturing, logistics, and local commerce.

VC firms often target exits within five to seven years, a model likely incompatible with the realities of African markets. While some venture-backed startups achieve an exit in as little as 2 years, most take about six years with five funding rounds to get to an Initial Public Offering (IPO).

Unlike the US or Europe, which have more homogeneous markets, the 54 African countries have fragmented markets with different regulations and dysfunctional regional economic blocs like EAC, ECOWAs, and SADC. This fragmentation makes scaling across borders a bureaucratic nightmare and expensive, making startups less attractive to VCs that may be looking for quick expansion.

The widespread low-income levels in most African countries mean lower spending, loosely translating to lower profit margins for local businesses. This makes growth difficult for startups that target mass-market consumers. Around 35% of the over 1.4 billion people in Africa live below $1.90 per day, the global extreme poverty line.

Another problem facing African founders is insufficient local investor networks. The continent’s VC landscape has relatively few local investors. Since most VCs investing in Africa are foreign, a disconnect exists between the operational realities of the regional economies and investors’ expectations–though some of them understand the continent.

Given these challenges, African founders should explore alternative funding, considering the continent’s realities. From revenue-based financing to grants from development agencies, these approaches could be the key to Africa’s startup ecosystem, overcoming sometimes unrealistic expectations from VCs. These alternative approaches prioritise sustainability, allowing the founders to scale businesses at a pace that matches market realities.

Thriving without VC backing

Contrary to the growing belief that startups cannot scale without VC funding, companies like Kenya’s BitPesa (now AZA Finance) and Pesapal have proven otherwise. Pesapal, a payments service provider, has built its business through strategic partnerships with banks and mobile money platforms, focusing on sustainable revenue growth instead of external funding. In an industry where VC-backed fintechs have struggled to crack the market, Pesapal has registered steady growth by prioritising cash flow and profitability.

Some well-funded VC-backed competitors and fintechs burned through cash, expanding in multiple markets to meet investors’ expectations—some, like Lidya and KopoKopo, eventually pivoted or downsized, abandoning unsustainable cost structures. Conversely, BitPesa adopted an organic expansion, leveraging partnerships with established brands instead of burning investor cash. The approach allowed the company to prioritise long-term profitability over short-term high valuations.

In multiple media interviews, Agosta Liko, Pesapal co-founder, claimed the company is profitable without revealing details. The company has over 30,000 POS machines in Kenya, with commercial banks following. According to the Central Bank of Kenya (CBK), there are 56,000 POS, meaning Pesapal controls over half of the market. Today, Pesapal processes over a million transactions daily across Kenya, Uganda, Tanzania, Rwanda and Zambia.

In its early years, Cellulant relied on grants and corporate partnerships before eventually securing institutional investment. These two examples show that African startups can explore alternative funding models like bootstrapping, strategic alliances, grants, and revenue-based financing, which supports long-term growth without the pressure that comes with VC funding.

Instead of giving up equity, founders can raise capital pegged on their revenues. While revenue-based financing (RBF) is still uncharted territory for most African entrepreneurs, it can be a favourable model, especially in industries with steady income streams. Under this model, investors receive a share of revenues until the agreed amount as a multiple of principal investment–usually three to five times. South Africa’s Linea Capital has started giving startups funding through this model, promising a non-dilutive, collateral-light funding structure compared to the VC option. By linking repayments to a company’s revenue growth instead of fixed schedules, like in the case of loans, RBF allows founders to scale sustainably.

Ethiopia’s Cooperative Bank of Oromia is piloting RBF for small businesses with cheques of up to $1,700. In a market with limited foreign investment and strict collateral requirements for bank loans, Cooperative Bank’s experiment could help entrepreneurs raise capital that fits their needs. Its success suggests that RBF could be among the alternatives African founders can ride on to fund their ventures.

Companies like Kenya’s Little Cab, a ride-hailing company, have succeeded in raising revenue-linked funding, which caters to their growth models rather than VC scaling pressures. Despite stiff competition from VC-backed ride-hailing apps like Uber and Bolt, Little Cap has cut its niche in the market, becoming the darling of most corporates. The company claims to have over 5000 corporate members, including leading banks and telcos, an area that Uber has struggled with in the Kenyan market.

Large companies, including banks, telcos, and FMCGs, are seeking partnerships with innovative startups. Such arrangements give startups market access, capital, and operational support–which some VCs might not offer. For instance, Safaricom’s M-Pesa has partnered with startups like KopoKopo and Payless to expand payment solutions. The agreements between startups and established brands offer founders credibility and operational support that money alone cannot buy.

Startups that offer solutions that address social problems can leverage mobile-based crowdfunding platforms like M-Changa or impact investment funds such as Acumen. Community-driven funding models and impact investment funds are filling the gaps left by traditional banking systems with rigid collateral requirements and VCs. Large corporations and foundations owned by wealthy Africans have also set platforms to fund small businesses like the Tony Elumelu Foundation. The foundation claims that it has disbursed over $100 million to more than 18,000 entrepreneurs across Africa.

While traditional bank financing has been out of reach for most startups due to high interest rates and rigid collateral requirements, some lenders have since relaxed the rules. Banks like Kenya’s Equity Bank and Nigeria’s Access Bank have introduced SME-friendly solutions with flexible repayment plans that can accommodate startup growth cycles.

Grants and development financing from multilateral agencies like the World Bank, African Development Bank, and USAID often offer grants to startups in education, healthcare, and clean energy–among other areas that align with their objectives. Such financing is valuable for founders addressing social challenges that may not give quick returns after huge investments.

Shifting the narrative

The VC model is not the only funding alternative for African startups. While it is effective in the Silicon Valley context, some investors have not adapted to the realities of Africa. Therefore, the question is not whether African founders can raise more VC funding but whether they should peg their hopes entirely on it. Alternative funding models like crowdfunding and bootstrapping offer something VCs mainly cannot: sustainability, independence, and a total focus on solving real problems rather than chasing higher valuations.

Adonijah Ndege

Senior Reporter, TechCabal

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