The most schooled people in Africa
What funded founders have in common – and what it means for backing the next one
She is a founder in KuGompo City, South Africa (formerly East London). She has a small team, a product that works, and a handful of paying customers who keep coming back. What she does not have is money to grow. The bank offers her a loan, secured against assets she does not have. A government programme offers a modest grant and a place on a training workshop. Neither fits.
She knows exactly what she wants: capital that shares the risk if the bet goes wrong, and brings help if it goes right. Economists call it equity. She just needs a partner.
A remarkable new study shows she is in the majority. A team of economists surveyed 4,444 startup founders across 51 African countries, then ran an experiment that asked them to rate realistic-looking investment offers, one attribute at a time. Founders across the continent prefer equity to debt, and they prefer it by a wide margin. How wide? The experiment lets us put a price on it: swapping a debt contract for an equity one is worth about as much to a founder as cutting the loan’s interest rate by eleven percentage points.
That finding looks like a story about finance. But it is really a story about people. Equity is how you finance a bet on talent and ideas; debt is how you finance assets. A startup economy that runs on equity therefore only works if a country keeps producing people worth betting on – and the managers and engineers they will need to grow. South Africa does not produce nearly enough of them, and it produces them unequally. Here’s why it matters.
