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.
“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.”
Briter Bridges’ latest report, titled Debt Financing in Africa’s Innovation Ecosystem, noted that there has been a surge in debt financing, especially in the cleantech and fintech sectors, indicating a shift in funding trends.
Importantly, 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.
However equity funding declined, and 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.
However, “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 revealed 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.
Significant to this discussion, is the “…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.
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