Higher interest rates and increased capital expenses are frequently the results of the demise of a significant capital agent, such as the Silicon Valley Bank (SVB). A few smaller banks, as well as several private credit funds, and venture capitalists, have quickly taken over SVB’s disproportionate share of venture debt and loans.
The cost of capital wasn’t even a consideration for most founders less than two years ago. Post-Covid startup investment allowed African entrepreneurs to outspend the region’s poor economic situation.
The circumstances that caused the SVB to collapse indicated a global financial crisis. Expectedly, the cost of capital in all sectors is increasing. It is more challenging for any institution to adequately meet the funding needs of startups given the current financial situation.
The funding markets look to be collapsing, interbank lending has slowed to a crawl. Notably, while interest rates on loans increased sharply and are extremely volatile, the funding landscape has largely been filled by venture debt financing.
As international investors withdrew from large-scale fundraising rounds, H1 2023 VC funding in Africa saw a $1.4 billion fall in venture capital deals in the first half of this year. There were just 263 VC deals in the continent’s venture ecosystem, allocating a total of $2.1 billion in capital to 258 different startups.
In comparison to the $3.5 billion raised over the same period last year, this represents a 40% decrease in volume and value.
As equity capital became more difficult to get, debt financing established itself as a reliable alternative source of funding for African digital businesses. However, African founders may face numerous difficulties as the cost of capital keeps rising in this era of high global interest rates.
According to an analysis by One Campaign, the rising cost of capital means that a growing number of low- and low-middle-income countries will be unable to turn crisis-hit economies around.
It gets even worse for the perceived Big Four (Egypt, Kenya, Nigeria, and South Africa) given recent currency devaluations. The countries’ deepening foreign exchange crisis could see startups in the tech ecosystem that plan to raise foreign debt pay more in interest.
The current financial narrative will make it more difficult for banks to step into SVB’s lending shoes. It will be even more difficult for startups to secure funding, which has been largely filled by venture debt secured from investors in the United States. The broad decline in the global funding sector and increased capital cost should have been expected by African founders, yet they have struggled to stay afloat. How can startups survive this?
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