One of the primary factors contributing to the surge in debt within the continent&#8217;s startup ecosystem is believed to be the decline in equity funding. Experts weigh in.



<blockquote class="wp-block-quote has-text-align-center is-layout-flow wp-block-quote-is-layout-flow">
&#8220;The preference for debt over equity in these sectors can indicate that startups are looking to avoid diluting ownership and are confident in generating revenue to service debt.”
</blockquote>



According to Briter Bridges&#8217; latest report, titled Debt Financing in Africa’s Innovation Ecosystem, there has been a surge in debt financing, especially in the cleantech and fintech sectors, indicating a shift in funding trends. In the past decade, digital, technology-enabled, and green companies across the continent have secured over $2 billion in disclosed debt funding from 140 funders through more than 200 deals, making up approximately 10% of the total funding during this period.



As equity funding declines, debt financing has rapidly grown, accounting for more than a quarter of total funding to innovative companies in Africa in 2023. Cleantech, specifically, experiences debt-funding representing 50% of the total raised, indicating a changing financing landscape.



Similar to equity, over three-quarters of debt funding is directed to Nigeria, Kenya, Egypt, and South Africa.



&#8220;Over the last 18 months, there has been a notable decline in total equity funding volumes and deal flow to startups in Africa. Between January and October of 2023, investment raised hit $2.7 billion across 600+ deals, about a third less than the funding raised at the same time in 2022,&#8221; states the report.



The report analyses the uneven distribution of debt funding, with cleantech and fintech securing the majority. Cleantech sees dominance in solar home kits and pay-as-you-go products, while fintech leads in asset financing and buy-now-pay-later products. It also reveals that nearly three-quarters of debt funding flows to asset-heavy businesses in cleantech, mobility, agriculture, and logistics.



<blockquote class="wp-block-quote has-text-align-center is-layout-flow wp-block-quote-is-layout-flow">
“…the outcomes of the COP28 program held in Dubai have played a pivotal role. The agreements reached during this global environmental conference have acted as catalysts, instigating substantial investment inflows into Africa&#8217;s burgeoning innovative ecosystem.”
</blockquote>



A significant finding is the concentration of debt funding in specific mega-deals: &#8220;Just five deals, [including] M-Kopa’s $200m, MNT-Halan’s $140m, Sun King&#8217;s $130m, Wave Mobile’s $92m, and Planet42&#8217;s $75m debt round, accounted for nearly a third of the total funding over the last decade. However, not all debt deals are mega-deals.&#8221;



A noticeable shift is observed, with almost a quarter of debt deals falling within the $1 million to $5 million range, indicating increased access to debt funding at earlier startup development stages.



&#8220;Innovations like convertible notes and revenue-based financing are making this possible, helping to increase the role of debt in Africa’s startup ecosystem and offering entrepreneurs a much-needed alternative to equity,&#8221; explains the report.



Nigerian business analyst Liadi Oluwaseyi Jimoh sees this shift as an indicator of startups&#8217; confidence in revenue generation and their commitment to maintaining ownership.



&#8220;The preference for debt over equity in these sectors can indicate that startups are looking to avoid diluting ownership and are confident in generating revenue to service debt. It also suggests that lenders are gaining confidence in the startups&#8217; long-term viability and creditworthiness,&#8221; Jimoh tells FORBES AFRICA.



He notes that &#8220;Africa, with its burgeoning population and advancing economic development, is experiencing a substantial demand for sustainable energy solutions.&#8221;



According to Jimoh, fintech companies in Africa have reached a level of market readiness, demonstrating sustainable business models that can handle debt financing.



&#8220;The robustness of these models showcases the industry&#8217;s ability to navigate the complexities of debt while maintaining steady growth.&#8221;



Nigerian cleantech expert Michael Osumune also expresses optimism, viewing this trend as a significant boost to the continent&#8217;s innovative landscape.



