Why venture capital can’t be the only way to fund African startups

Quite too often, the explanation for African startups shutting down is a standard, “We failed to raise additional funding.”

Now, whether this is a convenient cop-out or the reality is a different question, but the fact that too many startups cite this reason for their failure should warrant some consideration.

Venture capital is the default funding option for a lot of African tech businesses. That includes those that are truly venture-scale and businesses that, at best, are tech-enabled SMEs. That outcome is largely down to the limited funding options available to early-stage businesses on the continent.

Bank loans, private credit, asset financing, and private equity are out of reach of the average early-stage business because they do not possess the detailed financial history and collateral that these capital allocators require to make investment decisions. That leaves venture capital, possibly the only funding option today, willing to overlook the absence of a financial history as the last resort.

In the past, VCs shoehorned every business couched in tech lingo into their portfolios — and have paid dearly for it. In the aftermath of the lessons forced on them by the zero-interest-rate policy, most, especially in Africa, have refused to take the bait.

With limited capital available, the preference appears to have shifted to startups that are truly venture-scale. A few glib pitchers may yet make it past investors, but those cases are becoming rarer.

Designing capital that serves not stifles

What has refused to go away is the capital need of early-stage African tech businesses. One X user, commenting on the news of GoLemon’s shutdown, asked a crucial question — if GoLemon, with all the traction that it had, couldn’t find funding, is the VC/funding ecosystem truly dead?

A cursory answer to the question is that the VC/funding ecosystem isn’t dead. Cynics may yet argue that the ecosystem is dead, but startups have raised over a billion dollars this year already, so clearly, some businesses are getting funded.

What is showing up more acutely is the gap for early-stage financing on the continent. Early-stage deals have fallen significantly both in volume and value. On the other hand, we’re seeing the rise of debt funding.

In 2025, debt funding to African startups was 25% ($534 million) of funding raised. One of the reasons for this is that the startups getting debt are more mature and choosing to keep more equity. The majority of the startups accessing debt are also playing in asset-heavy spaces and can’t afford to dilute themselves every time they need to fund working capital or asset acquisition.

Which brings us back to the question this article tries to answer. If early-stage startups are failing to get the capital they need from venture capitalists, what other funding sources should be explored?

VCs are increasingly wary of funding ideas and early ideas with no differentiation, so identifying early-stage funding alternatives has become even more important.

Angel investing is one option that can fill that gap. However, it is constrained by liquidity. Not enough startups are providing secondaries in a decent enough time frame that angel investors can bank on. More importantly, though, angel investing thrives when experienced professionals have earned significant payouts through exits, employee stock options, or investments built over the long term. The African economy has not produced enough growth for this to become a reality.

Grants are another option, but even that has become highly competitive. Go to any grant or pitch competition organised by a credible party with the promise of capital and you’ll be sure to find some established startup in the lineup.

While private capital has a role to play here, the government has an even bigger role considering its ability to absorb losses and make investments without needing to return capital to limited partners. Nigeria appears to be on the right path with this through the iDICE programme that provides equity-free funding for startups. That’s a step in the right direction and one that replicating at the subnational level could yield immense results.

Policy can also be wielded to make investing in early-stage startups more attractive. Ghana is set to unlock more capital for its businesses by increasing the threshold for pension funds to invest. Similar reforms could channel more long-term domestic capital into Nigeria’s innovation economy instead of leaving it overly dependent on venture capital.

Venture capital cannot be the only financing option

But financing businesses cannot begin and end with venture capital. Most tech businesses are not venture-backable, and they do not need to be. Many may never deliver the exponential returns a VC fund is looking for, but they can still create jobs, generate tax revenue, and strengthen the economy. Their capital needs are different, and so too should the financing available to them.

This is where development finance institutions, commercial banks, revenue-based financing, asset-backed lending, venture debt, invoice financing, and government-backed credit guarantees all have a role to play.

A healthy financing ecosystem is one where businesses can access the right type of capital at different stages of their growth, rather than forcing every founder into a venture capital model that was never designed for them.

Ultimately, the conversation Africa needs to have is not simply about how to produce more startups, but about how to finance more businesses. Venture capital helped catalyse a generation of technology companies, but it is never going to finance an economy. Building one requires a much broader capital stack — one that supports everything from ambitious software startups to food delivery startups.

GoLemon deserves to exist, as the reactions from customers show; FoodCourt deserved to exist too. It’s jollof rice probably facilitated a few debates. Lazerpay deserved to exist. All these startups shut down or paused operations before they had a chance to build something for the long haul, and it is time we began to design financing vehicles that support them.