The Problem with Free Money
Africa’s startup scene has a funding problem. Or rather, it has a free money problem. For years, donor funding—from USAID, the World Bank, European development agencies, and Silicon Valley philanthropy—has been the lifeblood of the continent’s tech ecosystem. Grants have poured into fintechs, agritechs, health startups, and edtech platforms, fueling a generation of African entrepreneurs. But as the global funding environment shifts, the question is no longer whether this money is good, but whether it is sustainable.
Here’s the thing about free money: It’s great, right up until the moment it stops.
In 2020, then-President Donald Trump tried to cut USAID’s budget, citing the agency’s inefficiencies and an America First policy that deprioritized foreign aid. While the Biden administration reversed many of these policies, the break made it clear that donor funding isn’t a guarantee—it’s a political tool. And when governments and development agencies shift priorities, African startups that depend on grants are left scrambling.
Startups as Nonprofits
Venture capital has long been the yardstick for startup success, but in Africa, donor funding often plays a bigger role. This creates a weird dynamic: Some of the continent’s most celebrated startups operate more like NGOs than businesses.
Think about it—many African startups aren’t built to maximize revenue but to maximize grant eligibility. They chase SDG (Sustainable Development Goal) impact metrics instead of profit margins. They design products to fit the interests of development agencies rather than the actual purchasing power of consumers. And when the grant money dries up, these startups don’t pivot. They disappear.
The global development complex is structured around a simple idea: that African markets are too fragile, too unequal, or too politically unstable for traditional private capital. The problem is that this reasoning creates a cycle. Startups expect free money, investors expect dependency, and the market never quite matures.
This is not how, say, Paystack built a $200 million business that Stripe wanted to buy.
The Venture Capital Mirage
The obvious solution would be for African startups to wean themselves off donor funding and focus on private capital—venture capital, angel investors, and even good old-fashioned revenue. But this is harder than it sounds.
For one, African startups operate in a fundamentally different financial environment than their Western counterparts. Silicon Valley startups can burn cash for years because they have access to a seemingly endless supply of venture funding. African startups, on the other hand, are often expected to be profitable much faster, without the safety net of deep-pocketed investors.
At the same time, venture capital itself has never been a perfect fit for Africa. Most African markets are fragmented, regulatory hurdles are high, and consumer spending power is low. The traditional VC model—blitzscale, dominate, exit—doesn’t always work in economies where infrastructure gaps are real and growth is slow.
A reality check: In 2023, Africa’s total VC funding dropped by more than 50% from the previous year. Global interest in African startups is cyclical, often peaking when investors see Africa as “the next big thing” and crashing when they remember how hard it is to scale in markets without reliable electricity.
So if donor funding isn’t sustainable and venture capital isn’t reliable, where does that leave African startups?
The Revenue-First Playbook
The answer might be the most obvious one: Make money.
The African startups that will survive the next decade are not the ones that win the most grants but the ones that master cash flow. Revenue-first startups—companies that can generate profits early and grow sustainably—are better positioned to survive a downturn in donor funding or venture capital.
Take M-KOPA, for example. The Kenyan fintech started as a solar energy company using pay-as-you-go financing models to provide electricity to low-income households. It didn’t just rely on donor funding—it monetized financial services, upsold customers on asset financing, and scaled a profitable business.
Or look at Flutterwave, which ignored the donor ecosystem entirely and focused on building payments infrastructure. It wasn’t built for aid agencies—it was built for businesses. That strategy paid off with a multi-billion-dollar valuation and real revenue streams.
The startups that thrive in Africa will be the ones that treat donor funding as a bonus, not a business model.
The Real Role of Donor Money
This isn’t to say donor funding should disappear altogether. It plays a critical role in funding research, de-risking innovation, and supporting projects in markets that private capital ignores. But there’s a difference between using grants as a launchpad and using them as a crutch.
In the long run, Africa doesn’t need more donor-backed startups. It needs startups that can stand on their own. The goal should be to build businesses that don’t just attract development funding but also attract customers willing to pay for a product or service.
Because at the end of the day, the best form of funding isn’t a grant or an impact investment. It’s a paying customer.
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