&#8220;This upward trajectory is notably attributed to several key factors. First and foremost, the outcomes of the COP28 program held in Dubai have played a pivotal role. The agreements reached during this global environmental conference have acted as catalysts, instigating substantial investment inflows into Africa&#8217;s burgeoning innovative ecosystem. These agreements likely underscore a shared commitment towards sustainable practices and technological advancements,&#8221; Osumune shares with FORBES AFRICA.



Focusing on startups addressing energy access, Osumune anticipates substantial funding in this sector. &#8220;This can be attributed to the growing emphasis on clean energy solutions. The continent has witnessed a remarkable shift in the paradigm of clean energy access, with advancements in Electric Vehicle (EV) mobility, solar-powered housing solutions, and eco-friendly cooking technologies, among others. This shift aligns with the global push towards sustainable practices, and investors are keenly capitalizing on the immense potential of fintech solutions addressing energy access gaps.&#8221;



As the new year unfolds, Osumune believes this trend positions African startups on the forefront of addressing environmental challenges while fostering economic development.

Closeup shot of two person trading Nigerian naira and US dollar

Debt Financing In Africa’s Tech Landscape: Cleantech And Fintech Startups Lead The Shift

Ask someone for a large donation and the person is likely to balk. If considerate, a polite plea to mull it for a while might be made. Ask for something smaller, akin to pocket change, and there probably would not be much resistance to it. That is the underlying wisdom behind crowdfunding.
The network effect of the internet means small donations from a vast number of people can amount to a lot. Now imagine if, instead of a charitable course, the proposition is one of profit, naturally with some risk. It has the potential to attract many takers.
But how is that any different from the normal stock or bond issuance process? Do interested investors not similarly take as many units of a share or bond sale as they want or can afford? Well, crowdfunding avoids the regulators and transcends borders. Of course, these supposed advantages also come with risks. Even so, they provide an opportunity for small- and medium-sized enterprises (SMEs) to secure alternative sources of financing in difficult environments; especially in African countries where SMEs constitute more than 90% of businesses, according to the International Finance Corporation (IFC). SMEs also account for about 80% of employment in Africa. Top among their challenges is access to credit; which even when they are able to secure, is usually at exorbitant interest rates.
<a href="http://www.forbesafrica.com/investment-guide/2018/02/15/first-peace-progress/" target="_blank" rel="noopener">READ MORE: First Peace, Then Progress</a>
Crowdfunding, a form of so-called “alternative debt”, is just one of a few new approaches to financing SMEs. Asset-based finance is already widely used. Approaches other than the typical bank debt are beginning to be used, with fancy titles like hybrid instruments and equity instruments, albeit limitedly, according to a report by the Organisation for Economic Co-operation and Development (OECD).
Crowdfunding is different in that it is mostly project-focused, as opposed to financing the entire business. Although still mostly debt financing, equity type financing is beginning to evolve. Whether it is via donations, reward or sponsorship, pre-selling or pre-ordering, lending or equity, not needing an intermediary other than the platform through which the financing is facilitated is a key attraction. And potential returns to backers need not be financial. For the reward or sponshorship type, an acknowledgement, service or token of appreciation suffices.
As the name implies, investors who back a venture in the pre-selling or pre-ordering format sometimes expect no more than the product they backed before it gets to the mass market; and may be at a much lower price. In the lending format, it is the typical payment of interest and principal that one finds in other credit environments that prevails. Alternatively, the parties could agree to share revenue and thus partake in the risk of the venture. And the equity form is no more than the investors buying into the venture via shares.
Global crowdfunding financing was $34.4 billion in 2015 and more than 70% of it was through lending, according to a 2016 report by research firm Massolution. How much of this went to Africa? A paltry $24.2 million, which is less than 1%. Most crowdfunding financing still takes place in North America ($17.25 billion) and Europe ($6.48 billion); about 70% of the global total.
<a href="http://www.forbesafrica.com/investment-guide/2018/01/15/change-rules-rewarded/" target="_blank" rel="noopener">READ MORE: Change The Rules And Be Rewarded</a>
Since crowdfunding has so far been limited in Africa, what is the potential for indigenous platforms? A sense of this potential would first have to be inferred from current savings in African countries of about 15% of GDP, according to the International Monetary Fund (IMF). This is not ideal. What funds could potentially be put into such ventures are increasingly destined for ponzi-type schemes that offer ridiculously high returns. That is not to say there is no potential. In Nigeria recently, funds were successfully raised for the family of a deceased policeman via crowdfunding. But if the object is a business venture, without the sentimentality of a supposed noble cause, how easy would it be to similarly mobilize funds?
It seems the potential is limited – for now at least. &#8211; Written by Victor Mamora

