Building venture markets where none exist: Coordination, capital, and evidence

Access to finance is a foundational driver of inclusive and sustainable economic development. By expanding access to financial services, enabling innovation, and facilitating market participation, finance can empower households and firms, reduce poverty, and unlock growth opportunities. Over the past decade, J-PAL and its affiliated research network have built a substantial body of evidence on digital financial services, credit, and other dimensions of financial inclusion. 

This is the second post on how to build venture markets where none exist in a blog series highlighting five priority areas for financial inclusion in Africa. In 2025, J-PAL Finance sector Co-Chairs Emily Breza and Emanuele Colonnelli convened a group of researchers in Nairobi, Kenya with J-PAL Affiliated Professor Christopher Woodruff and Private Enterprise Development in Low-Income Countries (PEDL) to engage with finance-sector stakeholders, including representatives of banks, lending groups, and financial investors to advance the research agenda on inclusive finance for development. See the first post here.

When markets fail to form: A coordination problem, not just a financing gap

In many African countries, limited business growth remains a central development challenge. When firms cannot scale, productivity stagnates, job creation slows, and the broader economic transformation that lifts people out of poverty becomes harder to achieve. Yet, even high-potential businesses often struggle to access early-stage and growth capital. Venture capital (VC) and private equity (PE) markets, which fuel young, fast-growing firms in other parts of the world, are often thin, fragmented, or entirely absent. As a result, even promising businesses remain stuck: unable to scale, adopt new technologies, and create productive jobs.

This challenge goes beyond a shortage of funding; it reflects a coordination problem. High-growth ecosystems require more than capital: They depend on skilled fund managers, experienced operators, credible exit opportunities, and investors willing to finance long-duration and uncertain returns. When these elements are missing at the same time, it becomes very hard for private markets to take shape on their own. Conversations with investors in Nairobi (including TLCom Capital, Antler Africa, TLG Capital, Flourish Ventures, VestedWorld, Investisseurs & Partenaires, and Sayuni Capital) repeatedly pointed towards these missing complementary inputs. 

In response, governments and development finance institutions (DFIs) are often asked to step in to help markets take shape. Their role is meant to be catalytic: using public capital to unlock private investment and support the early stages of ecosystem development.

This creates an inherent tension. Public capital is meant to enable the emergence of private markets without replacing them. Used in the wrong way, it can discourage private investors or lead to ecosystems that never become self-sustaining. Used well, it can help overcome coordination failures and accelerate the shift to private‑led markets. Getting this balance right is critical for long-term growth, productivity, and job creation.

From capital to exits: What we are seeing in practice

In many African countries, DFIs are deeply involved in early-stage finance, using a range of tools to support firms and investors. These tools include early commitments to venture funds, co-investments alongside private investors, guarantees that mitigate financial risk, and technical assistance for fund managers and startups. These approaches are often combined as part of blended finance strategies designed to mobilize additional private capital. Many such strategies also point to the need for local institutional investors to play a larger role in private markets.

Conversations with practitioners in Nairobi, including teams from BII, IFC, Proparco, and Norfund highlighted the shared goal not to replace private markets, but to help create conditions in which private markets can function. The focus is instead on building healthy investment ecosystems by ensuring liquidity, follow-on funding, and credible exit opportunities for growing firms.

One investor noted that when DFIs remain the dominant source of capital even in later funding rounds, it becomes harder to convince private investors that exits are achievable. Some practitioners also observed that early exits are sometimes pursued not because a company is struggling, but to demonstrate that exits are possible before raising the next fund. Thin acquisition markets, a limited pool of potential buyers, and uncertain exit paths remain persistent challenges and often deter private funds from entering the market in the first place.

Another recurring theme was that capital alone is not enough. Early-stage ecosystems also depend on qualified people (stay tuned for our third blog post in this series, covering why people matter in high-growth entrepreneurship): experienced managers, mentors, operators, and service providers who can identify opportunities and support firms as they grow. Without the right people in place, financial support alone often falls short.

Timing also matters. DFIs may enter markets too early, before a pipeline of investable firms exists, or stay too long, without clear signals for when and how private capital should take over. Some DFIs highlighted the difficulty of scaling local-currency investments in environments with high economic volatility—conditions that make the risks too great for private investors. And in practice, the criteria for when public support should step back are usually unwritten and implicit.

