Investing in Africa’s Climate Tech: Lateral’s Approach to Driving Sustainable Growth
Why Climate Tech? Why Africa?
The world is abuzz with excitement about climate tech, and rightfully so. With billions of dollars in investable dry powder and the potential for multi-billion-dollar opportunities, it’s no wonder the share of global VC funding going to Climate Tech has more than tripled within the last ten years.
However, when it comes to Africa’s climate tech landscape, the pace of investment significantly trails behind, accounting for less than 1% of the global Climate Tech funding. Africa’s narrative in the context of climate has predominantly been one of vulnerability and adverse effects, given the continent’s high susceptibility to the negative impacts of climate change. Consequently, many discussions about Africa’s climate opportunities have centered on climate justice and impact. At Lateral, we prefer to approach the topic from an economic lens, focusing on the continent’s untapped potential.
1.) Africa is in the building phase
No country has achieved prosperity without increasing its energy utilization per Capita. In fact, there is no higher correlation to GDP growth than this factor.
So, the question is, how does Africa do this — increase its energy density but do so in a sustainable and resource-efficient way?
Secondly, no country has achieved economic prosperity without manufacturing and an industrial base. For the most part, all African nations are net exporters of raw goods and importers of finished products. We believe both problems can be solved by reframing Africa’s climate position. Africa’s global competitive advantage is its pathway to prosperity. These are namely, its demographics, arable land, freshwater and access to rare earth minerals. For instance, African countries alone hold 30% of the world’s mineral resources and 19% of the global reserve of metals needed for battery-powered electric vehicles (EVs) as well as other low-carbon infrastructure. The continent also has 60% of the world’s solar resources, yet it only has 1% generation capacity.
Therefore, Africa can profit from global decarbonization by shifting energy-intensive solutions to Africa. For any use case that can use labour, energy, or natural resources, Africa is actually in the brightest spot to do that investment development.
From a climate competitiveness perspective, it is particularly well positioned, given its low base of installed capacity for new technology, such as green ammonia, green hydrogen for ammonia, and other innovations for the distribution of renewable resources.
2.) The foundation has been set.
The 3 Ds — Decarbonisation, Decentralisation, and Digitization- are driving headline trends in climate tech and a full-scale disruption and transformation of the sector.
Decarbonization. Decarbonization represents a paradigm shift towards low-carbon energy sources, fuelled by shifting consumer demand and proactive government action across sectors like energy, transportation, manufacturing, food, and agriculture.
Digitization. The convergence of digitization and clean technology not only accelerates the transition towards a sustainable future but also unlocks new opportunities for innovation and growth in the climate tech space in multiple ways. For instance, digital technologies provide the necessary infrastructure for flexible distributed systems, enabling the integration of renewable energy sources into existing grids seamlessly. Additionally, recent advancements in cloud storage, artificial intelligence (AI), and machine learning (ML) have significantly lowered the barriers to entry for hardware startups, making it more affordable to ideate, establish companies, and scale operations than several years ago.
Decentralization. This trend plays a big role in innovating new business models within climate tech. For instance, sectors like clean energy involve a shift from large-scale, centralized power plants to smaller, distributed energy resources. In transportation, decentralized mobility solutions, such as ride-sharing platforms and electric bikes, are revolutionizing urban transportation systems and reducing reliance on fossil fuels.
Overall, these three interrelated trends are setting the foundation for significant climate tech innovation opportunities on the continent.
Lateral’s Climate Tech Investment Framework
Strictly speaking, Climate Tech refers to technologies specifically focused on reducing GHG emissions or addressing the impacts of global warming. This encompasses companies across multiple sectors, primarily those that are the most carbon emissive today, such as Energy, Mobility, Food, the Built Environment, New Materials, and Industrials — simply put, Climate Tech is heterogeneous and touches on everything. As Shyle Kann puts it, “The challenge with truly tackling climate change — and, conversely, the most attractive thing about “climate tech” — is how pervasive GHG emissions are throughout the global economy.”
Consequently, to tackle climate change, we must reconfigure almost all our economic systems, from generating and transmitting energy to transporting humans and goods to growing, making, and building things. We at Lateral see the spectrum of companies solving for climate broadly divided into four major categories: How we power things, how we move, how we live, and those reversing climate change, i.e., Carbon Removal and Restoration
⚡️How we power things
Market backdrop
One reason the clean energy transition is accelerating so rapidly is that it has become an economically viable means of matching increasing energy demand propelled by remarkable advancements in technology and economics. Between 2010 and 2021, the cost of solar declined by 88%, and onshore wind fell by 68% globally.
With its abundant sunshine and wind resources, Africa stands at a pivotal moment in the energy landscape. As the continent seeks sustainable solutions to power its burgeoning economies and meet the needs of its growing population, the democratization of renewables, grid orchestration, and energy storage emerges as opportunities
Opportunities & Outlook
Democratization of Renewables: As Africa navigates the complex journey towards electrification, vertically integrated platforms are emerging to guide customers through every step, from installation to financing and operations management. These platforms democratize access to renewables, making them more accessible and manageable for a broader range of consumers.
Grid Orchestration and Enhanced Energy Distribution: Grid orchestration is essential for optimizing the integration of renewable energy into existing power systems. Smart grid technologies enable real-time monitoring and control, improving reliability and efficiency. In Africa, where grid infrastructure is often fragmented and unreliable, such advancements hold significant promise.
Moreover, the rise of interconnected microgrids enables peer-to-peer energy trading, fostering energy democratization and resilience. By decentralizing control and empowering local communities, grid orchestration paves the way for a more inclusive and resilient energy ecosystem.
