Table of Contents
In Lagos, Nairobi, Cape Town and Cairo, the cranes of a different sort of construction project have been busy for a decade. Co-working spaces, accelerators, fintech licences and pitch decks have all multiplied. Politicians and development bankers talk earnestly of "ecosystems". And yet for all the noise, in 2022 — the peak year for African venture capital — the continent attracted barely one percent of global VC deal value, despite accounting for nearly three percent of world GDP. The median African startup raises around $900,000 in its first round. In other emerging markets it is more than twice that.
A new study by a team of economists at the University of Chicago, Columbia, Stanford and the World Bank's IFC, drawing on the largest survey of African founders ever assembled — 4,444 respondents across 51 countries — together with a decade of deal-level data, helps explain why. Its findings should give pause to anyone investing in, advising or simply cheering on the continent's startup story.
Begin with what African founders actually want. A common assumption is that entrepreneurs in poor countries need cheap loans. The paper's clever incentive-compatible experiment, in which founders rated randomised investment offers in exchange for real introductions to investors, finds the opposite. Africa's founders display an overwhelming preference for equity over debt — so strong that switching a hypothetical offer from a debt instrument to an equity one is valued by founders as much as cutting the interest rate by eleven percentage points. They are not naive about it: they dislike dilution, balk at board seats, and reject the most aggressive equity terms. But across almost every cut of the data — by sector, by country, by founder seniority — they prize the risk-sharing and flexibility that equity brings. The preference is, if anything, stronger among founders running more successful firms.
So far, so encouraging for the venture-capital model. The trouble lies on the other side of the handshake.
Roughly eighty percent of VC deals in Africa involve at least one foreign investor — a share considerably higher than in any other emerging market. Most of the money comes from North America and Europe; China plays a smaller role than headlines suggest, and development finance institutions a secondary one. Capital flowing between African countries remains thin: a Senegalese fund is more likely to be eclipsed by a New York one than to find itself partnering with a Kenyan peer. Even among the most active venture-capital firms operating on the continent, a majority are either foreign-headquartered or anchored by foreign limited partners.
The foreignness extends to the founders who receive the cheques. Among VC-backed entrepreneurs in Africa, 46.8% have studied abroad and 58.4% have worked abroad. Combine the two, and roughly two-thirds of funded founders have foreign education or work experience — a far higher share than in any comparable region. Activity is also extraordinarily concentrated: in 2024 the "Big Four" of Nigeria, Kenya, South Africa and Egypt soaked up 72% of VC deal value while accounting for just 42% of African GDP. Four cities — Lagos, Nairobi, Cape Town and Cairo — captured nearly half the money on around a tenth of the GDP.
Why does foreign capital flow so freely to a continent supposedly hobbled by weak contract enforcement? Part of the answer, the authors argue, is that it doesn't really have to confront those institutions. More than half of African VC deals are denominated in foreign currency, mostly American dollars; among deals involving foreign investors, the share approaches two-thirds. Successful startups frequently reincorporate in Delaware, Mauritius or the Cayman Islands. The contracting environment of African VC is, in effect, partly offshore. That is convenient for the foreign investor — and rather harder to replicate for the local one.
It also raises the question of who can plausibly access this money. Here the paper's most striking statistical finding deserves attention. A founder whose investor's country matches their own country of education is 7.7 percentage points more likely to receive funding from that country, against a baseline probability of 2.2% — roughly a fourfold increase. The same effect, of similar magnitude, holds for work experience. Each such match brings, on average, an additional $1.1 million or so in funding. Whatever else venture capital is, it is a network business.
For investors and operators, three implications follow. The first is that the conventional metaphor of "lack of capital" mischaracterises the problem. There is plenty of capital reaching Africa; it is the wrong sort, supplied by the wrong people to the wrong founders. Equity is what entrepreneurs want and what the model needs to function, yet local equity remains scarce. The authors' counterfactual exercise is instructive: were Africa's local-capital frictions reduced to European levels, the share of locally financed deals would rise from 26% to 42%, and total startup creation would expand by roughly 13%. Lift the constraint on local entrepreneurs reaching the financing margin — chiefly a matter of human capital and access — and startup activity rises by 29%.
The second implication concerns founders. Africa does not lack educated entrepreneurs; those who do receive VC have schooling levels indistinguishable from their European or American counterparts. What it lacks is a deep enough pool of them. The premium attached to a foreign degree or a stint at a Silicon Valley firm is not, the paper finds, justified by superior post-funding performance: foreign-connected startups exit, fail and hire at much the same rates as their purely local peers, once funded. The advantage is at the door, not in the room.
The third implication is for development-finance institutions, governments and the foreign funds themselves. Pouring more dollars from London or San Francisco into the existing pipeline will further entrench the very pattern that limits the ecosystem's growth. The harder work — building African limited partners, deepening domestic pension and insurance pools, broadening the founder funnel beyond the diaspora, and crowding in a wider base of impact-oriented capital across more African countries — is less photogenic. But it is what the evidence now suggests matters most.
Africa's startup story is sometimes told as a tale of frontier optimism interrupted by funding winters. The new data suggest a more uncomfortable diagnosis. The model works; the demand is real; the talent exists. The plumbing, however, runs mostly through other people's countries — and quietly determines who gets to build.