At the same time, there are reasons for optimism. Many African countries are seeing a growing pool of local entrepreneurs, particularly in digital sectors where it is easier to get started. Several of the investors who met at J-PAL’s 2025 event in Nairobi, such as TLG Capital, Purple Elephant Ventures, and Untapped Global, are building their business models and investment strategies around alternative financing approaches that can work where traditional models struggle.

DFIs and private investors are testing new tools and structures (see, for example, FASA’s strategy or a recent TLG/IFC partnership). And while more administrative and deal-level data becomes available, there are new opportunities to rigorously evaluate firm outcomes and broader ecosystem impact. Together, these developments create an opportunity to move beyond anecdotes and start building systematic evidence about what actually works.

The need for research: Evidence gaps in entrepreneurial ecosystems

A key open question is how high-potential firms grow in these settings and how access to finance shapes their trajectories. Most of the existing evidence is descriptive or based on case studies, limiting what we can learn about causality and underlying mechanisms.

Based on conversations with practitioners and ongoing research, three major gaps stand out. Addressing these gaps requires rigorous evidence on how entrepreneurial ecosystems form, evolve, and ultimately become self-sustaining. This matters because both public and private capital need to support growth that lasts and not temporary fixes that disappear once the funding does.

1. What is the causal impact of venture capital and private equity on local economic activity?

Beyond individual success stories, we still know surprisingly little about the broader effects of venture capital and private equity on development outcomes such as firm growth, job creation, productivity, and spillovers to the wider ecosystem. Do private capital markets meaningfully contribute to economic development, and through what mechanisms? Answering these questions requires credible causal evidence, ideally from studies that exploit policy changes, eligibility thresholds, geographic expansions, or funding cycles that differentially affect firms or markets.

2. At which stages of the firm and ecosystem lifecycle are DFIs and government interventions most effective?

Venture ecosystems rely on a sequence of complementary inputs: early risk capital, capable fund managers, follow-on investors, operational expertise, and credible exit opportunities. DFIs and governments intervene across many of these stages through capital, guarantees, and technical assistance. Yet key questions remain. At which stages do these interventions generate the greatest impact, and where might they instead crowd out private markets?
How can financial instruments and investment structures be designed so that DFI participation crowds in, rather than displaces, private capital? How do investments at the seed, growth, or later stages shape firm behavior, investor expectations, and exit dynamics? And how do non-financial interventions, such as governance support or fund-manager training, interact with capital over the firm and ecosystem lifecycle?
Answering these questions is central to designing interventions that foster self-sustaining ecosystems rather than prolonged dependence.

3. Is the standard venture capital model well suited to low-income countries?

The classic venture capital model relies on equity financing, long fund horizons, and exits through acquisitions or public markets—assumptions that may not hold in many low-income settings. This raises the question of whether alternative approaches, such as revenue-based financing, hybrid debt–equity instruments, or different fund structures, may be better aligned with local firm dynamics and more realistic exit opportunities.

How do these models shape firm behavior and growth trajectories relative to standard equity financing? Do they alter firms’ investment decisions, risk-taking, governance, or incentives to scale? And what are their longer-term implications for investor participation, market depth, and the development of sustainable exit pathways?

J-PAL’s Finance policy team continues to support new research that addresses core questions on financial inclusion and innovation, while synthesizing findings across studies to surface key insights for policymakers and financial institutions. Stay tuned for future posts in this series outlining more evidence-informed approaches to expanding access to financial services, enabling innovation, and building economic empowerment. Subscribe to receive updates.

* We would like to thank all finance-sector stakeholders we were able to meet in Nairobi for their insights and openness: Antler East Africa, Baridi, Beyond Capital Ventures, British International Investments (BII) in Kenya, Central Bank of Kenya, Enza Capital, Equity Bank Kenya, FASA - Financing for Agricultural SMEs in Africa Fund, Fleetsimplify, Flourish Ventures, IETP - Investisseurs et Partenaires, IFC Kenya, Ketha Africa, Kukua, NALA, NCBA Bank Kenya Plc, Norfund, Onafriq, Proparco, Pure Infrastructure Ltd, Qhala, Sayuni Capital, Stanford Seed East Africa, TLCom Capital, TLG Capital, Untapped Global, VestedWorld, ZEP-RE (PTA Reinsurance Company), and 4C Group.