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 told TechCrunch 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.
Since its launch in 2016, Future Africa has invested in over 90 companies such as Flutterwave, Andela, Stears, and 54gene, worth over $6 billion, according to the firm. On the other hand, TLG Capital – with its strong debt structuring expertise spanning more than a decade – has invested in over 30 deals to date such as FairMoney and Branch, exiting over 20, it said in the shared statement. Future Africa intends to leverage the credit fund’s debt experience to build out this venture debt program. According to Aboyeji, the program seeks to help and reward founders who do a good job of building the right financial discipline as well as encourage founders to build good businesses rather than chase valuations.
“We have seen access to liquidity become increasingly challenging for founders, and are pleased to reiterate TLG Capital’s commitment to Africa’s early-stage entrepreneurs with Future Africa. Having already engaged with 13 of Future Africa’s founders we see common challenges: businesses contend with large currency devaluations in home markets while raising US Dollar equity, for instance,” said Aum Thacker, an investor at TLG Capital. “We are developing a suite of best-in-class products so founders can focus on operating and innovating – while TLG as a structuring partner helps ensure their businesses are best placed in response to macroeconomic headwinds.”
As Thacker’s quote reads, the structuring support from TLG has been offered to 13 of Future Africa’s portfolio companies so far (though the checks are yet to be written to these startups). They meet certain criteria, Aboyeji said, one of which is that selected startups must generate between $1-10 million in annual revenue.
TLG Capital intends to structure the debt in such a way that they are asset-backed and based on “proper fundamentals.” The firm will also work closely with the CFOs of Future Africa’s portfolio to prepare them to: maintain proper records and financial discipline, achieve proper unit economics and receive and manage leverage on their books. Thacker, who leads TLG Capital’s focus on originating and executing transactions within the growth equity space, will carry out the selection as both parties plan to expand this funnel in the coming months.