Market research shows that while debt-financing is a growing trend among start-ups in Africa, equity financing still trumps all forms of funding.

According to the Partech Africa Tech Venture Funding report for 2021, the number of debt deals in the start-up community totalled 43, with 45% of those deals secured in Nigeria alone.

“37 African tech start-ups raised a total of US$767-million in 43 debt rounds. This confirms the rise of the debt asset class, with global lenders building confidence into Africa tech,” the report stated.

It added that while debt funding remains widely under-reported and undisclosed, it is growing in prominence as part of fundraising start-ups.

The report added that Fintech firms took 54% of the total debt raised while Cleantech followed with 23%. Fintech companies such as MFS Africa raised a total of US$100-million in its Series C round, with US$30-million in debt. Sun Culture also closed a debt round of US$11-million representing Cleantech.

Despite the uptake of debt financing, most start-ups prefer equity stake offers since it provides them with ‘patient’ investment as compared to a pure credit facility.

Joshua Murima, Head of Engagement and Investor Relations at Briter Bridges said: “Technically debt has to be paid back, whereas equity investments are more perceived as ‘bets’. Debt is tied to revenues, not to profit, as in the case of equity.”

“Companies with a proven model and recurring revenues, which are now several across Africa compared to a few years ago, are perceived as less risky,” he added.

Murima said that mixed equity and debt models at growth stage is due to the strengthened cashflow role of debt as companies scale.

Start-ups with significant growth margins are likely to negotiate on debt to avoid excessive dilution in the company ownership.

“It helps accelerate growth while limiting dilution from equity rounds,” the report concluded.