Strategy Note /

Debt funding for tech startups – the African experience

  • Africa tech startups raised US$767mn in debt in 2021. Fintechs received more than half of this funding. Nigeria took 45%

  • For lenders, debt becomes more viable in later funding stages with more cashflow certainty and asset collateralisation

  • For tech startups, debt limits dilution, provides a cushion between equity rounds and can fund temporary cashflow needs

Debt funding for tech startups – the African experience
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Rohit Kumar
Rabail Adwani
Tellimer Research
11 March 2022
Published byTellimer Research

African tech startups are breaking records in equity funding, which more than doubled in 2021, with 2022 also starting off strongly. Debt funding of tech startups is currently small but could become an important part of the funding mix. In 2021, African tech startups raised US$767mn of debt across 43 founding rounds; fintechs took the biggest slice (54%). By geography, Nigeria was the leading destination, followed by South Africa.

Debt funding is usually difficult to obtain in tech startups’ early days due to a lack of collateral and cash flow uncertainty, but there are still cases where debt could be well-suited to the needs of both investors and companies. In this note, we discuss the state of debt funding in the African tech startup ecosystem and look at the top lenders, and the biggest sectors and destinations, for debt investors, as well as the biggest individual transactions. In addition, we consider the types of tech startups for whom debt funding is most suitable, why these startups may prefer debt over equity, and some of the obstacles they face when raising debt financing.

Debt funding in the African tech startup ecosystem

In 2021, 37 African tech startups raised around US$767mn in 43 debt funding rounds (based on Partech data). Just to put in perspective, equity funding during the same period was US$5.2bn across 681 transactions. This indicates that debt is still a small component of the tech startup funding mix.

African tech startup equity and debt funding

Looking at the sectoral mix, over half of the debt funding to African tech startups in 2021 was concentrated in fintechs, followed by cleantech with almost one quarter. There was also a significant concentration of transactions, with six deals above US$40mn accounting for 57% of the aggregate. Some of the notable debt borrowers in the year include MFS Africa, Moove, Trella, and TradeDepot.

Nigeria captures the largest share of tech startup debt funding

Nigerian startups raised the highest amount at US$345mn (45%) of the total debt funding followed by, South Africa, Pan-African (present in multiple countries within the region), and Kenya. The debt funding mix is broadly in-line with that of equity financing, where 33% of total funding went to Nigeria, followed by 20% in South Africa. Ghana and Nigeria have captured a greater share of debt financing, while the financing mix for South Africa and Egypt is heavily skewed to equity.

Africa VC startup investment by country

The top debt-raising African tech startups

According to Crunchbase data, most of the tech startup debt financing in Africa since 2017 went to renewable energy firms as they are capital-intensive and need funds to finance the equipment (eg solar panels). Other industries that raised debt include financial services, e-commerce and logistics. Within financial services, lending fintechs often raise debt to strengthen their balance sheet and fund their credit disbursement.

Zola Electric, M-KOPA, Daystar Power are some of the most active debt-raisers in the renewable energy sector startups. Within fintechs, Moove and MFS Africa have also relied heavily on debt funding. Other top debt-raising companies include TradeDepot (e-commerce) and Ison Xperiences (business process outsourcing)

Debt raised by African startups

The main lenders to African tech startups

According to Future Africa, these are some of the institutions that have actively offered debt to African tech startup firms. Among these, Lendable is focused on fintechs.

Institutions providing debt to African startups

Which tech startups are best suited for debt funding?

As discussed above, reliance on debt funding is usually limited in the tech startup ecosystem, but certain companies nevertheless raised significant debt funding. So which startup companies are best suited for debt funding and where should debt investors feel most comfortable?

In our view, debt funding in startups becomes a more viable option for lenders in the later stage funding rounds, largely because cash flows become less volatile once the business model is proven. In addition, industries with debt-friendly assets or business models have a better chance of accessing debt.

For example, financial companies looking to fund their lending, particularly where they can point to, is strong risk management to reduce the uncertainty in repayment cash flows or businesses that can use the funding to purchase transferable assets (such as inventory or equipment). In such cases, debt financing can actually make more sense than equity; asset and liability cash flows can be better matched, the debt can be collateralised, and returns to equity-holders can be enhanced.

Why tech startups may prefer debt over equity

Non-dilutive. Early-stage tech companies may need to give up a significant shareholding to venture capitalists to raise equity. But debt funding, if available, can help founders from excessively diluting their ownership while also allowing their business to meet its cashflow needs.

Cushioning between equity funding rounds. Tech startup companies often raise money in cycles of one to two years and typically set themselves goals to reach before embarking on their next funding rounds. In cases where there are temporary delays in achieving targets, the company might have to raise equity at a lower valuation than desired. Venture debt could be an attractive alternative in these cases, buying time to delay additional equity rounds until the company achieves its performance targets.

Additional funds for unforeseen circumstances. Startup companies may require temporary cash facilities between equity rounds due to unforeseen circumstances or a transient poor trading environment (eg due to the Covid pandemic). Debt may help solve short-term financing requirements.

Obstacles in raising debt financing for tech startups

Monetary tightening. Owing to growing inflationary pressures, central banks have started to reverse the monetary stimuli provided to support economies weakened by the Covid pandemic. These interest rate hikes are bringing the era of plentiful, low-cost financing to an end.

Stringent criteria. During the initial years of a tech startup, debt financing may be difficult to raise. The stringent criteria attached to issuing debt, requiring collateral to secure exposures and a favourable credit history, are hard to satisfy

Lack of supply. Very few venture debt capital firms are active in Africa, which limits the capital pool available to tech startups. Larger, international firms have yet to make significant inroads into the continent.