One of the primary factors contributing to the surge in debt within the continent’s startup ecosystem is believed to be the decline in equity funding. Experts weigh in.
“The preference for debt over equity in these sectors can indicate that startups are looking to avoid diluting ownership and are confident in generating revenue to service debt.”
According to Briter Bridges’ latest report, titled Debt Financing in Africa’s Innovation Ecosystem, there has been a surge in debt financing, especially in the cleantech and fintech sectors, indicating a shift in funding trends. In the past decade, digital, technology-enabled, and green companies across the continent have secured over $2 billion in disclosed debt funding from 140 funders through more than 200 deals, making up approximately 10% of the total funding during this period.
As equity funding declines, debt financing has rapidly grown, accounting for more than a quarter of total funding to innovative companies in Africa in 2023. Cleantech, specifically, experiences debt-funding representing 50% of the total raised, indicating a changing financing landscape.
Similar to equity, over three-quarters of debt funding is directed to Nigeria, Kenya, Egypt, and South Africa.
“Over the last 18 months, there has been a notable decline in total equity funding volumes and deal flow to startups in Africa. Between January and October of 2023, investment raised hit $2.7 billion across 600+ deals, about a third less than the funding raised at the same time in 2022,” states the report.
The report analyses the uneven distribution of debt funding, with cleantech and fintech securing the majority. Cleantech sees dominance in solar home kits and pay-as-you-go products, while fintech leads in asset financing and buy-now-pay-later products. It also reveals that nearly three-quarters of debt funding flows to asset-heavy businesses in cleantech, mobility, agriculture, and logistics.
“…the outcomes of the COP28 program held in Dubai have played a pivotal role. The agreements reached during this global environmental conference have acted as catalysts, instigating substantial investment inflows into Africa’s burgeoning innovative ecosystem.”
A significant finding is the concentration of debt funding in specific mega-deals: “Just five deals, [including] M-Kopa’s $200m, MNT-Halan’s $140m, Sun King’s $130m, Wave Mobile’s $92m, and Planet42’s $75m debt round, accounted for nearly a third of the total funding over the last decade. However, not all debt deals are mega-deals.”
A noticeable shift is observed, with almost a quarter of debt deals falling within the $1 million to $5 million range, indicating increased access to debt funding at earlier startup development stages.
“Innovations like convertible notes and revenue-based financing are making this possible, helping to increase the role of debt in Africa’s startup ecosystem and offering entrepreneurs a much-needed alternative to equity,” explains the report.
Nigerian business analyst Liadi Oluwaseyi Jimoh sees this shift as an indicator of startups’ confidence in revenue generation and their commitment to maintaining ownership.
“The preference for debt over equity in these sectors can indicate that startups are looking to avoid diluting ownership and are confident in generating revenue to service debt. It also suggests that lenders are gaining confidence in the startups’ long-term viability and creditworthiness,” Jimoh tells FORBES AFRICA.
He notes that “Africa, with its burgeoning population and advancing economic development, is experiencing a substantial demand for sustainable energy solutions.”
According to Jimoh, fintech companies in Africa have reached a level of market readiness, demonstrating sustainable business models that can handle debt financing.
“The robustness of these models showcases the industry’s ability to navigate the complexities of debt while maintaining steady growth.”
Nigerian cleantech expert Michael Osumune also expresses optimism, viewing this trend as a significant boost to the continent’s innovative landscape.
“This upward trajectory is notably attributed to several key factors. First and foremost, the outcomes of the COP28 program held in Dubai have played a pivotal role. The agreements reached during this global environmental conference have acted as catalysts, instigating substantial investment inflows into Africa’s burgeoning innovative ecosystem. These agreements likely underscore a shared commitment towards sustainable practices and technological advancements,” Osumune shares with FORBES AFRICA.
Focusing on startups addressing energy access, Osumune anticipates substantial funding in this sector. “This can be attributed to the growing emphasis on clean energy solutions. The continent has witnessed a remarkable shift in the paradigm of clean energy access, with advancements in Electric Vehicle (EV) mobility, solar-powered housing solutions, and eco-friendly cooking technologies, among others. This shift aligns with the global push towards sustainable practices, and investors are keenly capitalizing on the immense potential of fintech solutions addressing energy access gaps.”
As the new year unfolds, Osumune believes this trend positions African startups on the forefront of addressing environmental challenges while fostering economic development.