Lagos-headquartered venture capital firm Future Africa is teaming up with TLG Capital, a London-based open-ended credit fund, to launch a $25 million venture debt fund earmarked for portfolio companies.
The fund created from TLG’s existing funds will help Future Africa’s portfolio companies preserve their runway in an increasingly tight fundraising environment. Last year, African startups raised over $5 billion and one common theme from two mega-rounds that were announced was some dependency on debt funding: B2B e-commerce platform TradeDepot and fintech MFS Africa.
The event signaled that startups need debt irrespective of their business type. Over the last two years, we’ve seen startups such as mobility fintech Moove and B2B food supply chain platform Twiga – most recently through the yet-to-be-launched Hustler Fund in partnership with the Kenyan government – raise several million in debt to run operations.
Debt funding activity may have slowed down this year, but Future Africa founder and general partner Iyinoluwa Aboyeji said that the cost and risk appetite of equity capital coupled with rising interest rates will push founders toward embracing debt to run startup operations. He argued further that even when founders manage to raise equity it may come with terms that could heavily dilute their ownership of the business.
“Many founders want to keep growing through the downturn,” said the founder-cum-investor. “Debt is the best option provided that your unit economics are well defined and you have built the appropriate financial discipline which even equity investors are asking to see now.