Report by RAVEN
In a financial shift, African startups are increasingly embracing debt, securing over $1.1 billion by November 30, signaling a strategic move by investors to prioritize protection amid drops in equity funding. This surge in debt funding, accounting for 35% of the $2.6 billion raised in 2023, contrasts with a 60% share held by equity, which is notably down from 2022 and 2021 levels.
The momentum in debt funding is palpable, with the $1.1 billion surpassing 2022 and 2021 figures of $676 million and $257 million respectively. The trend highlights a significant evolution, with the report from Africa: The Big Deal noting that, in 2023, for every dollar of equity announced, 70 cents were raised in debt, compared to 19 cents in 2022 and 7 cents in 2021.
Strategic Use of Debt:
Experts attribute this shift to startups strategically using debt to finance growth, emphasizing large deals from major players like MTN-Halan, Sun King, and M-Kopa. Debt financing offers a breathing space for startups to scale at their own pace, retaining ownership while diversifying funding sources.
Financial expert Johnson Ajani emphasizes that well-structured debt funding allows startups flexibility in scaling, maintaining control, and meeting obligations. The report by Partech reveals a nearly six-fold increase in debt financing deals for African startups since 2018.
Challenges and Considerations:
While debt funding offers startups flexibility, some experts caution about its associated risks. There’s a consensus that, despite its attractiveness, startups should prioritize positive cash flow and carefully scrutinize terms and conditions, considering factors like interest rate adjustments and macroeconomic influences such as foreign exchange fluctuations and regulatory changes.
Expert Insights:
Founder in Residence and Director of Programs at Startupbootcamp, Henry Azubuike Ojuor, suggests that, particularly in African startups, debt is often a more viable approach than equity, given the challenges in playing the venture game. However, he acknowledges the potential risks associated with debt funding.
In the face of upward adjustments in interest rates in Nigeria, financial expert Ajani advises caution and advocates for static interest loans to mitigate risks. He also underscores the importance of startups ensuring their business models can sustain repayments, emphasizing the critical nature of survival and sustainability.
Conclusion:
As the landscape of startup financing undergoes a notable transformation in Africa, the increasing reliance on debt reflects a strategic maneuver for sustained growth and control, offering a dynamic alternative to traditional equity funding avenues.
