• Wednesday, July 24, 2024
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BusinessDay

Startups tap debt to beat equity funding drought

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The funding crisis for African startups has deepened in 2024, with dwindling investor dollars pushing companies to incur debt to stay afloat.

Start-ups are recording fewer funding rounds, resulting in widespread layoffs and shutdowns.

According to Africa: The Big Deal, a data insight firm that tracks deals above $100,000, African startups announced $729 million in funding in the first five months of 2024, with debt financing accounting for 35 percent. This amount pales compared to the $1.7 billion announced in the same period of 2023 and $2.7 billion in 2022, highlighting the difficult funding climate for startups.

As a result, startups are increasingly relying on debt financing, which was rare in the ecosystem until 2023.

Between 2019 and 2022, debt financing constituted between 4 percent and 8 percent of total funds raised on the continent. This figure jumped to 38 percent in 2023 and currently stands at 35 percent.

Read also: Nigeria retains spot as Lagos climbs 12 places on global startup index

In May alone, startups raised $187 million, a rebound from the $75 million raised in April. The new funding pattern in Africa was showcased in May, with 4 percent in grants, 31 percent in equity, and 65 percent in debt.

Additionally, the largest share of funding in 2024 has gone to climate-related ventures, which attracted 44 percent of all rounds, an increase from 19 percent in Jan-May 2021, 23 percent in 2022, and 32 percent in 2023.

According to Briter Bridges, a data insight firm monitoring startup deals on the continent, over 70 percent of the total funding raised in May came from seven debt deals, four of which involved Kenyan startups led by the U.S. International Development Finance Corporation (DFC).

Kenya continues to lead the funding pack on the continent, the firm noted. “Startups in Kenya dominate the landscape, accounting for almost half of the funding volume. In Kenya, the deals primarily involve cleantech, health, and mobility startups,” it said.

Read also: African early-stage startups to get $10m support amid funding drought

Briter Bridges recently revealed that over the last ten years, African startups had borrowed $2 billion to bridge their funding gap.

Debt financing in the African startup ecosystem has grown over the previous five years due to a decline in equity funding.

Briter Bridges stated, “While debt is certainly playing a role in Africa’s startup ecosystem and innovations on the financing side making it more accessible, one of the biggest drivers of debt’s rise in Africa’s startup ecosystems may actually be the dramatic fall in equity funding, which fell from $2.6bn in 2022 to $1.4bn in 2023.”

In its 2024 Outlook, Stears highlighted, “Debt financing will continue to grow. As monetary tightening in the West cools, currency volatility in markets like Nigeria will remain a concern for investors. Equity flows may not make a swift recovery, so debt will plug the funding gaps.”

Recently, Olumide Soyombo, partner at Voltron Capital, noted that the current funding climate allows startups to build real businesses focused on revenue.

“It brings us back to building with the right mindset. The VC winter in Africa allows us to reset how we want to build,” he said at ARM Labs Lagos Techstars Demo Day in February.