Startups in Nigeria and across Africa are likely to rely more on debt financing in 2023 as equity funding may fall to only $2bn in the year.
According to Africa: The Big Deal, this is due to a funding downturn that is affecting the global and continental startup scene.
In its monthly insight for August, it stated that year-on-year funding further fell by 24 per cent to $244m in August 2023.
It added that 30 ventures announced a funding round above $100k in August, and of the $244m raised, $109m was debt financing.
Equity financing involves the exchange of shares in a company for cash investments while debt financing occurs when a startup raises capital through borrowing.
It said, “In August 2023, 30 ventures announced a funding round of at least $100k: 23 were purely equity, two were a mix of equity and debt, and five were debt only (including Spiro’s $63m and d.light’s $30m securitisation facility).
“To these, we should add two exits/M&A announcements: Moniepoint’s acquisition of Kopo Kopo (fintech, KE), and Grinta’s purchase of Auto-Cure (healthtech, EG). Overall, the total value of disclosed equity + debt transactions last month reached $244m ($135m equity + $109m debt), a +80 per cent jump MoM, but less than in August 2022 (-24 per cent and far less than in August 2021 (÷3).”
Even though it slightly rose by more than 5 per cent month-on-month, equity investments have fallen by 80 per cent year-on-year from 2021 levels.
In August 2021, OPay raised $400m and PalmPay $100m, taking the monthly total to $683m.
So far, startups have raised $1.3bn in equity funding in 2023, a figure they had attained by February 2022 of 2022 (by August, they had raised $3bn).
According to Africa: The Big Deal, Equity funding raised so far in 2023 is far lower than the two previous years and is unlikely to reach the $4bn mark of the past.
The data firm continued, “A year earlier in 2021, start-ups had claimed $2.1bn by August but were just entering funding heatwave territory. At this rate – and if we do a quick rule of three -, equity funding in 2023 is on track to reach just under $2bn.”
The reasons for the slowdown in global startup funding have been well documented, with an economic downturn and rise in inflationary pressures contributing their bits to the downturn.
In 2022, debt financing on the continent rose by 106 per cent to $1.55bn in Africa, according to Partech Africa.
The firm stated that the challenging funding environment had paved the way for debt to become a vital alternative source of capital for tech start-ups because of how the environment for equity funding had made the equity capital route more expensive and unsustainable in the long term.