Is Africa Ripe For Crowdfunding?

Slaves To Debt: Oh, What We Owe!

In these trying financial and debt-ridden times, any money-making scheme sounds better than it should.
The purveyors of Ponzi schemes step in and millions of Africans hand over their savings. In a Ponzi scheme, Peter is robbed to pay Paul. It promises a return on investments, with a claim it is secure; but there is no real investment.
The operator of the scheme uses the money deposited by early investors to pay the first dividend, until investors feel comfortable and decide to invest more. Eventually the scheme falls apart as more cash is taken out and fewer people join.
Yoliswa May (not her real name), of Johannesburg, regrets the day she heard the word Ponzi.
“I should have listened to my inner voice,” she says after R30,000 (around $2,200) went down the drain.
“It’s upsetting to think of how much money I threw away. I lost more than I gained, because I reinvested my returns. I am like a person who walked out of their house with money and got mugged.”
Encouraged by family, she fell into the trap and joined MMM – a worldwide Ponzi scheme run by a convicted Russian fraudster Sergey Mavrodi, who swindled 10,000 Russians out of 110 million roubles ($4.3 million at the time).
“My sister told me of MMM [South Africa], because she had invested with it and received money back. The second time her investment matured, she showed me and said ‘join man, this thing works,’” she says.
<div id="attachment_31374" style="width: 1034px" class="wp-caption alignnone"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-31374" class="wp-image-31374 size-large" src="http://www.forbesafrica.com/app/uploads/2017/05/GettyImages-514978632-1024x703.jpg" alt="" width="1024" height="703" srcset="https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-514978632.jpg 1024w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-514978632-300x206.jpg 300w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-514978632-600x412.jpg 600w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-514978632-768x527.jpg 768w" sizes="(max-width: 1024px) 100vw, 1024px" />Mugshots of Charles Ponzi</div>
May, in a heartbeat, cashed in her savings and invested R20,000 ($1,520) in MMM and a month later had about R26,000 ($1,900) in her bank account.
“I was excited after I received the money. I believed that it works. If I didn’t receive the R26,000, I would have never invested again. I chose to invest more money because I was told the more you put in the more you get. So I did just that,” she says.
It promises 30% returns in a new world order with its own currency – the mavros – making it harder for law enforcement to pin it down. It works on a “get help and give help system”.
There is no centralized bank; one member transfers money to another.
May topped up her investment to R30,000 ($2,200). Then things got ugly.
“Two weeks later, our mavros were frozen. They still are. Apparently there was a panic, and a lot of people were withdrawing at the same time so there needed to be a restart,” says May.
“When everything was happening, at the back of my mind I knew that we were warned that things would end this way. The authorities warned us to stay away from MMM because once our money is gone, it would be untraceable, but we didn’t listen. However members remain positive that we will get our money back. It’s a lesson learned. I will never get involved with Ponzi schemes again.”
While May has her head in her hands, Sifiso Sithebe, of Durban, is on his way to the bank with a smile on his face.
“It changed my life. My life has just never been better,” he says.
Sithebe is a breadwinner for his wife and three children but was drowning in debt before he invested R1,000 ($78) in MMM.
“I needed to settle my debt. My family and I were struggling financially. But when I became a member, money was no longer a problem. I could do more than I had planned to with the money I received,” he says.
“I renovated my house and even bought myself a second-hand car. If I never joined, I would have never been able to do any of that; that is why I don’t regret joining.”
Loyiso Heart, a businesswoman from East London, went into MMM with the same hope.
Tired of low returns from the bank, she invested R20,000 ($1,500) in MMM and her confidence in the system grew.  Her next attempt, however, was disastrous.
“My mother and I got together and invested R50,000 ($3,900). Two months later our money went down the drain. The stupid thing that I did was to move to MMM Nigeria after the MMM South Africa saga… I was devastated.”
Heart says, for a long time after both systems collapsed, she had hope it would recover.
“I don’t think they will ever return,” says Heart now.
