Startups in Nigeria and other African countries have borrowed $2bn in the last 10 years to bridge their funding gap, according to a report by Briter Bridges.
The report, which had the theme ‘Debt financing in Africa’s innovative ecosystem’, noted that the amount accounted for about 10 percent of the total funding raised in the period and more than three-quarters of it went to the big four (Nigeria, Kenya, Egypt, and South Africa).
It added that debt financing in the African startup ecosystem had grown over the last five years due to a decline in equity funding, noting that from 2019 to H1 2023, debt as a share of the total volume of funding to ventures in Africa increased from four percent to 26 percent.
It said, “While debt is certainly playing a role in Africa’s startup ecosystem and innovations on the financing side making it more accessible, one of the biggest drivers of debt’s rise in Africa’s startup ecosystems may actually be the dramatic fall in equity funding, which fell from $2.6bn in 2022 to $1.4bn in 2023.
“Over the past ten years, more than $2bn in disclosed debt funding has been raised by digital, technology-enabled, and green companies in Africa from more than 140 funders for a total of more than 200 deals.”
The report stated that Kenya had raised over $800m in debt financing between 2014 and the first half of 2023, adding that during that period Nigeria raised $415m+, South Africa $280M+, and Egypt $190m+.
According to Briter Bridges, unlike with equity, most of the debt funding is flowing to companies with collateral with nearly 75 percent of debt funding going to asset-heavy businesses in cleantech, mobility, agriculture, and logistics.
It noted that nearly half of all disclosed debt funding went to cleantech companies and around 20 per cent went to fintechs.
It stated, “The majority of this went into digital lending products where startups can use their existing loan books as collateral.”
Nearly a quarter of all debt deals done were between $1m and $5m showing that more companies were accessing debt funding at earlier stages of their fundraising journey.
It expanded, “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 offer entrepreneurs a much-needed alternative to equity.”
The data insight firm stated that in 2023, debt funding’s share had rapidly grown as equity funding declined.
It added that over the last 18 months, there had been a notable decline in total equity funding volumes and deal flow to startups in Africa as between January and October 2023, investment raised hit $2.7bn across 600+ deals, about a third less funding raised at the same time in 2022.
The firm highlighted, “While debt funding maintained its growth trajectory, equity dramatically fell, resulting in debt accounting for more than a quarter of the total funding to innovative companies in Africa.
“Yet, while diversification of funding is a positive sign for the ecosystem as a whole, questions are emerging around the role of debt financing and when it should be sought.”