Too little, too concentrated: Why AI start-up funding in Africa must be rethought

One yr after the AI ​​Summit in Paris, the international community is meeting again this week New Delhi for the Global Summit on Artificial Intelligencewhose aim might be, particularly, to support the spread of AI applications in developing countries. In Africa, investment in AI and technology continues to be regionally focused “Big Four” – South Africa, Egypt, Kenya and Nigeria – on the expense of other countries across the continent. This evaluation examines the causes of this imbalance and the levers that could possibly be used to raised direct capital.

Between 2015 and 2022, investment in African startups experienced unprecedented growth: The variety of start-ups supported has increased greater than sevenfolddriven by the expansion of mobile technologies, fintech and a large inflow of international capital. From 2022 onwards, nonetheless, tougher economic conditions led to a “financing bottleneck” (a decline in enterprise capital investment), which has been more severe for African startups than in other regions of the world. This trend reinforced the concentration of capital within the countries with probably the most developed startup ecosystems, namely South Africa, Egypt, Kenya and Nigeria.

However, there are good reasons to be certain that these investments are distributed more evenly across the continent. Over and beyond Stimulating economic activitythe technological innovations developed by these start-ups represent one significant lever for developmentas they offer solutions tailored to local conditions: targeted financial solutions, improved agricultural productivity, strengthened health and education systems and responses to priority climate challenges, etc.

Concentrate investments on the Big Four

In the early 2020s, the phrase “Big Four” emerged to explain Africa’s major technology markets: South Africa, Egypt, Kenya and Nigeria. The notion, likely inspired by the term “Big Tech,” suggests the existence of “champion countries” within the tech sector.

In 2024The Big Four captured 67% of equity tech funding (investments in exchange for shares in technology corporations). In detail, the shares recorded by the person countries were distributed as follows: about 24% for Kenya, 20% for South Africa and 13.5% each for Egypt and Nigeria.

This funding cluster is just not just geographical; it also has a powerful sectoral dimension. Capital is usually aimed toward sectors which are considered less dangerouslike digital finance or “Fintech”often on the expense of areas like edtech And Cleantech – i.e. technologies which are dedicated to education or environmental solutions.

A An estimated 60-70% of funds raised in Africa come from international investorsespecially for financing rounds over 10-20 million dollars. These investments, often concentrated in additional structured markets, represent probably the most visible transactions but are also considered the least dangerous.

Emerging peripheral ecosystems and potential that are usually not yet sufficiently translated into investments

While the Big Four concentrate the vast majority of investment, several African countries now have proven AI potential and a pool of promising start-ups, without achieving investment volumes commensurate with this potential.

Countries reminiscent of Ghana, Morocco, Senegal, Tunisia and Rwanda are forming an emerging group whose members have favorable AI fundamentals but still underfunded. This gap is much more striking once you consider that Ghana, Morocco and Tunisia, all of which have dynamic start-up pools, together make up the gap around 17% of African technology corporations outside the Big Four. At the identical time, local financial structures are having difficulty meeting these financing needs in regions which are perceived as peripheral.

This difficulty in attracting investment may be explained particularly by institutional and business ecosystems that also should be strengthened, because the performance of technology corporations is dependent upon the existence of such systems structured entrepreneurial ecosystems that provide access to knowledge, qualified workforce and support mechanisms (accelerators, incubators and investors).

Finally, it can be crucial to do not forget that these weaknesses are part of a bigger context: in 2020 The entire African continent accounted for just 0.4% of world enterprise capital flows and currently represents 2.5% of the worldwide AI market. Emerging countries outside the Big Four are subsequently mechanically disadvantaged in an already highly concentrated competition.

Directing investments to arrange countries for AI

To attract capital for AI startups, a rustic itself have to be AI-ready. The adoption of AI on the national level doesn’t only depend upon technological aspects. The AI Investment Potential Index (AIIPI), a research initiative, emphasizes that this introduction also is dependent upon economic, political and social aspects. Therefore, increasing a rustic's AI potential requires not only strengthening energy and connectivity infrastructure, but in addition improving governance standards, public sector effectiveness and human capital.

Priority actions vary depending on countries’ progress in AI. In more advanced countries like South Africa or Morocco, the challenge is more about supporting research, optimizing AI applications and attracting strategic investments. In countries with more moderate scores, priorities are likely to give attention to strengthening connectivity infrastructure, human capital and regulatory frameworks.

The platform aipotentialindex.org allows, amongst other things, to visualise the index results at a worldwide level and discover the areas through which countries can invest to extend their AI investment potential (research, government effectiveness, connectivity, human capital, AI strategies, etc.). The AIIPI helps investors not only discover countries which are already well advanced in AI, but in addition those with untapped potential. For public decision-makers and development actors, it provides a framework for prioritizing reforms and investments.

Sovereign wealth funds and instruments for brand new technologies

Once a rustic's AI investment strategy has been determined, the query of AI financing instruments arises. Several instruments for technology and AI are emerging on the continental level. Development finance institutions reminiscent of the African Development Bank or the West African Development Bankare launching initiatives designed to support the expansion of the continent's digital economy.

At the national level, African sovereign wealth funds (SWFs) provide an extra channel to support AI and start-up financing across the continent. These means, reminiscent of the Mohammed VI Fund in Morocco or the Pula Fund in Botswanamobilize public savings for long-term economic development and work with development banks.

Partnerships as powerful levers for start-up financing

Financing digital and AI infrastructure alone is just not enough to construct start-up ecosystems suitable for driving economic growth. International public-private partnerships also play a crucial role. The “Choose Africa 2” initiative.The project, led by AFD and Bpifrance, goals to handle funding constraints faced by entrepreneurship across the continent, particularly in its early stages. Funding mechanisms reminiscent of Digital Africa, which bring together public actors and native partners, enable small, early-stage investments “Technology Forever” Start-ups whose technologies have strategic, social and environmental impacts.

While these mechanisms alone are usually not enough to correct investment imbalances, they’ll still help expand access to finance beyond the traditionally best-resourced ecosystems.

Central political, strategic and legal leadership

Financial investment alone is just not enough and have to be supported by strong political ambition. Legal and strategic frameworks at national and continental levels are necessary structural levers for the expansion of digital start-ups in Africa.

On the one hand, African Union-led policies, including the Digital transformation strategy for AfricaThe Continental Artificial Intelligence Strategy and the African Digital PactProvide roadmaps that enable states to speed up digital transformation. There are also instruments at national level, for instance the Tunisian one “Founders Act” law. or National AI strategiesreminiscent of the one published by Ghana outlining the country's ambitions to turn out to be Africa's “AI hub”.

Finally, a crucial political commitment was made on the Global AI Summit in Kigali last April, where 52 African countries announced the creation of an AI summit $60 billion African AI fund the mixture of public, private and philanthropic capital. This initiative highlights a strategic goal across the continent: to position Africa for these emerging technological challenges. However, these AI-focused funds could face problems Governance and financial structuring challenges. There stays a risk that they might reproduce the asymmetries already observed in sovereign wealth funds if transparency mechanisms are usually not put in place. Their impact will subsequently depend upon the establishment of standards and governance tools adapted to the brand new technological challenges.

These frameworks create the obligatory initial conditions for the emergence of local AI solutions and supply a structuring strategic framework. However, their impact on investor confidence will depend upon how effectively they’re aligned with appropriate financing mechanisms and strengthened local capacities.