By Jennie Graham, MBA’23
This article was written in response to a seminar given by Rotimi Thomas, CEO & Co-Founder of SunFi, in an EDGE Seminar at Duke University’s Fuqua School of Business in Fall 2022. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.
Africa is responsible for less than 3% of the world’s CO2 emissions to date,[1] and yet already finds itself on the front lines of climate change, facing floods, extreme weather, and declining agricultural production. By some estimates, climate change could cause Africa’s GDP to decrease by as much as 30% by 2050.[2] As the continent is home to around one-fifth of the world’s population, the human toll alone is huge. Despite this, Africa still struggles to mobilize the external private capital required to address and mitigate climate change. While public commitments remain strong, relatively little private finance goes to green investment in Africa—less than 4% of global climate finance.[3] Conspicuously absent is venture capital, which invested over $60 billion in climate tech between 2013 and 2019, of which only 0.2% went to deals in Africa.[4]
Why is this? Well, there are several commonly cited barriers to VC investment in climate tech in Africa. There are complex regulations to navigate, policy instability, currency risk, and weaker tech ecosystems. For many VCs, a more established industry such as fintech, which took 54% of all venture funding in Africa in 2021, is a far easier place to make a bet.[5] Where climate tech investments have often depended on existing infrastructure and collaboration with governmental organizations, many new, disruptive fintech companies simply require a mobile device and an internet connection to reach customers and scale, thus bypassing some of those risks.
As mentioned at a recent EDGE Seminar by Rotimi Thomas, CEO and Co-Founder of SunFi.co, blended finance (which combines concessionary public funds and private capital to reduce the risk profile of an investment) can be a viable alternative to mitigate some of the perceived risks in the short-term. But there are huge opportunities for investors seeking market-rate (or higher) returns if they are willing to direct purely commercial funds to climate tech projects in Africa today. And many of those projects come with less political or economic risk than investors might think.
Off-grid and mini-grid solar projects are one such area. Where regular electricity grids are not adequately serving consumers, either through patchy or non-existent service, substantial demand exists for a better solution. And solar projects are well-suited to meet this market need. Not only is Africa home to 60% of the best solar resources globally,[6] but with every passing day more skilled installers are trained, the cost of the technology decreases, and awareness around solar energy grows. A growing number of solar installers work directly with consumers, communities, or businesses, and an ecosystem has developed around financing these projects (e.g., Thomas’s business SunFi.co) and managing their digital operations. The regulatory environment is also getting more friendly by the day, as countries commit national resources to the development of solar and create increasingly ambitious targets for solar production. The time is ripe for venture investment in this space, especially in some of the lower-capex services around solar energy production such as financing and data management, and there are still opportunities to win big.
The electric mobility space, especially the light urban vehicle category, also offers opportunities for private capital to invest in Africa. In East Africa, personal vehicle ownership rates are low and motorcycle taxis play an important role in urban settings. For example, in Kenya, motorcycles or “boda-boda” are the most accessible form of transportation in cities and the industry is estimated to generate $4M a day. Yet traditional petrol-fueled motorcycles are costly to run for the individual and severely impact urban air quality. With new fiscal incentives for consumers put in place by the Kenyan government to help them meet their electric vehicle target of 5% of all newly registered vehicles by 2025, now is a fantastic time for VCs to consider investing in electric motorcycles there. And there are already several small but growing companies providing affordable, electric vehicles and charging systems in the wider region (e.g., e-motorcycle company Ampersand, which serves taxi drivers in its beachhead market of Rwanda). With a large existing customer base to tap and favorable government regulations coming into force, electric mobility is another great place for VC investment.
These are just two of the areas where VCs could get involved in climate tech in Africa today, but many more opportunities exist to seek returns in the climate space across the continent. VCs have historically been reluctant to enter these markets, but the barriers to entry have never been lower and conditions have never been more favorable. Now is the time for VC funding to step up and get involved in preparing Africa for a low-carbon future.
[1] Africa Energy Outlook 2022, IEA, Paris, 2022. Accessed September 2022. https://www.iea.org/reports/africa-energy-outlook-2022
[2] Burke, M., Hsiang, S. & Miguel, E. “Global non-linear effect of temperature on economic production.” Nature 527, 2015. Accessed September 2022. https://doi.org/10.1038/nature15725
[3] Sembene, D., Mitchell, I. & Brown, H. “What is holding back private climate finance in Africa and how can it be unleashed?” Center for Global Development, 2022. Accessed September 2022. https://www.cgdev.org/blog/what-holding-back-private-climate-finance-africa-and-how-can-it-be-unleashed
[4] The State of Climate Tech 2020, PwC, 2020. Accessed September 2022. https://www.pwc.com/gx/en/services/sustainability/assets/pwc-ethe-state-of-climate-tech-2020.pdf
[5] Siele, M. “Why Africa is defying global trends in VC funding.” Quartz Africa, 2022. Accessed September 2022. https://qz.com/africa/2175765/the-big-deal-vc-funding-in-africa-is-up-150-percent-from-q1-2021-to-q1-2022/
[6] Africa Energy Outlook 2022, IEA, Paris, 2022.
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