Nigerian startups turn to debt as equity dries up: Analysis

Nigerian digital entrepreneurs, fueled by ambition and a scarcity of traditional funding, have borrowed roughly $415 million over the past decade, according to a new report by Briter Bridges, a research firm focused on emerging markets.

This figure represents a significant chunk of the $2.1 billion borrowed by African startups during the same period, highlighting a growing reliance on debt as equity funding falls from grace.

“Debt Financing in Africa’s Innovative Ecosystem,” reveals a sobering picture: a continent brimming with entrepreneurial spirit, struggling to access the venture capital traditionally seen as the lifeblood of startups. Equity funding, the report explains, plummeted from $2.6 billion in 2022 to a mere $1.4 billion in 2023. This dramatic drop has pushed many promising ventures towards debt, a riskier path, but potentially the only alternative in a tightening financial landscape.

The reasons behind this shift are complex. Global economic uncertainties, coupled with an increasingly cautious VC landscape, have made investors less willing to take risks on early-stage African startups. This, in turn, has created a perfect storm for debt financing to flourish. Lenders, attracted by the potential of Africa’s young and tech-savvy population, are increasingly offering innovative debt solutions tailored to the needs of cash-strapped startups.

However, this growing reliance on debt is not without its concerns. While it can provide a much-needed boost for growth, it also saddles young companies with the burden of repayment, potentially hindering their long-term stability. Additionally, the lack of established credit infrastructure in many African countries can make it difficult for startups to secure favorable interest rates or loan terms.

The rise of debt as a preferred funding source within Africa’s startup ecosystem demands close attention. While it can potentially fuel innovation and create exciting new ventures, it is crucial to ensure that responsible lending practices are followed and that adequate support mechanisms are put in place to protect startups from drowning under the weight of debt.

With careful navigation and continued investment in the continent’s financial infrastructure, Africa’s entrepreneurial spirit can emerge from this funding shift stronger and more resilient than ever before.