Tighter Examination of Investments Faced by African Startups versus Their Global Counterparts
In the vibrant world of venture capital, African startups are navigating a unique landscape that sets them apart from their global counterparts. This difference is largely due to the stringent investment scrutiny that many African startups face, a result of weak governance structures, higher perceived risks, and a challenging regulatory environment.
The average African venture capital (VC) firm manages significantly less capital compared to VCs in other regions, with an average of $50 million in assets under management, significantly less than the $324 million average for Asian VCs. This capital disparity influences the investment landscape, making it more challenging for African startups to secure funding.
One of the key reasons for this scrutiny is the deficit in governance and financial controls. Many African startups operate with informal business structures, centralized founder control, and weak or absent boards, as seen in Nigeria's ecosystem. This results in poor financial controls and leadership conflicts, undermining investor trust and increasing perceived risk.
Informal business norms and survival pressures lead startups to prioritize rapid growth over building sustainable governance systems. This compromises transparency and accountability, core tenets investors require to scale confidence alongside capital.
Moreover, many African angel investors come from traditional, less risky sectors and view startups as risky with uncertain returns. Local investors often prefer informal, relationship-based deals, making them hesitant toward formal legal agreements and structured deal processes. This reduces the availability of local early-stage funding.
High-net-worth Africans sometimes prefer investing abroad due to clearer regulations, predictable exits, and less risk, creating a brain drain of local capital important to startups. The fragmented and complex regulatory environment also creates additional hurdles for startups and investors alike, further complicating the funding landscape.
The effect on funding ability is significant. Startups must spend more time and resources meeting governance standards and complying with investor demands, which might divert focus from product and market development. Many promising startups may struggle to attract substantial funding because they cannot convincingly mitigate risks linked to governance or regulatory compliance.
Investors may apply tougher scrutiny or avoid investing altogether unless governance practices improve and local capital is more willing to back startups. The resulting cautious investment approach can slow the growth of African startups compared to their global peers who operate in more mature ecosystems with established governance norms.
This scenario points to a need for improved governance frameworks, investor education, and supportive regulatory reforms to build trust and unlock funding. In 2025, African startups raised nearly $300 million in January, with about 40 companies securing $289 million in funding, indicating a promising start to the year.
Despite the challenges, the venture capital landscape in Africa is not without its bright spots. Cities such as Austin, London, Miami, Paris, and Sydney are emerging as growing startup ecosystems, albeit lacking the investor scale necessary to secure successful fundraising rounds. Andreessen Horowitz, a venture capital firm based in California, supports entrepreneurs who are shaping the future through technology and has invested approximately $45 billion in capital across various funds.
Brandon Solomons, a startup advisor, has been trying to understand the level of risk aversion in African markets, considering the need for significant early-stage support. Solomons notes that African venture capital firms remain highly risk-averse due to the region's lower capital availability. Olowu, a venture capitalist, urges African investors to support local startups without imposing unnecessary obstacles.
For African startups, demonstrating significant revenue before attracting serious investment is often necessary. However, investors in Africa require greater proof of traction and perform more thorough financial audits. A WhatsApp channel "0029Vb3xgMr42DcfICgi7T1N" provides updates on tech, startups, and venture capital across all 54 African countries, offering a platform for startups to connect with potential investors.
Despite the perception of Africa as a high-risk environment due to factors like political instability, currency fluctuations, and infrastructure challenges, Andrew Chen, General Partner at Andreessen Horowitz, believes that the only rational place for founders to raise money is in Silicon Valley, especially if looking for funding with founder-friendly terms. However, the resilience and innovation shown by African startups suggest that they are not deterred by these challenges and are carving out their own path in the global startup ecosystem.
[1] Adebayo, O., & Adewunmi, O. (2021). The Governance Challenges of African Startups. African Business. [3] Osei-Assibey, E., & Osei-Assibey, C. (2020). The Role of Angel Investors in African Startups: A Comparative Study of Silicon Valley and Africa. Journal of Entrepreneurship and Small Business. [5] Mwangi, S. (2021). The Impact of Regulatory Environment on Venture Capital Investment in Africa. African Journal of Business Management.
- Despite the lower average assets under management in African venture capital firms compared to their counterparts in other regions, the investment landscape remains challenging due to the deficit in governance and financial controls in startups, resulting in poor trust and increased perceived risk for investors.
- The survival pressures and informal business norms in African startups often lead to a prioritization of rapid growth over building sustainable governance systems, compromising transparency and accountability, which core tenets investors require to scale confidence alongside capital.
- High-net-worth Africans' preference for investing abroad and the fragmented regulatory environment create additional hurdles for startups, diverting their focus from product and market development and making it more challenging for them to secure substantial funding.
