In 2021, 37 African tech startups raised a total of $767 million in 43 debt rounds, indicating the rise of the debt funding class and increasing global lender confidence in African tech, per Partech’s report on venture capital funding in Africa.
This trend appears to be ongoing with Future Africa, a pan-African-focused fund, announcing that it has created a $25 million venture debt fund in partnership with London-based TLG Capital.
The venture debt fund, which is earmarked from TLG’s existing funds, will be invested in Future Africa portfolio companies that meet specified criteria such as cash management, CFO reporting, and governance.
“Many startups are focused on VC equity investor milestones such as customer acquisition strategy and cost, customer lifetime value.” Aum Thacker, an investment professional who joined TLG last year to build its focus on growth equity space, told TechCabal. “These metrics aren’t the most important when extending debt financing because financiers care obviously about them but they also care about how bankable the business is.”
Thacker shared that after startups go through this evaluation process and receive debt funding from TLG, banks and other traditional lenders can also choose to invest in the companies.
“These criteria are natural things that startups need to do to scale before Series C and D, so I think we’re helping them to do that earlier anyway,” Thacker said.
The venture funding program will see Future Africa and TLG Capital work together to build a best-in-class service suite for portfolio companies beyond capital, helping portfolio companies with investor introductions, talent acquisition, financial planning and analysis, and industry benchmarking.
This announcement comes a month after TechCabal reported that Future Africa transitioned to a leaner operation model.
Founded in 2016, Future Africa has invested in 97 portfolio companies across Africa such as Nexford, Eden Life, Stears, and Evolve Credit with an aggregate value of $6 billion. TLG is a private equity fund that invests in small and medium enterprises (SMEs) in sub-Saharan Africa. It has invested in over 30 deals, including African-focused Neobanks, Branch and Fairmoney, and exited over 20 of such deals.
Why debt funding?
As venture investors increasingly focus on profitability and cash flow over growth and expansion, debt funding offers startups aligned with this new metric an alternative funding source.
The new debt financing programme offers mature startups the opportunity to finance essential purchases and expansion plans without sacrificing the dilution of equity. Debt funding has often been attractive to startups in the renewable energy and lending sector, which offer credit facilities to their customers.
“Generally debt funding preserves founders’ ownership. Right now equity is harder to find plus the terms are most likely not going to be friendly because of the market environment,” Aboyeji told TechCabal.
“Debt is a more straightforward way to grow if you truly understand your unit economics and have derisked your business.”
*Future Africa is an investor in Big Cabal Media, the parent company of TechCabal.