<img loading="lazy" decoding="async" class="alignleft wp-image-31375 size-large" src="http://www.forbesafrica.com/app/uploads/2017/05/GettyImages-599310874-copy-1024x681.jpg" alt="" width="1024" height="681" srcset="https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-599310874-copy.jpg 1024w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-599310874-copy-300x200.jpg 300w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-599310874-copy-600x399.jpg 600w, https://cms.forbesafrica.com/wp-content/uploads/2017/05/GettyImages-599310874-copy-768x511.jpg 768w" sizes="(max-width: 1024px) 100vw, 1024px" />
National Consumer Commission (NCC) spokesman, Trevor Hattingh, says Ponzi schemes are popular because the returns on investment are high, but so is the risk.
“Investing money in a pyramid scheme is a risk because such schemes do not offer any guarantee that you will get your money back. The returns are also not guaranteed, and because the scheme is not registered as a business, or have physical offices, you will not easily be able to track them down if they do not pay you out,” he says.
They are also illegal.
“You run the risk of being prosecuted by law enforcement and other regulatory authorities in South Africa because pyramid schemes are prohibited in terms of Section 43 of the Consumer Protection Act… Consumers should note that they have no legal recourse when a pyramid collapses and they run a risk of losing all their invested money. A pyramid scheme is essentially a get-rich-quick scheme and people join it to make a quick buck. In doing so they obviously do not consider the risks involved,” says Hattingh.
Hatting warns consumers to be cautious with their money.
“Consumers looking to invest money should do due diligence on schemes before deciding to invest in them. Do research about companies and most importantly establish if they are registered to offer financial services. The objective of [Ponzi schemes] is to defraud participants. People are drawn into participation and end up losing their money. There are always more people that lose money than those who gain or benefit from the scheme,” he says.
The problem is so widespread that African governments are discussing working together to get rid of the illegal schemes.
On its website, MMM claims that it is a “community” of people that are simply assisting each other when in need.  It claims it’s a stokvel. A stokvel is an investment society to which members regularly contribute an agreed amount and from which they receive a lump-sum payment.
Worryingly, MMM has all the signs of a Ponzi scheme but its participants are adamant it’s a stokvel.
Miziyonke Mtshali, COO of the National Stokvel Association of South Africa (Nasasa), says this is common.
“We have seen Ponzi schemes that pose as stokvels in order to gain acceptance and support in the communities. We usually learn of new schemes through customers who contact our call center to verify the registration of the schemes they have been approached to join,” says Mtshali.
“In order to gain the trust of the public, these schemes claim that they are members of Nasasa.”
Mtshali warns people to be vigilant as they work with the National Prosecuting Attorney (NPA) to fight such schemes.
Despite these investigations, Mavrodi warns his participants on the MMM South Africa website not to pay attention to ‘negativity’.
“We’re fighting against the world financial system, helping ordinary people, breaking the rules and declaring it expressly – what is to be expected then? It’s only natural they are going to throw all kinds of obstacles our way. Have you seen what happened during Trump’s election campaign when he decided to go against the rules? Have you seen the river of lies and slander the “fair and independent” media poured down on him? It’s about the same thing,” he says.
While Mavrodi claims that all MMM participants have a good story to tell, May is still waiting for her money.
<h3>The Godfather Of The Ponzi Scheme</h3>
Charles Ponzi is the Italian father of Ponzi schemes. He swindled about $7 million, in the early 1900s, from new investors to existing ones. 
Born in Italy in 1882, he moved to Boston, United States, in 1903 and worked as a clerk. He was no stranger to fraud and corruption. He scammed people by promising them a whopping 50% interest in 45 days, or 100% in 90 days. He earned $15 million and became a millionaire in just six months. 
His scam was based on the purchase of International Reply Coupons (IRC), which postal senders provide to receivers to pay for the cost of a reply. 
Justice eventually caught up with Ponzi and he was charged with 86 counts of mail fraud and faced a lifetime in jail. He pleaded guilty to mail fraud and spent 14 years behind bars. 
He died on January 18, 1949, in Rio de Janeiro, Brazil.

