Africa’s clean technology (clean tech) space is yet to produce any ‘unicorns’ (privately held startup companies valued at over $1bn) like its financial technology (fintech) counterparts, but investor excitement is palpable. In 2022 alone, clean-tech ventures in Africa raised $863mn in equity, pipped to the post only by fintech, and representing 18% of total funds raised across all technology sectors on the continent.

Global clean tech, climate tech and renewable energy entrepreneurs have been amongst the biggest beneficiaries of the global shift in capital allocation within the energy sector. Between the second half of 2020 and the first half of 2021, a total of $88bn was invested in climate tech, with the first half of 2021 posting a record $60bn, according to PwC. This was more than three times the investment in the same period in 2020 as more and more non-traditional investors scan the sector for opportunities.

US climate tech firms received the lion’s share of funding, followed by Europe and China. Africa is not left behind, however, as clean tech finance is becoming increasingly important as the continent strives to meet its energy needs in a sustainable manner. What is often less known is the flow of capital into sustainable energy investments in Africa.

Capital typically flows into clean tech via project finance, corporate finance and blended finance instruments, including large donor grants. Financing for utility-scale clean energy projects in Africa has typically been anchored by big development finance institutions, large private equity investors and multilateral lenders, and is often layered with complex risk guarantee mechanisms and credit enhancements. Morocco, South Africa and Egypt have had their fair share of these.

One such is the $240mn SOLA Group and African Rainbow Energy financial close on 200 MW solar PV projects, that will lead to a 13% reduction in carbon emissions from a major mineral sands project in South Africa. While these projects help achieve climate mitigation or adaptation goals, their long lead time and complex structures, and regulatory hurdles have slowed the pace of financial flows for these utility scale projects.

Instead, in recent years, investors and lenders have been expanding their Africa exposure by seeking opportunities in the startup, venture and growth phase clean energy ecosystem in Africa.

The growing startup ecosystem
Today, there are more than 500 startups operating across Africa in the climate tech space, in industries such as agriculture, clean energy, sustainable materials, e-mobility, transportation and nature-based solutions. Of these, 147 have been able to raise funds from venture capital investors since 2015. The African Private Equity and Venture Capital Association (AVCA) counted 79 climate-related deals worth $1.3bn for 2022, with an average ticket size of $22.7mn, suggesting that the bulk of capital raises have been targeted towards the smaller end of the project scale.

Of these deals, 73% were venture capital investments while there was a mix of debt investments and other financial products such as grants. 2022 was also a year of debt capital investments for climate tech startups, where clean tech companies represented 39% of all debt capital investments in Africa with 16 deals that totalled $608mn.

Naturally, Africa’s leading tech hubs in countries such as Nigeria, Kenya, South Africa and Egypt, have also been where the majority of clean tech focused investors have gone. Major venture capital funds coming into Africa, such as US-based growth equity firm General Atlantic and venture capital firm USV, are real signs that there will be an abundance of global funding to support the sector.

But there is also a growing tide of corporate investors, including within Africa, who are responding to the push towards sustainable investing and voluntary environmental, social and governance (ESG) reporting by pooling capital to accelerate investments across the value chain outside their core businesses. South Africa’s Sasol, for instance, announced in 2023 that its new Sasol Ventures will partner with a venture capital fund, Emerald Technology Ventures, to invest $60mn over the next five years in early-state and startup climate ventures, making it the largest chemicals and industry venture capital fund in South Africa.

Innovative business models are solving economic problems
The visibility of large-scale projects has perhaps masked the silent revolution taking place in the distributed, decentralised and off-grid clean tech market in Africa.

The continent is home to many countries that face significant energy challenges, with up to 600 million people lacking access to stable, reliable and affordable electricity. The business models of the companies receiving these new capital inflows range from the simple pay-as-you go solar home systems (SHS) for residential markets, to startups which are helping users monetise their carbon credits on global carbon trading exchanges, or those helping to curb carbon emissions through renewable energy and electric vehicle products and services.

The diversity of funding options is another trend that is enabling the emergence of the clean tech ecosystem and promoting service innovation. A swarm of small donor grants are now being applied to ventures that serve last-mile residential communities. For example, USAID, through its Power Africa programme, has been providing grants of up to $1mn to support off-grid companies, including those providing energy services and products to rural communities. Elsewhere both commercial and concessionary debt for demand-side financing are popular features of pay-as-you go or lease-to-own solar systems. 

