Climate-Tech Startups in Nigeria Experience Surge in Private Funding

Climate-tech startups in Nigeria are witnessing a remarkable surge in private investment, signaling a significant shift in the economic landscape that could accelerate the country’s progress towards sustainable energy solutions. Over the past few years, these startups have raised more than $3.4 billion, with a substantial increase observed since 2019. This influx of capital is transforming the energy sector, particularly in Lagos, where solar panels are increasingly becoming a common sight on rooftops.

Transformative Growth in the Energy Sector

Nearly a decade ago, the concept of climate technology was still nascent in Africa, and securing funding for startups in this sector was a formidable challenge. However, the landscape has drastically changed, thanks to the increasing awareness of the benefits of sustainable and renewable energy sources. This shift is largely driven by the detrimental effects of fossil fuels, which are prevalent across Sub-Saharan Africa.

Rensource Energy, a leading player in this evolving market, offers solar and battery-based power subscription packages. The company’s CEO, Prince Ojeabulu, highlights the transformative impact of these investments. “Automatically if you are using fossil fuel generation, which is the mainstay in this side especially in West and Central Africa, you have a lot of carbon emissions which are not good for the atmosphere. Businesses like ours try to address such issues 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,” explains Ojeabulu.

Breaking Old Perceptions

Initially, financial backers were skeptical about the viability of the solar industry. “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,” Ojeabulu adds.

Despite these advances, the journey is far from over. The continent needs approximately $277 billion annually to meet its climate goals for 2030, as per the funding database Africa: The Big Deal. Experts emphasize that to unlock further financing and fill this gap, African countries must address persistent risks like currency instability which deters investors.

Expanding Investment Horizons

Investors are now being urged to broaden their focus to other climate-related industry sectors such as flood protection, disaster management, and heat management, and to employ diverse funding methods. Ojeabulu notes that funding for climate tech has become more restricted as the industry has expanded and grown. “In 2015 it was a lot easier, you had a lot of VC-backed, VCs very much interested in a 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 tighter given the value chain is expanded and players are now looking to specific areas in the value chain to play in and due to that we are now also seeing successful and unsuccessful businesses,” he explains.

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Significant Investment Figures

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.

This growth in funding is significant, especially considering the overall decline in the amount of money raised by all startups on the continent last year. The funds raised by climate-tech startups last year amounted to more than a third of all funds raised by startups in Africa in 2023, placing climate tech second only to fintech, a more mature sector.

The Role of Venture Capital

Venture capital plays a crucial role in this sector, typically supporting businesses with substantial risk but great long-term growth potential. Startups use this capital 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 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,” he says.

In addition to 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. Yet, private sector financing in general still lags far behind that of public financing, which includes funds from governments, multilaterals, and development finance institutions. From 2019 to 2020, private sector financing represented only 14% of all of Africa’s climate finance, a figure much lower than 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 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. However, investors are also starting to understand the economic benefits of adapting to climate change and solutions as they have returns on their investments.

Looking Forward – Climate-Tech Startups

As climate-tech startups continue to grow and attract more funding, the future looks promising for Africa’s energy sector. With the right investments and strategic focus, these startups can play a pivotal role in meeting the continent’s climate targets and ensuring a sustainable future.