Raise and Return: The Increasing Role of Venture Studios in East Africa’s Startup Ecosystem
East Africa’s entrepreneurial landscape is at a crossroads. Despite a growing youth population, abundant resources, and rapid technological advancements, many promising startups still struggle to scale. East Africa’s startup field has established itself as a leading hub for innovation, with fintech, agritech, and healthcare sectors leading the charge and attracting one-third of Africa’s total startup funding in 2024.
The region’s ability to secure $725 million in funding for the second consecutive year highlights investor confidence in its growing ecosystem. Kenya’s dominance, accounting for 29% of the continent’s total, reinforces its status as a key player, with Nairobi thriving as a regional tech hub. However, despite this promising trajectory, a deeper challenge persists: the limitations of the traditional venture capital (VC) model, which prioritises short-term gains rather than long-term sustainability in fostering value creation.
This misalignment between the VC model and the realities of East Africa’s startup ecosystem necessitates a more effective approach to long-term growth. This raises an important question – does the region need an alternative approach? Enter the venture studio (VS) model: a novel approach that goes beyond funding by actively helping build startups from their infancy. This article argues that to unlock East Africa’s full entrepreneurial potential, the focus must shift from the sink-or-swim VC model to the multidimensional approach of venture studios. By prioritising sustainable value creation and alignment with regional needs, venture studios offer a transformative pathway to building a resilient startup ecosystem.
Current Venture Capital model in East Africa
The traditional VC model involves general partners fundraising from limited partners and making equity investments in early-stage startups with high growth potential. VC firms typically provide funding in exchange for ownership stakes, often targeting businesses at the seed – nascent firms – or Series A stage – firms that have begun to gain traction. These investments are generally high-risk but aim for substantial returns once the startups break even and achieve a successful exit through an acquisition or initial public offering (IPO). However, success in VC tends to follow a power-law distribution, where only a small number of funds deliver the majority of returns. VC funding provides startups with quick access to capital, enabling rapid growth, talent acquisition, and product development to compete in fast-moving markets. It fosters innovation by supporting high-risk ideas without debt burdens, making startups more attractive to top talent seeking significant returns.
Africa’s VC funding decreased by 44% from $1.91 billion (2023) to $1.07 billion (2024). This reduction is indicative of the decrease in overall investors' confidence, due to the challenges faced by the VCs. The limited operational support leaves first-time entrepreneurs – many lacking the expertise to scale - struggling with execution and mundane operational tasks. Coupled with insufficient mentorship, this further increases the startup’s failure risks. Additionally, limited local investment compels heavy reliance on foreign VCs and exposes startups to global economic fluctuations and misaligned priorities. Many international VCs lack deep local market insight, leading to mismatches between investor expectations and regional realities. Without patient capital from local investors, startups may struggle to secure sustainable, long-term funding. Similarly, the pressure for quick exits often pushes startups to prioritise short-term gains over long-term growth, potentially leading to premature scaling. In East Africa’s smaller markets and with limited human capital, such an approach increases the risk of failure if startups are ill-prepared for rapid expansion., such an approach increases the risk of failure if startups are ill-prepared for rapid expansion.
Venture Studio Model as a Solution
Venture Studios create and launch startups from the ground up, offering a hands-on approach to entrepreneurship. They fill the gap in operational support by providing startups with essential resources. They focus on identifying problems, developing solutions, and building startups internally, aiming to mitigate failure risks through active involvement. This model integrates resources, expertise, and capital under one roof, enabling a more controlled and efficient path to startup success. A successful VS is characterised by its ability to provide shared resources and strategic guidance during the lifecycle of the startup. By providing centralised resources- technology, legal, HR, and marketing – studios allow startups to focus on their core activities. Their on-the-ground approach helps startups make informed decisions, significantly reducing the likelihood of setbacks. VS in East Africa holds the key to unlocking sustainable success and propelling the region’s entrepreneurial ecosystem to new heights.