GettyImages-87252136-copy

I’m Like A Person Who Walked Out Of My House And Got Mugged

<h3>What is a budget deficit?</h3>
A budget deficit occurs when a government’s expenditures become more than the revenue it has collected. It is common for governments to run a deficit and to use debt (bonds) to finance them. The interest from the debt needs to be paid out each year. If debt is too high, creditors’ concerns about a country’s ability to repay its debt rise and will hence demand higher interest rates. It becomes harder for governments to raise funds as their debt levels rise too far.
Faced with this problem, a country can either default or restructure its debt.
<h3>Defaulting</h3>
Argentina defaulted in 2001 on $81 billion worth in bonds and opted to devalue its currency to be able to pay its debt.
In 2012, Greece experienced the largest restructuring in history. After years of living beyond its means, high budget deficits and the poor economic climate made it difficult for the country to make payments on its bonds and led to downgrades and high interest rates on new debt. It eventually became too expensive for the country to roll over its debt, leading to the Greece debt crisis. The country is moving towards recovery.
<h3>Another route</h3>
Much closer to home, in April 2009, Liberia bought back $1.2 billion in commercial paper from its private foreign creditors. The debt, twice the country’s GDP and a quarter of the foreign debt, was bought back at an almost 97% discount of the face value. This was achieved after two years of negotiations and with the help of the World Bank, Germany, the United States (US), Britain and Norway.
In 2007, Liberia’s debt totaled $4.9 billion, 700% of GDP. That year the World Bank and African Development Banks reduced the country’s debt by $400 million and $250 million respectively. The previous default was in the mid-1980s.
Last year the world saw the US government’s shutdown. The financial year ended and a new budget had to be agreed upon by the House and Senate; without this, non-essential services were put on hold. The second issue was that the government had run a large budget deficit and its repayments were due. The Democrats wanted to increase tax while the Republicans called for a reduction in spending. A deal was struck and disaster averted.
In the first couple of months of the new financial year, the government’s deficit was reduced by 22%. Federal revenue climbed by 10% in the same period.
<h3>South Africa’s deficit</h3>
Rising debt costs and below target tax receipts are not helping ease South Africa’s debt. The 2013/14 budget deficit is forecast at 4.6% of GDP. Public sector borrowing increased to 7.4% of GDP in 2012/13. The country’s finance minister, Pravin Gordhan, has already vowed to maintain spending limits curbing wage growth. For the 2012/2013 tax season the South African Revenue Services collected R814 billion ($75 billion). Lower economic growth rates in recent years have made it hard to continue using tax revenue to reduce the budget deficit, and there has been an increased reliance on foreign investors to help finance budget deficit.
The South African government adopted a counter-cyclical fiscal policy to shield the country from the recent recession, which worked. On the flip side, the country moved from a surplus of 1.7% of GDP to a deficit.
It is clear, that unlike the general public, governments have a lot more options available to them when they fail to pay their bills. The lights won’t get shut off and the furniture repossessed.   FL

Tag: Debt

FORBES AFRICA SOCIAL MEDIA

Debt Financing In Africa’s Tech Landscape: Cleantech And Fintech Startups Lead The Shift

Is Africa Ripe For Crowdfunding?

Slaves To Debt: Oh, What We Owe!

I’m Like A Person Who Walked Out Of My House And Got Mugged

Deficits And Debt Ceilings