Equity investors, for their part, have played along the entire clean energy ecosystem, taking bets on both early stage, growth stage and late stage ventures. In Africa, 25% of all funds raised by startups in 2022 were by startups within the climate tech sector that offered renewable energy products and solutions.

However, with the risk premium often placed on a typical African investment portfolio, there needs to be an expansion in the number of finance vehicles that attract investors with different levels of risk appetite. Investor challenges have ranged from not understanding the regulatory landscape to not finding ventures of sufficient scale to invest in, or the over-concentration of early stage ventures in the potential pool of investee companies.

The visibility of large-scale projects has perhaps masked the silent revolution taking place in the distributed, decentralised and off-grid clean tech market in Africa... [where] up to 600 million people lack access to stable, reliable and affordable electricity.
 

For African and Africa-focused startsups, the response has been to find both organic and inorganic ways to scale. A growing appetite for mergers and acquisitions (M&A) has helped tackle the scale challenge in recent years. This expansionist drive has also in part been driven by the need for service providers to own the technologies and software that underpin their service delivery to African consumers.

For instance, in 2019, global energy player Engie acquired Africa-focused Mobisol, a vertically integrated SHS company, which had previously acquired Lumeter, an off-grid software company two years earlier.

Partnership models for growth and profitability
Key to the growing investment appetite for Africa’s clean tech enterprises has been the growing support system for these ventures, such as technical assistance funds, financial advisers and consulting firms. The African Development Bank’s (AfDB) Sustainable Energy Fund for Africa (SEFA) provides technical assistance and financing to support the development and deployment of clean energy technologies in Africa. It has supported a range of projects, including off-grid and mini-grid projects, and large-scale renewable energy projects.

The growth in technical assistance continues to crowd in new types of funders and today, across Africa there are also at least six active lenders to pay-as-you-go solar companies; SIMA, SunFunder, responsAbility, OIKO credit, Lendahand and CDC Group.

Early-stage businesses have also benefited from venture builders like Factor E and Satgana, which support founding teams to form a team or proof of concept and help de-risk these businesses. The Shell-backed Nigeria-focused fund, All On, which has its own business accelerator, in 2022 invested $500,000 in Koolboks, a startup that provides pay-as-you-go solar-powered refrigeration solutions in Africa.

It is also not unusual to see investment partnerships from Silicon Valley. Oolu Solar’s $3.2mn series A was led by Persistent Energy Capital with participation from YCombinator, an American technology startup accelerator, launched in March 2005, to cement its prime position in Francophone West Africa’s off-grid solar sector.

Fintech and carbon markets as enablers
Partnerships have also extended beyond the sector. Clean tech with a fintech component is often viewed by investors as a compelling proposition in Africa. Considering that three of Africa’s startup unicorns are all fintech companies, this makes sense. Solar companies such as Sunking, D-light and M-KOPA, whose East-Africa focused asset financing platform provides underbanked customers in Africa with essential products including solar lighting, had strong proprietary payments technology or worked closely with fintech partners. 

Given that there is a long tail of growth in clean tech, meaning it is typically not profitable for a long time, these new partnership and business models provide scope for revenue diversification that can help deliver more robust returns to investors. 

In addition to advanced fintech infrastructure, investments that include a voluntary carbon component also have greater potential to reach scale and profitability faster. Voluntary carbon markets mean that clean technologies which prevent carbon production can sell the carbon credits to those who wish to reduce their net carbon exposure.

An economic revolution in the offing
Shifting consumer preferences towards solar in some African markets, combined with increasing diesel and petrol prices, is contributing to clean technology penetration. Venture builder, Persistent, estimates an Africa SHS market of $18bn in the decade leading to 2019, with additional growth among the at least 3 million new SHS systems since then, not to mention the growing commercial and SME end-user markets. The possibility to rapidly scale the sector’s growth by integration with other types of services is clear, given Africa’s known reputation for embracing leapfrog technologies.  

Mobile economy and digitisation of finance, for instance, offer huge opportunities for innovative financial services, while innovations in cloud computing, wireless data, machine learning and artificial intelligence (AI), while still in infancy in Africa, could improve the effectiveness and efficiency of last mile distribution organisations.

Energy demand in Africa continues to increase; around 60% of the population live in off-grid or low grid areas, and clean tech contributes only 7% compared to 30% globally. Thus, the scope for growth is tremendous.

Perhaps the most compelling attraction for investors has been the potential for these clean ventures to create economic opportunity in Africa through the economic empowerment of the entrepreneurs themselves, and the millions of households and micro and small and medium enterprises they seek to serve. This would be the biggest revolution of all.