The growth of 625% in the global VS market in the past 7 years, indicates growing interest, confidence and investment in this model. In East Africa, a handful of studios such as Delta40 and Pyramidia are actively investing and building startups. Despite around 47% of the venture studios globally being ‘vertical agnostic’ - no focus on a particular industry – majority of VS aim at building ‘technology-centric’ companies. Delta40 – launched in March 2023 in Kenya – is tackling climate change in Africa by investing in technology ventures, whereas Pyramidia – launched in Kenya in 2021 – focuses on addressing the agricultural and climate challenges facing the region.
The Venture Studio model has emerged as a powerful approach to value creation through hands-on involvement, significantly increasing startup success rates while mitigating risks. A study by the Global Startup Studio Network (GSSN) analysing top VS found that of the 415 companies they launched, only 9% failed, 3% successfully exited, and 88% remained operational. The same research demonstrated that startups emerging from VS have a 30% higher success rate than traditional VCs. Operational support coupled with efficient resource management, provided by venture studios is crucial for boosting startup success and higher survival rates.
Additionally, studios gain a deeper understanding of regional challenges and consumer behaviour. This localised insight helps ensure that startups are better aligned with local market needs, increasing the chances of long-term success. VS typically hold substantial equity in the startups they create, hence they align their interests with those of the startups. This ensures that studios are incentivised to support sustainable growth, leading to long-term value creation. A 2022 GSSN report highlighted that VS startups reach Series A faster than traditional startups (25.2 months vs. 56 months) with a 30% higher success rate. Moreover, the average internal rate of return for startup ventures is 53% compared to 21.3% for VCs, which can be attributed to the proactive guidance provided. Greater VS presence in East Africa could significantly enhance the local startup ecosystem through administrative assistance. This transformative potential could foster a more resilient, innovation-driven ecosystem and empower local entrepreneurs to scale more effectively.
Challenges of the Venture Studio Model
In contrast, venture studios face unique funding and business model challenges. Studios take a significant ownership stake - around 34% - in the startups they create, in exchange for the risks they assume. Consequently, founders often hold a smaller share of equity compared to traditionally funded startups. This potentially raises investors’ concerns about the founders' long-term motivation, particularly due to potential future dilution, leading to hesitation in studio investments.
Additionally, founders receiving less ownership could affect their long-term financial upside, especially in the case of a successful exit. Running a venture studio is more complex than managing a traditional Venture Capital fund. Studios frequently have higher operating costs and require different fundraising structures, often straying from the conventional 2% management fees and 20% carried interest model. This, along with the need to manage fewer startups, can make securing funds from LPs more challenging.
Furthermore, the highly competitive nature of the startup ecosystem makes acquisition and retention of top talent challenging for venture studios. Studios also require a diverse in-house team with expertise that is often in high demand and necessitates offering competitive incentives and favourable working conditions for retention. They must carefully manage resource allocation across multiple startups, increasingly complicating balancing time and capital allocation. This makes it challenging to scale operations and support multiple startups simultaneously.
Conclusion
The venture capital model, while effective in other regions, faces significant limitations in East Africa. Limited operational support, pressure for quick exits, and reliance on foreign investors create barriers to long-term startup success. The venture studio model, by contrast, offers a more sustainable alternative, actively building startups through hands-on involvement, shared resources, and strategic guidance. This approach not only mitigates failure risks but also aligns startup development with regional needs, fostering long-term value creation.
The success of venture studios globally, evidenced by higher startup survival rates and faster scaling timelines, suggests their huge potential to transform East Africa’s entrepreneurial landscape. Despite challenges such as founder equity concerns and resource-intensive operations, the benefits of venture studios – reduced risk and operational efficiency – outweigh these hurdles. To fully unlock the region’s potential, investors and policymakers must explore and support venture studios as a viable alternative to VC funding. By embracing this innovative approach, the region can build a more resilient, locally driven startup ecosystem that fosters sustainable growth, and long-term success. Venture studios are not just an alternative – they are a necessary evolution for East Africa’s entrepreneurial future.
