President William Ruto chairs a meeting of the Committee of African Heads of State and Government on Climate Change on the sidelines of the African Union Summit in Addis Ababa, Ethiopia. [File, Standard]
When a Kenyan health-tech startup offering affordable micro-clinics in Nairobi’s informal settlements wanted to expand a few years ago, it struggled to attract scale-level funding. Donors were constrained, and investors deemed it too risky.
It didn’t even matter that the venture was focused on helping break barriers to healthcare by combining affordable clinics with innovative health technology to ensure families in Nairobi slums access high-quality care close to home. Luckily, it eventually succeeded in raising the requisite investments to scale.
Unfortunately, not many social ventures have stories with such a happy ending. All across Kenya, in particular, and Africa in general, many game-changing ideas stall before takeoff, not because they are not viable, but because no investor or donor is willing to provide the initial capital, otherwise known as catalytic or risk capital, to test new markets or ideas.
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Often referred to as pre-seed or patient capital, catalytic capital is a subset of impact investing that takes on risks others won’t. It paves the way for larger flows of private investment by funding innovation, testing ideas, and scaling proven models. It’s not charity. It’s smart, targeted investment for public good – and long-term resilience.
It’s the kind of funding that takes higher risks to reduce the risks for other investors. It’s a fund that’s willing to accept lower returns to make a bigger impact on society. Its goal is to prove that investments in underserved markets like African small and medium enterprises and startups can work. Such an investment goes into funding pilots, proving concepts, and clearing the runway for growth. In short, catalytic capital helps transform bold ideas into investable opportunities.
Transformative impact
Recent studies have shown that every $1 (Sh129) of catalytic capital mobilises $4 (Sh518) of downstream traditional investment for social impact ventures such as the Kenyan health-tech startup mentioned above. Yet, globally, catalytic capital constitutes less than 0.01 per cent of all investment capital. And while the impact investing market has grown to about $1.1 trillion, only a fraction of this sum can be considered catalytic capital, leaving a tremendous amount of transformative impact unrealised, according to Stanford Social Innovation Review.
Catalytic capital – flexible funding for early-stage social ventures working in challenging but promising markets – is just what Africa needs now. With shrinking aid, stretched government budgets, growing public debt, and a burgeoning young population, African countries need private capital to deliver inclusive and sustainable growth.
Currently, studies show that every year until 2030, Africa faces a $200 billion (Sh25.8 trillion) gap in financing the Sustainable Development Goals (SDGs). Yet an estimated $1.8 trillion (Sh232.2 trillion) lies idle across the continent, untouched, in pensions, insurance pools, and other assets – largely because traditional investors consider social ventures too risky. The truth of the matter is, Africa doesn’t lack money; it lacks risk capital in the global impact space and in efforts to address the SDGs financing gap.
The timing to step up mobilisation of catalytic capital can’t be more right: Over the past five years, Africa has weathered three major global shocks: The Covid-19 pandemic, the Russia-Ukraine war, and the recent wave of unexpected aid cuts. These crises revealed the continent’s vulnerability and heavy dependence on external support. The hard truth is that Africa’s systems lack the resilience to absorb such disruptions.
The question now is: How can Africa turn these lessons into a roadmap for resilient and self-reliant growth led and largely funded by Africans themselves? We can’t keep waiting for help because the next crisis isn’t a question of if, but when. Will we be ready?
To build that resilience and independence, we need a new approach to philanthropy. Traditional grant-making isn’t enough. We need philanthropists, foundations, governments, and high-net-worth individuals to see themselves not just as donors but as catalytic investors. Their capital should aim to unlock domestic private investments by funding early risk and enabling scalable solutions.
Philanthropy can play a vital role in bridging the gap in early-stage risk, funding innovation, testing new models, and proving concepts, thereby unlocking larger flows of private investment capital into the social sectors. Without this catalytic bridge, the continent will continue to struggle to attract capital into critical social sectors that drive sustainable growth.
The old model of charity simply won’t cut it anymore. What Africa needs is a bold, risk-absorbing capital that unlocks markets, strengthens institutions, and empowers people.
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By Frank Aswani