Cleantech and fintech startups attracted the most debt funding in Africa in the fourth quarter of 2023, according to Briter Bridges, a provider of market insights to businesses and investors.
The firm said in a report titled ‘Debt financing in Africa’s innovative ecosystem’ Q4 2023, that debt is on the rise in Africa’s startup ecosystem driven by a combination of a rapid decline in equity funding, innovations in debt financing, and a better understanding of if and where debt can best meet the funding needs for startups.
“Cleantech accounted for nearly half of the total debt funding to startups in Africa. It has largely gone to hardware asset-heavy businesses that can borrow against the underlying asset,” the report said.
Briter Bridges cited an example of startups that offer solar home solutions or pay-as-you-go-solar. “This is similar to mobility startups that offer electric vehicle solutions.”
It said fintech on the other hand accounted for nearly a quarter of the total debt funding to startups in Africa over the last decade but has largely raised debt for on-lending for asset financing or Buy now, pay later startups or against their existing loan books to extend their business.
“Debt has had a very limited role to date in software startups, 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 report said.
It added that the majority of specified and disclosed debt deals happened at 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 $50,000.
“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,” it said.
Briter Bridges said this does not seem to be slowing down and several early-stage debt funders have already closed funds this year.
It said no single financing instrument should be relied on heavily for Africa’s startup ecosystem. “They all have trade-offs and debt is not without its risk.”
“Many investors are raising venture debt funds betting that the ecosystem will recover and valuations will be higher over the next few years than they have been over the last one,” the report said.
It noted that interest rates continue to stay high and many startups relying on asset financing will likely feel the impact of this on their cash flow.
“The rise of debt is a positive sign for the ecosystem but needs to avoid being a hammer in search of nails. It will continue to increase, especially 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.
“In many cases, debt may not be appropriate for startups, and in others, it may be more appropriate for innovative businesses and projects that are not startups, such as financing wind or solar farm projects,” Briter Bridges said.