Blended Capital Models

A New Frontier for Early-Stage Investing in Africa

Africa’s entrepreneurial landscape is teeming with potential. However, one of the persistent challenges for early-stage ventures is access to the right kind of capital at the right time. I previously wrote about how and why the right kind of capital for African businesses is a mixed form that seeks both impact/sustainability and profit.

Traditional venture capital often falls short in addressing the unique needs of African startups (compared to those in other emerging markets), which face hurdles ranging from infrastructure gaps to market volatility. Enter blended capital models, an innovative approach that combines non-dilutive funding with equity investments, offering a more sustainable pathway for nurturing Africa’s next wave of innovators.

The Need for Blended Capital

Africa’s venture capital ecosystem has seen significant growth in recent years. In 2022, African startups raised over $6.5 billion in funding, a notable increase from previous years. However, much of this capital has been concentrated in later-stage deals, leaving early-stage startups underserved. These early ventures, often characterized by unproven business models and higher risk profiles, require more than just financial investment—they need capacity-building, market access, and technical support.

Blended capital models address these needs by combining grants, concessional funding, and equity. Grants and concessional funds provide the risk capital necessary to de-risk ventures, allowing them to develop and prove their concepts without the immediate pressure of financial returns. Once the business model is validated, equity investments can come in to scale the venture.

How Blended Capital Works

A blended capital structure typically involves a non-profit entity (OpCo) providing non-dilutive funding and technical assistance, while a parallel for-profit entity (the Fund) makes equity investments. This model ensures that startups receive the holistic support they need to thrive.

For instance, a recent blended capital initiative in Africa is 54 Collective (where I work), which operates through a dual-entity structure. The OpCo, funded by a grant from one of the largest foundations in the world, provides non-dilutive capital and technical assistance to early-stage ventures across the continent. The Fund, a separate entity, steps in with equity investments once these startups are ready for scale.

The Impact of Blended Capital in Africa

Blended capital is not just a financial innovation; it's a catalyst for inclusive growth. By combining patient capital with commercial investment, this model allows ventures to grow at a sustainable pace, ensuring that social impact is not sacrificed for financial returns. According to the Global Impact Investing Network (GIIN), blended finance models have mobilized nearly $140 billion in private sector investment for development in emerging markets.

In Africa, blended capital is particularly effective in sectors such as agriculture, health, and renewable energy. These sectors often require significant upfront investment with longer payback periods, making them less attractive to traditional venture capital. However, by de-risking these investments with concessional capital, blended finance is unlocking new opportunities for innovation and impact.

Challenges and Considerations

While the benefits of blended capital are clear, there are challenges to be mindful of. One key issue is alignment between the goals of the non-profit and for-profit entities. It’s crucial that both sides work towards a shared vision to avoid mission drift. Additionally, there is the challenge of measuring impact and financial returns simultaneously. Investors and grant providers must agree on metrics that capture both social impact and financial performance, ensuring transparency and accountability.

Another consideration is the regulatory landscape. African markets are diverse, and regulatory frameworks can vary significantly from one country to another. Structuring blended capital models requires careful navigation of these regulations to ensure compliance and avoid unintended legal complexities. For example, some African countries may require the OpCo to register locally as a non-profit entity through which the OpCo would deploy its funding (or as a financial institution - if the funding is through concessionary loans instead of grants) to businesses in those jurisdictions. Fund structuring/set-up, administration and compliance requirements are an additional concern.

The Future of Blended Capital in Africa

As Africa continues to emerge as a hub for innovation, blended capital will play a crucial role in bridging the financing gap for early-stage ventures. By providing a balanced mix of patient capital and commercial investment, this model not only supports the growth of individual startups but also contributes to the broader development of Africa's entrepreneurial ecosystem.

For investors looking to make a meaningful impact while achieving sustainable returns, blended capital offers a compelling opportunity. It’s not just about financing the next big idea—it's about building a resilient and inclusive economy for the future.

Conclusion

Blended capital models represent a new frontier in early-stage investing in Africa, combining the best of both worlds: the social impact of philanthropy with the scalability of venture capital. As this approach gains traction, it has the potential to reshape the African entrepreneurial landscape, driving growth and innovation in some of the world’s most promising markets.

By leveraging the strengths of both non-dilutive and equity funding, blended capital offers a blueprint for sustainable development that aligns profit with purpose—a win-win for investors, entrepreneurs, and society at large.