African startups raising between $100,000 and $1 million have seen funding fall by almost half over the past six months, according to Husein Merchant, who leads Village Capital’s regional operations.

Merchant attributed the decline primarily to a shortage of exits. Investors expecting returns within five or seven years have not seen enough exits to demonstrate that those ticket sizes and instruments—including SAFE notes and direct equity—are working. Without stronger evidence that investments from the previous cycle delivered returns, investors are hesitating and looking for data and repeatable patterns before committing new capital.

Village Capital is a global nonprofit that backs high-impact startups in emerging markets. It backed PiggyVest in 2017 and invested in Trade Lenda and AirSmat in September 2026. Merchant said the organisation does not currently have a fund of its own and instead manages facilities on behalf of partners.

Its newest vehicle is the Africa Ecosystem Catalysts Facility, a $4 million pilot. Since making its first investments in May 2026, the facility has committed about $1.3 million to seven companies: five in Ghana and two in Nigeria. Work on the vehicle began in early 2025, with much of that first year spent designing the partner-led sourcing process before investments could close, leaving roughly $2.7 million still to be committed.

Rather than distributing the capital in lump-sum cheques, Village Capital releases it in tranches tied to milestones. Merchant said the structure is intended to reduce premature repayment or exit pressure on early-stage companies and allow the investor to assess operational performance before deploying the full amount. How the remaining capital is deployed—and whether the milestone structure produces the performance data Merchant said investors are waiting to see—will be the near-term markers for the pilot.

The approach reflects what Village Capital calls “purpose-suited capital”. Merchant said businesses, regions and founders do not necessarily benefit from the same financing instrument. The structure should instead reflect the business model, the intended use of the funds, local regulations and the founder’s long-term objectives. That may require looking beyond the standard options of equity, debt and SAFE notes.

The facility also uses a locally driven selection process. Following a competitive Request for Proposal (RFP) process, Village Capital contracted five local Entrepreneur Support Organisations (ESOs)—two in Nigeria, two in Tanzania and one in Ghana—to manage sourcing, applications, shortlisting and parts of the due-diligence process. Village Capital also engaged another entity to assist with sourcing, although it was not a full partner. The demand-side pressure behind the slowdown is stark by Merchant’s own account: running the application process directly in a market such as Nigeria could have drawn more than 500 applicants, against the seven companies the facility has backed so far.

Merchant said the aim was to avoid investment decisions made without sufficient on-the-ground context. His wider investment thesis focuses on “boring” businesses: cash-flow-oriented companies solving fundamental daily needs that investors can overlook while pursuing more fashionable technology narratives.

In the interview below, Merchant discusses the funding slowdown, the operation and compensation of the ESO partnerships, Village Capital’s investment criteria and the organisation’s view that Africa could become more of a consumer of artificial intelligence than a creator of it. The interview has been edited lightly for length and clarity.

Why African early-stage funding has declined

The number of African startups raising between $100,000 and $1 million has fallen by almost half in the last six months. What is causing that?

The most likely reason is that there have not been sufficient exits for investors expecting a return within five or seven years, whether through SAFE notes, direct equity or other instruments. Because there have not been enough exits to demonstrate that those ticket sizes and instruments are working, there has probably been a reduction in new investment.

Investors are looking for data and patterns they can follow. In the absence of strong evidence that past investments worked, they are hesitating to make new ones.

Are you seeing better companies for the same amount of money compared with five years ago?

There has definitely been a maturing among founders. There is now a better understanding of the types of capital available and the kind of capital founders want to raise.

In terms of business models, I do not think there is any meaningful difference. However, the founders I have been interacting with do seem better equipped to have conversations with investors than they were five years ago.

How the $4 million facility is being deployed

You have invested about $1.3 million across seven companies in 19 months from a $4 million facility. What explains that pace?

We started work on the Africa Ecosystem Catalysts Facility, the $4 million facility, around early 2025. Through this facility, we are not directly going out and finding companies to invest in. We are working with local entrepreneur support organisations.

We use their help to find relevant companies, and it is a fairly detailed and lengthy process. We first worked with them to explain the kinds of companies we were looking for and to design their sourcing process. They then made a call for applications and filtered the applications down. We reviewed those applications together, and that became our initial pipeline.

Even though the facility started in 2025, much of that year went into the engagement process. After we had the shortlists, we began the selection process, including in-person due diligence, legal due diligence and the other required steps. Only then could we close the investments.

If a company engages directly with an investor, it might close six months after the investor first hears about it. Our process was stretched further because we were not interacting with the companies directly at the outset. The ESO conducted an initial of diligence and passed the information on to Village Capital.

The second important point is that we are being very mindful about deploying in tranches this time. Even if we have allocated, for example, $500,000 to a company, we are not deploying the entire amount at the initial stage. We structure the investment according to milestones so companies are not burdened by pressure to repay or provide an exit, and so we can obtain evidence of the company’s performance before deploying the full amount.

What do you mean by purpose-suited capital?

The underlying thesis is that every business model, region and type of founder may not be able to make the best use of the same kind of capital. Capital needs to adapt to the business model, the use of the capital, local regulations and what the founder wants to achieve in the long term.

When we, as investors, look beyond the traditional instruments of equity, debt and SAFE notes, take the time to understand the business model and use of funds, and then design the capital according to that use, we refer to that as purpose-suited or fit-for-purpose capital.

Working with local Entrepreneur Support Organisations

How does the arrangement with local partners work?

This specific facility is a pilot, and we were learning as we went along. It is the first time we have implemented something like this in the region.

We engaged five local entrepreneur support organisations: two in Nigeria, two in Tanzania and one in Ghana. We also engaged another entity, not as a full partner, but as an organisation that helps with sourcing.

