Making challenge funds work: six lessons from supporting agribusiness innovation in Africa

Across much of Africa, smallholder farmers produce the majority of food consumed in their communities.

Despite their central role in food systems, many smallholders remain largely excluded from formal commercial markets. In recent years, development actors have increasingly turned to the private sector to help address this gap, notably through the use of challenge funds.

By leveraging competitive grants to share risk with businesses, these mechanisms aim to stimulate innovation and investment in markets that might otherwise be considered too uncertain. While the theory behind challenge funds is straightforward, implementing them in practice can be far from simple.

Over the past decade, Self Help Africa has managed several EU-funded challenge funds designed to strengthen agricultural value chains and create new opportunities for smallholder farmers.

The AgriFI Kenya Challenge Fund and the Enterprise Zambia Challenge Fund (EZCF) illustrate both the potential of this approach and the practical lessons that come from delivering it. Together, the two programmes have supported dozens of agribusinesses working across multiple value chains and integrated hundreds of thousands of farmers into more structured markets.

In Kenya, the AgriFI Challenge Fund supported 37 companies across 13 value chains, which helped to integrate around 162,000 smallholder farmers into inclusive agricultural markets while expanding smallholders’ access to climate-smart agriculture training, inputs (the resources, materials and substances used to produce agricultural commodities) and improved market opportunities. In Zambia, the Enterprise Zambia Challenge Fund supported 26 agribusinesses working with more than 200,000 farmers across agriculture, agroforestry and aquaculture value chains.

Here are six things we’ve learnt from both programmes.

Lesson 1. Developing a pipeline of eligible companies is essential

Challenge funds rely on open competition, but in many markets the number of enterprises with the capacity to manage donor-funded projects is limited. Businesses may lack audited accounts, access to matching finance or experience navigating grant processes. Without targeted outreach and clear guidance, innovative businesses risk being excluded simply because they are unfamiliar with donor systems.

This means it is important to invest time in developing a strong pipeline of eligible companies  by engaging with business associations, value chain actors and emerging enterprises.

Lesson 2. Grant funding is rarely enough

Many agribusinesses operate in dynamic and challenging environments where capacity constraints can limit their ability to implement ambitious projects. Across both programmes, technical assistance proved just as important as the grants themselves. Fund managers worked closely with companies to identify gaps in areas such as financial management, governance, sustainability practices and inclusive business models.
 
This blended approach, combining finance with tailored technical support, helps businesses translate promising ideas into viable investments.

Examples from the programmes illustrate how this works in practice. In Kenya, the solar irrigation company SunCulture used challenge fund support to expand its model of providing off-grid irrigation technology and technical support to smallholder farmers. By reducing farmers’ reliance on rainfall and enabling year-round irrigation, the technology allows farmers to increase productivity and extend growing seasons.

When the AgriFI Challenge Fund first supported SunCulture, the company’s annual revenues were approximately €600,000. Since then, it has grown rapidly and raised significant investment to scale its model. Recent funding rounds include a $27.5m Series B investment in 2024, followed by additional investments in 2025 from institutions such as British International Investment and WaterEquity, which is expanding access to solar irrigation solutions across many African regions. This illustrates how challenge funds can play a catalytic role in de-risking early-stage innovation, enabling companies to attract commercial investment and scale beyond the life of the grant.
 
Alongside such high-growth companies, challenge funds also support smaller domestic agribusinesses that play critical roles within local value chains. In Zambia, companies supported under the Enterprise Zambia Challenge Fund have helped farmers access markets through integrated value chain partnerships. These businesses provide extension services, inputs and aggregation systems while offering reliable offtake arrangements for farmers’ produce. By addressing both production and market access constraints simultaneously, these partnerships enable smallholders to participate more effectively in commercial supply chains.

Lesson 3. The broader market matters

Experience also shows that the broader market system matters as much as the performance of individual firms. Smallholder farmers across many African markets face structural barriers, including low productivity, limited access to quality inputs and weak aggregation systems, which prevent them from meeting the standards and volumes required by commercial buyers. Supporting businesses that tackle these systemic constraints can generate wider market benefits beyond individual projects.

Lesson 4. Access to finance remains a major obstacle

In many rural economies, smallholder farmers remain excluded from formal financial systems due to limited collateral, weak credit histories and the high transaction costs associated with serving remote clients. Challenge funds can help businesses pilot innovative solutions that make financial services more accessible to farmers, such as digital payment systems and asset leasing.

Lesson 5. Inclusive outcomes do not happen automatically

While many agribusinesses recognise the importance of gender equality, translating this commitment into practice often requires deliberate strategies and targeted support.

Experience from EZCF shows that while many firms adopt gender-sensitive practices, moving toward gender-transformative approaches requires deliberate incentives, such as including gender targets in performance metrics and providing dedicated technical support.

Lesson 6. Sustainability is key to competitiveness

Sustainability is becoming increasingly central to agribusiness competitiveness.

As global markets demand stronger environmental and social standards, companies are recognising that integrating sustainability into their operations can unlock new opportunities, from improved resource efficiency to access to premium markets and impact investment.

Applying these lessons

Taken together, these experiences highlight both the promise and the complexity of challenge funds as a development instrument. When carefully designed and well managed, they can catalyse private sector innovation, strengthen agricultural value chains and expand opportunities for smallholder farmers.

As development partners increasingly look to the private sector to deliver development outcomes, these lessons can help ensure challenge funds remain a powerful tool for building more resilient and inclusive agricultural markets.