Nigeria: Uptick recorded in private funding for climate-tech startups

Solar panels dot rooftops across sprawling Lagos, a Nigerian city that is transforming as it adopts solar power.  Nearly a decade ago, things looked quite different.

Climate technology was new in Africa, and it was tough to get funding for start-ups that would eventually enable the region’s electrification.

But the ecosystem has since changed, and in recent years, venture capital and private equity firms are increasingly funding climate-tech startups, with businesses raising more than $3.4 billion since 2019.

Rensource Energy, a company that provides solar and battery-based power subscription packages to individuals and businesses, is benefitting from the recent uptick in private funding.

“Automatically if you are using fossil fuel generation, which is the main stay in this side especially Sub-Saharan Africa, focusing more on West and Central Africa right, you have a lot of carbon emission and this things are not good for their atmosphere and what businesses like us try to do is to address such issue by using clean and sustainable energy at a scale that is equal to what the grid does, or equal to what larger fossil fuel diesel generators do,” says CEO Prince Ojeabulu.

Ojeabulu says financial backers were initially hard to find, they needed to be convinced they were investing in a good business model.

“There was a perception that needed to be broken which we had to do, so, that difficulty was there but a good thing was that we had a lot of early backers who believed that the solar industry would become what it is today which is there will be a lot of investment in the space, there would be advancement in technology and also the reduction in cost as a result of it,” he says.

But there’s still a long way to go, with the continent requiring $277 billion annually to meet its climate goals for 2030 according to the funding database Africa: The Big Deal.

Experts say to unlock financing and fill this gap, African countries need to address risks like currency instability which deters investors.

At the same time investors are being urged to expand their scope of interest to other climate related industry sectors like flood protection, disaster management and heat management, and to use diverse funding methods.

Ojeabulu says funding for climate tech is now more restricted as the industry has expanded and grown.

He says: “In 2015 it was a lot more easier, you had a lot of VC (Venture Capital) backed, VCs very much interested in renewable energy company, you had a lot of grants, giving the strategy at that time was to actually get patient capital that can enable the growth of a lot of the players. Now we are already in, the industry is a bit more tighter given the value chain is expanded and players are now looking to specific areas in the value chain to play in and the to that we are now also seeing successful and unsuccessful businesses.”

Still, the investment numbers for the climate tech sector — which includes businesses in renewable energy, carbon removal, land restoration and water and waste management — are compelling:

Last year, climate tech startups on the continent raised $1.04 billion, a 9% increase from the previous year and triple what they raised in 2019, according to Africa: The Big Deal.

That was despite a decline in the amount of money raised by all startups in total on the continent last year.

That matters because climate tech requires experimentation, and VC funding allows startups to take on risk.

The money raised by climate tech startups last year was more than a third of all funds raised by startups in Africa in 2023, placing climate tech second to fintech, a more mature sector.

Venture capital is typically given to businesses with substantial risk but great long-term growth potential. Startups use it to expand into new markets and to get products and services on the market.

According to Ojeabulu companies now require financing beyond the initial seed capital.

"A lot of the VCs (Venture Capital) playing in this space right now in Africa are doing a really fantastic job, I think room for improvement is now to see that bigger investors now look at the model and participate and take the level of risk that VCs will not be able to venture into to help scale the players who are now moving beyond that seed capital stage, were moving beyond that VC stage and then help them expand and solve the problem,” says Ojeabulu.

Besides venture capital, other investments by private equity firms, syndicates, venture builders, grant providers and other financial institutions are actively financing climate initiatives on the continent.

But private sector financing in general lags far behind that of public financing, which includes funds from governments, multi-laterals, and development finance institutions.

From 2019 to 2020, private sector financing represented only 14% of all of Africa’s climate finance, according to a report by the Climate Policy Initiative, much lower than in regions such as East Asia and Pacific at 39%, and Latin America and the Caribbean at 49%.

The low contribution in Africa is attributed to the investors putting money in areas they’re more familiar with, like renewable energy technology, and avoiding technology for adapting to climate change, such as flood defenses and waste experts say.

Investors are also starting to understand the economic benefits of adapting to climate change and solutions as they have returns on their investments.