African startups turn to debt as equity powder dries up

 

 

By Conrad Onyango, via bird story agency

In 2022, when funding from venture capitalists began to dry up in Africa, Treepz, a shared mobility startup, was faced with a difficult decision… throw in the towel or grow the business without new investors.

As part of their decision to keep going, they changed their core business model.

“Towards the end of 2022, we knew the funding draught would happen in Africa. We slowed down on the bus stop to bus stop business and amplified our corporate and car rental segments because their margins were a lot better,” explained Treepz Co-Founder & CEO Onyeka Akumah in an interview.

The challenges faced at Treepz mirror those of many African startups following a significant drop in venture capital funds that began in 2022 and worsened last year.

Treepz saw its strategy start to bear fruit a year later. This month, the platform announced that it had moved 1.2 million passengers and increased its coverage from eight cities to 24 cities in four African countries – Nigeria, Kenya, Ghana, and Uganda – by the close of 2023. In addition, Treepz generated over US$1.2 million in earnings for vehicle owners.

Another key highlight of 2023, according to the startup’s co-founder, was that the company became financially self-sustaining. The company recorded stable financials in 70% of its markets, including in its home base, Nigeria, and even in its newly launched Kenya operations.

Now the startup aims to more than double the number of its passengers, to 2.6 million in the four countries. To achieve this goal, Treepz plans to seal more shared mobility deals with corporates that have between 200 and 600 employees – and tap into the tourist transfer business.

“We will double-down efforts in 2024. We want to ensure organisations offer seamless commuting services to their employees and serve more tourists seeking car rental services,” said Onyeka.

As it expands its clientele base and coverage area, the startup said it is open to all types of funding but will leverage on debt in business areas that have a clear revenue path and returns that will bolster the company’s credit reputation and will allow it to secure more debt in future to grow sustainably.

“We are open to several financing mechanics to grow our business at Treepz, including debt funding. This kind of funding will be key for us in certain areas we have a formidable revenue model to support,” said Onyeka.

The Treepz model is being replicated elsewhere in Africa. Two different reports affirm the changing financing landscape, with more than a quarter of all funds raised in the startup scene in 2023 now classified as debt.

A report from Africa: The Big Deal shows that debt financing soared by 47% in 2023, to US$1.1 billion and accounted for 37.9% of the total US$2.9 billion raised by startups in 2023. By comparison, equity funding made up US$1.7 billion of the total funds raised, indicating a substantial 57% year-on-year decline.

In another report, this time by research firm Briter Bridges, debt financing is seen rising in Africa’s innovation ecosystem over the last five years. From 2019 to H1 2023, debt as a share of the total volume of funding to ventures in Africa rose from 4% to 26%.

Briter Bridges data shows while debt grew more slowly than equity from 2019 to 2022, it rose exponentially thereafter, largely driven by the dramatic fall in equity funding.

“This is not only affecting companies but investors as well who are also struggling to raise their funds and showing returns, which results in a greater push towards alternatives to equity,” said Briter Bridges in its report Debt Financing in Africa’s Innovation Ecosystem.

Akumah said the rapidly growing trend reflects a maturing startup ecosystem compared to a decade ago and will play a critical role in fuelling the growth of mature businesses on the continent.

However, he argued that this should ideally be fuelled by formidable business models and clear revenue generators.

“Raising debt funding has proven to be a lot easier for startups today who have clear revenue structures and proven models to support their growth and pay-back plans. We have seen this play out with several startups raising both equity financing and debt financing,” said Onyeka.

Briter Bridges researchers however warned in their report that the ecosystem would need to see a rebalancing of the funding ecosystem in the future, explaining that “while debt certainly has a role in Africa’s innovative ecosystems, it is not a silver bullet.”

bird story agency