Startup financing for SMEs: A pathway for economic transformation in Africa

Introduction: Unlocking Africa’s untapped potential

Across the African continent, a powerful movement is stirring—one driven not by multinational corporations or foreign aid, but by Small and Medium Enterprises (SMEs) and startups. These businesses are the lifeblood of Africa’s economies, accounting for over 80 percent of jobs in many countries and serving as engines of innovation, local value creation, and inclusive growth. Yet, one major constraint continues to throttle their transformative potential: access to startup financing.

If Africa is to rise and realise its vast developmental aspirations—from the African Continental Free Trade Area (AfCFTA) to the UN’s Sustainable Development Goals—it must confront and fix the persistent financing gap facing its startups and SMEs. Startup financing is not merely a business necessity but a strategic instrument for economic transformation.

The startup financing landscape: Challenges and gaps

Despite the vibrant entrepreneurial energy in Africa, many startups struggle to move from ideation to sustainability. Some of the most pressing challenges include:

1. Limited access to formal capital

Most African startups rely heavily on personal savings, family contributions, or informal loans. Traditional banks are often risk-averse, demanding collateral that young businesses cannot provide.

2. Inadequate venture capital ecosystems

While there has been a surge in venture capital in markets like Nigeria, Kenya, Egypt, and South Africa, the funds often flow to a narrow subset of tech-focused ventures, leaving other sectors underserved.

3. High cost of credit

Interest rates in many African countries remain prohibitively high. SMEs are caught between the rock of limited equity financing and the hard place of expensive debt.

4. Knowledge and capacity gaps

Many entrepreneurs lack financial literacy, investment readiness, or knowledge of alternative financing instruments such as angel investment, crowdfunding, mezzanine finance, or blended finance.

Why startup financing matters for economic transformation

Providing adequate startup financing is not just about helping entrepreneurs thrive—it is about systemically transforming Africa’s economic landscape in the following ways:

1. Job creation and youth empowerment

Africa’s youth population is booming. SMEs, especially startups, are uniquely positioned to create jobs at scale, particularly in high-growth sectors like agribusiness, creative industries, fintech, and green energy.

2. Local innovation and inclusive development

African startups often build context-relevant solutions, such as mobile money, solar kits, or digital health services, that address unique developmental challenges and foster social inclusion.

3. Boosting intra-African trade and regional integration

Through startup financing, scalable enterprises can grow beyond borders, leveraging AfCFTA to access broader markets and build competitive regional value chains.

4. Resilience against external shocks

COVID-19 and global economic turbulence revealed Africa’s over-reliance on imports and external supply chains. When adequately financed, startups can localise production, enhance resilience, and support industrialisation.

Pathways to scalable startup financing in Africa

To unlock the full potential of SMEs and startups, we must reimagine and reinforce Africa’s startup financing ecosystem through:

1. Public-Private Partnership platforms

Governments should collaborate with private investors, development finance institutions, and banks to create sovereign startup funds, guarantee schemes, and co-investment platforms that de-risk early-stage financing.

2. Encouraging angel investment networks

Empowering high-net-worth individuals to invest in local startups through tax incentives and legal frameworks can unleash millions in untapped domestic capital.

3. Development of impact investment and blended finance models

Strategic use of grants, concessional finance, and impact capital can catalyse private sector investment in high-risk but high-impact sectors.

4. Financial literacy and investment readiness

Building the capacity of entrepreneurs to develop bankable business models, understand term sheets, and pitch to investors is critical for capital absorption.

5. Leveraging technology and fintech

Digital lending platforms, blockchain, and AI-driven credit scoring can help reduce transaction costs and expand financing to underserved geographies.

Case in point: Nigeria’s rising startup ecosystem

Nigeria’s ecosystem exemplifies both the promise and the pitfalls. Lagos alone raised over $1.2 billion in startup funding in 2021, becoming one of the world’s most active tech hubs. Yet, many SMEs nationwide struggle to access even basic financing beyond fintech and a few elite ventures. Nigeria, and Africa, needs democratised access to startup capital that reaches women-led businesses, rural enterprises, and non-tech sectors like manufacturing, education, and healthcare.

Conclusion: From potential to prosperity

Africa stands on the cusp of a generational economic shift. The following billion-dollar companies, industrial champions, and breakthrough innovations will come not from New York or Shanghai boardrooms, but from the garages, markets, and co-working spaces of Accra, Kigali, Dakar, and Ibadan.

Startup financing is the bridge between vision and reality. We need courageous policies, collaborative ecosystems, innovative instruments, and a deep belief in Africa’s entrepreneurial spirit to walk this bridge.

By financing startups today, we are funding Africa’s economic transformation tomorrow.

 

Prof. Lere Baale is a visionary Pan-Africanist, CEO of Business School Netherlands Nigeria, and President of the Nigeria Academy of Pharmacy. He is a global advocate for innovation-driven leadership, economic transformation, and inclusive entrepreneurship across Africa.

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