Startups borrowing falls as equity funding rebounds in Q1

African startups borrowed less in the first quarter of 2024 when compared to 2023, Africa: The Big Deal has disclosed.

This underscores the resurgence of equity financing, which has been on a downward spiral. In the quarter, the equity-to-debt ratio stood at 2.5:1, compared to an average of 1.6:1 in 2023. It is still relatively higher than in previous years when the equity-to-debt ratio was 5:1 in 2022 and 14:1 in 2021, but it shows a recovery for equity financing.

In 2023, debt was a mainstay of many funding raises as startups sought capital amid a funding drought. “As debt has grown relatively to equity in the past few quarters—you may remember we dubbed 2023 ‘the year of the debt’—this impacted the overall funding performance more than it would have in previous years,” the data insight firm which tracks $100,000+ deals on the continent said.

Despite this glimmer of hope, the total amount raised in the first quarter of 2024 is still at its lowest since the fourth quarter of 2020, but the number of ventures raising at least $1m during a quarter has started to bounce back since the third quarter of 2023.

The total amount raised in the quarter was $466 million (Nigeria was responsible for $160 million) from $100k+ deals by 121 start-ups (excluding exits). Equity comprised most of the disclosed funding (71 percent), with debt making up the rest (28 percent).

“The total funding raised in Q1 2024 by start-ups in Africa was almost halved compared to Q1 2023 (-47 percent year-on-year). It also remains lower than what was recorded in 2022 (an all-time record) or 2021,” Africa: The Big Deal said.

In the last 12 months (April 2023-March 2024), start-ups in Africa raised $2.4 billion, 14 percent less than in the previous 12-month period (Q1-Q4 2023). This amount raised only represents 38 percent of the amount raised during the most successful 12-month period for the ecosystem, the $6.5 billion raised between July 2021 and June 2022.

According to Briter Bridges, a data insight firm that tracks disclosed deals of any size in Africa, funding into the startup space in Q1 was helped by Moove’s $100 million raised.

Fintechs continue to attract the most funding, with approximately 1 in 5 deals going to them. “Fintech startups still account for most deals, but their share is declining. Fintechs now only account for one out of every five deals,” the intelligence firm said.

In 2023, startups on the continent borrowed $1.1bn in 2023 as equity funding declined, according to data from Africa: The Big Deal.

In its 2024 outlook, Stears noted that debt, though expensive, would provide an alternative for founders seeking to retain ownership of their startups in 2024.

It said, “Meanwhile, debt financing is on the rise. Debt is a viable, though expensive, alternative for founders seeking to retain ownership and access urgent cash during a VC funding slump. Debt financing will continue to grow.”