In a transformative trend, startups across Nigeria and other African countries have secured a staggering $2 billion in debt financing over the past decade, significantly mitigating funding gaps in the region, according to a comprehensive report by Briter Bridges titled ‘Debt financing in Africa’s innovative ecosystem.’
The report delves into the dynamics of debt financing within the African startup landscape, emphasizing its pivotal role in sustaining entrepreneurial ventures. Highlighting key insights, the report reveals that the $2 billion debt financing constitutes approximately 10% of the total funding raised during the ten-year period. Notably, more than three-quarters of this financing is attributed to the “big four” countries in Africa—Nigeria, Kenya, Egypt, and South Africa.
Growth of Debt Financing
The report sheds light on the evolving landscape of debt financing in African startups, showcasing substantial growth over the last five years. This surge is particularly significant in the context of a decline in equity funding. From 2019 to the first half of 2023, debt financing’s share of the total funding volume for ventures in Africa has surged from four percent to an impressive 26 percent.
The report suggests that the rise of debt financing in Africa’s startup ecosystem is not only due to the increasing accessibility of debt but is also influenced by a noticeable decline in equity funding. Equity funding experienced a significant decrease from $2.6 billion in 2022 to $1.4 billion in 2023.
Key Highlights:
Geographical Distribution: Kenya emerges as a prominent player in debt financing, securing over $800 million between 2014 and H1 2023. During the same period, Nigeria raised $415 million+, South Africa secured $280 million+, and Egypt garnered $190 million+.
Sectoral Distribution: Debt financing predominantly flows to asset-heavy businesses in cleantech, mobility, agriculture, and logistics, accounting for nearly 75 percent of the funding. Cleantech companies received almost half of all disclosed debt funding, while fintechs secured around 20 percent.
Collateral and Funding Access: Unlike equity funding, most debt financing is directed to companies with collateral. Approximately 75 percent of debt funding goes to asset-heavy businesses. Nearly 25 percent of all debt deals are in the range of $1 million to $5 million, indicating increased access to debt funding at earlier stages of fundraising.
Innovative Financing Models: The report highlights the role of innovative financing models such as convertible notes and revenue-based financing, enabling entrepreneurs to access debt funding as a viable alternative to equity.
Shift in Funding Dynamics: In 2023, debt financing’s share has witnessed rapid growth, outpacing the decline in equity funding. Over the last 18 months, there has been a noticeable decline in total equity funding volumes, with debt financing accounting for more than a quarter of total funding to innovative companies in Africa.
The surge in debt financing among African startups signals a transformative shift in funding dynamics, providing a crucial lifeline for entrepreneurs. As innovative financing models gain traction, startups in Africa are diversifying their funding strategies, reducing reliance on traditional equity funding. The report by Briter Bridges underscores the resilience and adaptability of the African startup ecosystem, paving the way for sustainable growth and fostering a more robust entrepreneurial landscape on the continent.