African startups brave funding slump as debt funding more than doubles

African start-ups have more than doubled the amount of debt they have taken on in the past year, a rise that could continue as an economic slowdown makes equity financing more expensive and unsustainable in the long term.

Companies on the continent raised US$1.55 billion (R26 billion) in 71 debt deals in 2022, suggesting it has emerged as a solid alternative source of capital for African tech startups, venture capital firm Partech said in a Report.

Debt financing growth is expected to continue over the next few years, said Tidjane Deme, general partner at Partech.

“As equity financing has increased in recent years, first driven by fintech, we expect other sectors to follow,” he said. “We also expect more local actors to emerge and more global actors to get involved.”

The surge has helped Africa’s tech sector become “one of the very few, if not the only, VC market with net growth funding in 2022,” the Paris-based firm said.

VC funding rose 8% in Africa to $6.5 billion (R112 billion), while globally it fell 35% last year, according to the company’s annual survey of startups that power the majority of their businesses have the continent or derive most of their income from the continent. Data from market research firm Briter Bridges shows that African startups raised a record $5.3 billion last year.

Fears of a global recession and slowing sales have prompted a sell-off at the world’s biggest tech companies, prompting some like Alphabet Inc.’s Google and Inc. two job cuts. The slump has left private equity and venture capital firms reluctant to invest, raising the cost of equity and forcing startups to seek alternative financing.

The number of active debt investors in the continent is growing 2.5 times annually, with a good mix of local lenders, international lenders and development finance institutions, the report says.

Most of last year’s debt funding went to financial technology and clean-tech startups like Moove.Africa and D.Light, the study found.

Kenya drew on more debt than any other African country, taking nearly 40% of the total raised through 15 deals, while Nigeria received the most equity financing at $1.2 billion – down 36% year-on-year at 189 financing rounds, the report said.

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