Several ESOs applied to act as partners on the facility. The applications went through a detailed and rigorous selection process, which resulted in the partners we selected in each region.

The thinking was that we would use their local expertise. We wanted to avoid investors making decisions without an on-the-ground presence, so we relied on the ESOs to help us understand local context and nuances and to inform the investment decision accordingly.

These engagements were formally contracted. Village Capital contracted with all of the ESOs under agreements with a defined scope of work, specific milestones and compensation for the work they performed alongside us.

The contracts began with helping us refine our investment thesis for the region, because we wanted the local ESOs to validate it. Once that was done, we designed the application process together. We guided them on how we wanted companies to apply and what information we wanted shared, and we assisted them with shortlisting by explaining the kinds of companies to look for.

The broader objective was to draw on their local knowledge while also giving them insight into how the investment process works. By collaborating closely with us, we were helping them strengthen their own teams.

What are the local partners compensated for?

The contracts set out specific tasks. The main categories were running the application process, sourcing and shortlisting companies, and participating in some level of due diligence.

After receiving a recommendation from a local partner, what happens next? Can the partner veto an investment?

The ultimate investment decision belongs to Village Capital. The investment sits on our books and is ultimately a Village Capital investment, so the decision rests with us.

We wanted to involve the ESOs in the shortlisting and selection process so that we could reach a relevant number of companies much faster. If we had run the application process ourselves in a market such as Nigeria, more than 500 companies might have applied. With such a limited pool of capital, reducing that number to the seven or eight companies on which we wanted to conduct detailed diligence would have been extremely time-consuming.

When we engaged the ESOs, they brought us a solid list of about 30 to 40 companies, and we only had to spend our time reviewing those.

They also helped us identify companies we might otherwise have overlooked, either because the business model did not initially appear to be a fit or because the founder did not appear ready for investment. In several cases, an ESO strongly recommended that we speak to a particular founder because they believed the founder was strong and well suited to a facility like this. Without that recommendation, it is very likely we would have overlooked the company.

What makes an investment a yes or a no

What makes a company a yes for Village Capital, and what makes it a no?

Context is important because the answer applies to this specific facility. Village Capital does not currently have its own fund from which it invests. We manage facilities on behalf of partners, and the themes and objectives of each facility are of primary importance. A company that is a yes for one facility may not be a yes for another facility we manage later.

A great deal depends on the founder’s ability to convince us that they understand the problem extremely deeply and that they are the people who can solve it profitably. The founder’s ability to convey that understanding is very important.

In this case, we also relied on the ESOs’ opinions because, in most instances, they were familiar with the founders before recommending them. They had already conducted some form of vetting, either because the founder had participated in one of their accelerators or because they knew the founder through their network.

The founder needs to be credible and able to demonstrate that they understand the problem and can solve it.

Impact is also extremely important for Village Capital. Companies that do not meet the impact criteria are filtered out very early. The impact lens differs from facility to facility. A previous facility would have had a different impact focus from the current one, and the company selected must have a strong impact fit for that specific facility.

The decision also depends on what we want to achieve through the capital. If there is a strong emphasis on ensuring a return on investment, the metrics we examine are different. If the emphasis is on market creation, or if the capital can take on more risk, we look for more innovative or untested solutions that may or may not succeed. In those cases, the risk may be worth taking given the level of innovation.

Why local expertise matters

Why does Village Capital rely on local partners?

We believe African stakeholders should be involved in decision-making and the investment process as much as possible. That should be true for any region, not only Africa. For any investment made in a region, the opinions and expertise of people based there who understand that market should carry weight.

Partnering with local entrepreneur support organisations is an efficient way for us to achieve that because they have expertise in the regions where we engage. Although Village Capital has a team based in Africa, we do not have teams in every country. When we need expertise in a particular country or region, this partnership is an easy and efficient way to obtain it.

What have you personally learned from investing on the continent?

The biggest lesson is that you need to think locally and take into consideration the opinions and expertise of people and teams actually based in the market. That is what we are attempting to address through the new facility.

The second major lesson is that there is significant opportunity in boring solutions and businesses. Many investors chase flashy and trendy opportunities. In my opinion, the bigger opportunity lies in more ordinary, day-to-day businesses solving important needs that investors overlook. If more capital and attention were directed towards those solutions, there would be substantial opportunities for African entrepreneurs and investors alike.

Artificial intelligence and Africa’s macroeconomic challenges

What are your thoughts on investing in artificial intelligence in Africa?

To be honest, that is not a sector we have looked at yet, so I cannot give you an official view.

My personal opinion is that there is going to be a lot of opportunity on the consumer side for AI solutions. I do not have sufficient information about exactly what that could look like. But given that Africa may be more of a consumer of AI technology than a creator of it, I feel that investments and solutions may also lean towards the consumer side.

What are the macroeconomic headwinds in Africa, and how have you navigated them?

For most foreign investors, foreign-exchange fluctuations were among the biggest headwinds over the past two or three years. That has largely stabilised now. I would not say the fluctuations have subsided, but they have stabilised, so there is at least more predictability about what you can do next.

Depending on the solutions being considered in Africa, several have a heavy dependence on imports. In manufacturing, for example, many raw materials and components are imported from China and other markets. Tariffs and shipping-route disruptions over the past year or so have affected countries that depend heavily on imported technologies and components.

The two issues that immediately come to mind are foreign exchange and disruption in global shipping and trade.

Why Village Capital invests at the early stage

How important are early-stage startups to Africa, and why does Village Capital invest at that stage?

Every business starts as an early-stage company, and that is probably the point at which it needs the most support. That is one reason Village Capital supports companies at that stage.

There is a lot of value you can add to a company at that point, and the opportunity to create impact is much greater when working with early-stage companies than with companies that are far more mature.