Energy Storage: As Africa transitions to clean energy, the need for energy storage solutions becomes paramount. While Africa’s manufacturing capacity for storage may be limited, innovative approaches, such as hydrogen fuel cells, offer promising alternatives for long-term energy storage. Addressing the storage challenge is critical for ensuring grid stability and maximizing the benefits of renewable energy integration.
🚗 How we move
Market backdrop
The global shift towards electric vehicles (EVs) is well underway, with large car manufacturers setting targets to discontinue the production of ICE vehicles. The shift to EVs is slowly sipping into Africa, albeit slower than in other regions. While EVs have come down the cost curve quite substantially thanks to advances in batteries (89% decrease over the last ten years) they still face challenges in terms of convenience and cost.
In Africa, the challenge is further accelerated as local auto manufacturing capacity and supply chains remain weak; e-mobility startups have been forced to innovate their business models around assembling, financing, and ownership to ensure accessibility, affordability, profitability, and scalability.
Recognizing some of the challenges, countries such as Kenya, Rwanda, South Africa, and Morocco are starting to create enabling policies, including reduced or exempted VAT on electric vehicles, which are stimulating EV adoption and paving the way for sustainable transportation solutions.
Opportunities & outlook
In a highly fragmented market like Africa, first movers stand to benefit tremendously by building vertically integrated technology tools that support EV operations along the value chain and the entire ecosystem. We believe that startups and technologies addressing key value levers such as charge time, price, range anxiety, charging infrastructure, and vehicle size/choice will have the greatest chance of adoption.
Over the long term, as charging infrastructure becomes interoperable, new business models will emerge in charging networks, including aggregation and software layers to enable seamless payments. This interoperability will be essential for scaling EV adoption and building a sustainable transportation infrastructure across Africa.
🏠How we live
Market backdrop
Approximately 55% of the world’s population currently resides in urban areas, a figure expected to increase to 68% by 2050. This urbanization trend is particularly pronounced in Asia and Africa, where nearly 90% of the shift is projected to occur. African cities alone are expected to welcome an additional 1.3 billion people by 2050, driving a surge in demand for buildings. Remarkably, 80% of these buildings are yet to be constructed, presenting a massive opportunity for sustainable development.
Opportunity & outlook
While the market for sustainable urban development and net-zero carbon buildings is relatively nascent, we are witnessing the emergence of innovative solutions in this space. From our pipeline, we have started to see companies pioneering approaches that prioritize modularity, flexibility, and net-zero carbon emissions, all while providing cost advantages to customers.
💨Carbon Removal and Restoration
In addition to changing how we live, move, and power things, we must also address the damage already done by scaling carbon removal and regenerative solutions. The demand for carbon credits is expected to grow significantly as more companies commit to net zero emissions.
Market backdrop
Globally, the demand for carbon credits far exceeds supply. With mounting pressure on companies to translate net zero targets into tangible action, the demand for carbon credits is projected to grow exponentially, reaching $50bn by 2030. However, addressing key issues surrounding carbon offsets, such as regulations and market fragmentation, is essential to instill confidence among investors and founders, thus driving innovation in carbon technologies.
Recent regulatory tailwinds, including CORSIA deadlines, are bolstering demand for carbon credits. Corsia requires airlines to monitor and report their emissions, allowing them to purchase emission reduction units, if they exceed a set baseline. For the pilot phase (2021–2023), airlines don’t need to show compliance until January 31, 2025. For phase I (2024–2026), the deadline is January 31, 2028. To meet these deadlines, airlines should plan credit purchases well ahead to avoid any risks.
Africa is emerging as a frontier market for carbon offsets to supply the rising global demand. Currently, Africa accounts for ~12% of the world’s issued carbon credits while only tapping into 2% of its maximum annual capacity.
Opportunities & Outlook:
The carbon market landscape is complex, but prospective areas of opportunity lie in solutions that increase the supply of quality carbon credits:
Marketplace & Integrated Verifiers: Marketplaces that match supply and demand for removal projects and more. However, the bar for winning in this category is high, given that currently, most of the startups in Africa’s carbon markets ecosystem are project developers who work with better-capitalized marketplaces and integrated verifiers in the US/EU.
Low-cost and scalable solutions for measurement, reporting, and verification (MRV): These include solutions that provide data that allows carbon offset projects to be trusted, funded, and scaled.
Scalable carbon removal solutions. There is a growing demand for tech- and nature-based carbon removal solutions. While nature-based solutions like reforestation projects are cheaper, they often lack the data required for credible tracking and scalability. On the other hand,tech-based solutions, such as Direct Air Capture (DAC), are still nascent and expensive to scale but hold immense potential. Africa has the opportunity to leverage local resources and develop cost-competitive DAC technologies, contributing to the global carbon removal effort.
🎯 Closing thoughts
From revolutionizing energy production and transportation to reimagining urban development and carbon removal solutions, Africa’s climate tech ecosystem is poised for exponential growth. By leveraging the continent’s abundant resources, demographics, and talent, we can unlock its vast climate tech potential.
Given how early the entire category is, there are still many areas to unpack. We are just scratching the surface of our research, and these are some of the areas we’re starting with. The quality of our pipeline continues to amaze us and expand our perspective on the industry’s future. As a thesis-driven fund, we will constantly revisit our thesis and update our thinking on areas we are excited about.
We’re actively deploying capital from our second fund and are committed to leading seed rounds for founders who have advanced beyond the proof of concept and have achieved product-market fit. For those still in the pre-seed stage, we have our sister fund, Rally Cap Climate.
Please reach out via ebby@lateralfrontiers.com