Startups are increasingly central to development debates in Africa, where the continent’s young population, growing skilled workforce, and rapid adoption of digital technologies lend themselves to young, high-growth, technology-enabled firms. A key policy debate asks how to build the continent’s startup ecosystem and connect these firms to the capital they need.
In this paper, the authors tackle this issue, building new data on startups in Africa to study who builds these firms, which types of financing they demand, where that financing comes from, and the implications for startup creation and the sector more broadly. Their analysis proceeds in three steps, which are summarized below: a continent-wide founder survey that estimates financing preferences; venture capital (VC) deal records matched to founders’ education and work histories; and an accounting model that measures the drivers of investor and founder foreignness and quantifies its implications.
1. What kind of financing do African startups want?
The authors begin by surveying 4,444 African startups across 51 countries concerning their firms and demand for financing. The survey includes an experimental component in which founders rate profiles of potential investors that vary systematically along randomized dimensions, including deal terms, investor characteristics, and team composition. Respondents are told that their responses to this component will be used to facilitate connections with real investment partners aligned with their stated preferences.
The survey reveals the following:
- African startup activity is concentrated in a few urban hubs and led by highly educated founders, and substantial unmet financing needs exist. The average respondent seeks roughly $730,000 in external capital but secured only 32.1% of the amount sought over the previous three years, and cites access to finance as the main obstacle to growth.
- Entrepreneurs have a strong and pervasive preference for equity financing over debt. Founders are responsive to the costs of equity—they prefer lower dilution and dislike board-seat requirements—but continue to value equity even when it is bundled with monitoring and control provisions. The equity premium is larger among respondents running more successful and established firms, and remains strong in countries with better institutions. The evidence points to demand for flexible capital that relaxes repayment constraints while giving investors incentives to support the firm.
- Consistent with the role of investor support, founders also value investors with relevant expertise and local knowledge, especially those with local teams, local experience, and country or sector focus. By contrast, they do not place additional value on foreign investors once contract terms and other investor attributes are held fixed.
2. Who supplies capital to startups in Africa, and who receives it?
Building on these results, the authors next construct a dataset on firms that received VC financing between 2010 and 2024 by combining data from private capital research platform PitchBook with new Africa-specific data sources, and linking these records to founders’ education and work histories from LinkedIn.
The data reveal the following:
- About 80% of VC funding in Africa is raised in deals involving at least one foreign investor—a much higher share than in other emerging or developed markets. Most foreign investment comes from North America and Europe, with only a limited role for China and a secondary role for development finance institutions.
- Local equity markets are thin and intra-African flows remain limited. The type of capital startups demand is present in Africa, but it is supplied mainly from abroad.
- Foreignness also appears on the founder side. About two-thirds of founders who receive VC have studied or worked outside Africa. Founders are also more likely to raise capital from countries in which they previously studied or worked.
3. Why is Africa’s startup ecosystem so foreign, and what does it mean for the sector?
Finally, to measure the drivers of this investor and founder foreignness and quantify its implications, the authors develop an accounting model. They consider the role of three forces in driving the foreignness of Africa’s startup ecosystem: the relative cost of local versus foreign equity capital; the effective pool of local and foreign-exposed entrepreneurs at the financing margin; and local entrepreneurs’ access to the foreign investors that supply most startup capital.
They find the following:
- Africa stands out on three dimensions relative to comparable markets: local equity capital is unusually costly relative to foreign equity, the pool of local entrepreneurs reaching the financing margin is relatively thin, and local entrepreneurs have weaker access to foreign investors.
- In a counterfactual where the cost disadvantage facing local equity capital matches European levels, the local investor share rises from 26.1% to 41.7%, and the local founder share rises from 32.0% to 40.5%.
- The same frictions that generate foreignness also constrain startup activity. Lowering local capital wedges (making local capital more accessible) raises startup activity by 13.0%, while increasing the mass of local entrepreneurs reaching the financing margin raises it by 29.0%. Equalizing local entrepreneurs’ access to foreign investors raises startup activity by 16.9%, but shifts financing further toward foreign capital. Figure 8 summarizes these counterfactuals.
African startups demand flexible equity capital. But in Africa, foreign investors largely supply this capital, and it flows disproportionately to founders with foreign education or work experience. Building a broader startup ecosystem therefore requires both expanding the local supply of equity capital and improving local entrepreneurs’ access to the foreign capital that already finances much of the sector.