A report by Briter Bridges, a market intelligence firm focused on emerging economies, disclosed that Nigerian technology startups secured loans exceeding $415 million over a period of 10 years.
The report titled “Debt Financing in Africa’s Innovative Ecosystem”, revealed that over the last five years, debt financing has been on the rise in Africa’s innovation ecosystem.
From 2019 to the first half (H1) of 2023, debt as a share of the total volume of funding to ventures in Africa increased from 4% to 26%.
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The report disclosed that while debt is playing a role in Africa’s startup ecosystem and innovations on the financing side, one of the biggest drivers of debt’s rise in African startup ecosystems may be the dramatic fall in equity funding, which fell from $2.6bn in 2022 to $1.4bn in 2023.
African startups in general borrowed a total of $2.1 billion between 2014 and 2023. Startups from Kenya got the largest chunk of this debt with over $800 million borrowed through 60 deals.
The $415 million borrowed by the Nigerian startups came as the second-highest on the continent within the period. Also, the big four countries in terms of startups in Africa, Nigeria, Kenya, Egypt, and South Africa accounted for over 75% of the volume of total debt funding by African startups.
Part of the report reads,
“While there have been innovations around debt financing at the early stage, debt funding largely remains a later stage play for startups in Africa. The majority of specified and disclosed debt deals happened at the Series A and later stages. Total volumes are driven by a few mega-deals and the majority of funding is going to ticket sizes of at least $1m.
“However, there are a number of debt funders that are innovating to do deals at smaller ticket sizes and earlier stages. Some have even done deals for as low as $50k. Many early-stage startups are attracted to these deals as they are faster and founders do not need to dilute their ownership too early which many have seen create challenges for other startups over the last 18 months”.
Over 2023, the report revealed that debt funding’s share has rapidly grown as equity funding declined. 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.
Notably, debt has typically flowed to sectors where funding can be collateral against assets or other collateral like loan books. Nearly 75% of debt funding has gone to asset-heavy businesses in cleantech, mobility, agriculture, and logistics. In cleantech alone, debt funding represented 50% of the total funding raised, while Fintech accounted for only 20% of the total disclosed debt funding.
One of the major drivers of debt among African startups highlighted in the report is Fall off in equity. The fall in equity funding to startups in Africa decreased from $2.6 billion in H1 2022 to $1.5 billion in H1 2023. Equity deal flow is down from 297 in H1 2022 to 178 Y in H1 2023.
Briter Intelligence data also reveals a 20-25% decline in startups successfully progressing to higher-priced rounds, particularly in Series A and beyond, the firm disclosed that the trend underscores the increasing difficulty for these companies to secure equity rounds.
The fall in equity funding in Africa from 2022 to 2023 has reportedly forced startups and investors alike to look outside of equity to other funding sources.
Meanwhile, despite the surge in debts amongst African startups, Briter Intelligence said that the rise of debt is a positive sign for the ecosystem, but needs to avoid being a hammer in search of nails.
The firm noted that debt will continue to increase, over the next year, but it should be seen as part of a range of funding instruments and support that can best unlock sustainable investment and innovation ecosystems across Africa.