Should your startup raise venture debt?

Amongst the many things startups deal with is the question of funding.

How much should I raise? How much equity should I give up? What kind of funding should I raise? Whether building in Lagos, Bangalore, Nairobi or San Francisco, these questions resonate with founders. Founders must determine the best terms for them and convince investors to commit funds. These questions become critical during a funding winter such as we are encountering.

The most common funding approach startups adopt is exchanging equity (ownership stake in a business) for investment. This funding type has consistently made up at least 80% of annual startup funding since 2019, per Africa: The Big Deal database. But startups can tap into other kinds of funding. One option is grants/equity-free investments, particularly at earlier stages. Another is debt financing (venture debt).

Compared to equity funding, venture debt does not get is not quite as popular as equity funding. But it presents a viable alternative to founders, especially as it is not as dilutive as equity financing—founders do not have to give up a significant equity stake in exchange for this funding.

Across Africa, startups are tapping into pools of venture debt to enable them to scale. Venture debt has increased by 12x in the African tech ecosystem in four years, also based on data from Africa: The Big Deal database. Still, founders must be clear on whether their startups are suitable for this financing. We will address this today by looking at the typical characteristics of the startups that have raised venture debt and what this means for those considering this option.

What’s the venture debt trend?

Before analysing venture debt trends to show why it is worth discussing, I will briefly review how it works.