Insight, Finance & Agriculture
A Nigerian agritech has raised working capital on the domestic commercial paper market instead of taking another venture round. That is not a smaller version of the same thing. It is the correct instrument arriving for the first time, and it changes what a founder should be optimising for.
ThriveAgric has completed an oversubscribed 5.3 billion naira commercial paper issue, roughly 3.9 million dollars, the first transaction under a 50 billion naira programme approved by Nigeria's Securities and Exchange Commission (as reported). The proceeds go to commodity procurement, farmer networks and working capital.
Separately, Ventures Platform has closed a second pan-African institutional fund at 84 million dollars, above its 75 million target (as reported), with new backing from the European Bank for Reconstruction and Development and Norfund, focused on pre-seed through Series A.
Both are good news and they are usually reported as the same kind of news, which is a company in Africa raising money. They are not. They are two different instruments arriving for two different jobs, and the more interesting of the two is the smaller one.
A business that buys crops from farmers, stores them and sells them on has a specific and very old financing need. It buys at harvest, holds inventory, and converts back to cash when it sells. The money goes out and comes back within a season.
That is self-liquidating credit. The loan repays itself out of the transaction it financed. It is the oldest category in commercial banking and it is matched, by design, to short-dated instruments: trade finance, warehouse receipts, revolving facilities, commercial paper.
Now consider what happens when a business like that funds inventory with venture equity.
Equity is permanent capital. It has no maturity, it cannot be repaid, and it is priced for the possibility of a very large outcome. Using it to buy grain that will be sold in four months means the most expensive money on the balance sheet is doing the job of the cheapest. Every naira of inventory is funded by a claim on the company forever.
Founders feel this as dilution and describe it as the cost of growth. It is better understood as an instrument mismatch. The correct question is not how much money the business needs but what shape the cash flow is, and the shape here is a loop, not a line.
A 50 billion naira commercial paper programme is a facility that can be drawn, repaid and drawn again, in the currency the revenue is earned in, at a tenor that matches the crop cycle. That is the right instrument, and its arrival is a bigger event for this category of business than another equity round would be.
The obvious question is why a business with self-liquidating inventory needs a capital market at all, when this is exactly what banks were invented for.
Joseph Stiglitz and Andrew Weiss explained the answer in 1981, and it remains the sharpest account of the problem. Credit rationing persists in equilibrium. Lenders cannot distinguish good borrowers from bad, and raising the interest rate makes the pool worse rather than better, because safe borrowers drop out first and risk-seeking ones remain. So the lender stops raising the rate and starts refusing loans instead. Rationing happens among applicants who look identical, and to whole categories of borrower who cannot obtain credit at any price.
That is a precise description of agricultural trading in most African markets. The collateral is inventory of uncertain grade, in warehouses of uncertain security, in a sector the bank's risk committee has been burned by before. The bank cannot tell the good operator from the bad one, so it declines the category.
Which is what makes a public issue interesting as a mechanism rather than just as a headline. A rated, disclosed, publicly placed instrument substitutes public information for the bank's private screening. Audited accounts, a rating, a prospectus and a programme approved by a regulator do the work the credit officer could not do. The company is not proving it is a better risk. It is making itself legible to a different class of lender.
That is the general lesson and it travels well beyond agriculture. The route out of credit rationing is usually not a better pitch to a bank. It is producing the disclosure that lets somebody else price you.
Three practical implications, and they are decisions rather than observations.
Split the balance sheet by cash flow shape before raising anything.
Working capital, inventory and receivables are loops and should be funded with short-dated, repayable, revolving instruments. Technology development, market entry, hiring ahead of revenue and anything with an uncertain payoff are lines, and equity is the appropriate instrument for them. Most companies in this category have been funding both with the same money, and the working capital component is usually the larger one.
Currency matters more than rate.
Naira revenue against naira liabilities removes the exposure that has destroyed more African businesses than weak demand ever has. A cheaper dollar facility is not cheaper after a devaluation, and this is the same point that made the shift to local currency in off-grid solar funding the most important number in that sector.
The disclosure is the product.
Getting to a rated, regulator-approved programme requires audited accounts, governance, reporting and a track record that can be examined. That is expensive and slow and it is the actual asset being built, because once it exists it can be used repeatedly. A company that treats the first issue as a financing event has missed what it bought.
None of this is an argument against Ventures Platform's fund, which is doing a different job and doing it in a place with too few institutional funds.
But it is worth being clear about what development finance institutions are buying when they back a venture fund. Equity is the right instrument for uncertain, high-variance, intangible-heavy propositions with the possibility of a very large outcome. It is the wrong instrument for predictable, asset-heavy, moderate-return businesses, which is what a great many of the companies solving service delivery problems in African markets actually are.
We have made this argument before about infrastructure-shaped businesses funded on venture terms, and the working capital case is the same mismatch at a shorter tenor. A fund with a ten-year life and a requirement for a small number of very large outcomes will push a portfolio company towards growth rates the underlying business does not support, and the company will raise equity to fund inventory because equity is what is on offer.
The productive implication for a development finance institution is not to fund fewer venture funds. It is to notice that the instrument they most need to catalyse in these markets is a working capital market, and that the constraint on it is not capital but disclosure infrastructure: ratings, audited accounts, warehouse receipt systems, collateral registries and the regulatory approval process ThriveAgric has just been through.
That is unglamorous, it does not photograph well, and it would do more for the businesses in question than another fund close.
Cost of capital by instrument, over time, for the same company. All-in cost of the commercial paper against the implied cost of the equity it replaces. Founders rarely calculate the second and it is usually a large multiple of the first.
Whether the programme is drawn repeatedly. A single oversubscribed issue proves appetite. A programme drawn, repaid and redrawn across three seasons proves a market exists.
What happens to the farmers. A trading business with cheaper working capital can pay earlier and hold longer, which changes the price a farmer receives and when they receive it. That is the outcome that matters at the other end of the chain, it is the thing nobody in a financing story measures, and it is the same question about who bears the cost of an arrangement we have asked about interlinked supply contracts.
The Lab works on this in financial inclusion and regenerative agriculture, and on what a financing structure means for the households at the end of it through measuring change.
If you are structuring working capital for a business whose cash flow is a loop, tell us what you need to know.
This is an independent insight piece by Transitions Lab. For the Lab's applied work, see Financial Inclusion. See also What the Bond Is Actually Secured On on what a receivables-backed structure is really collateralised by, One Month Is Not a Trend on why venture structures fit some businesses badly, and Resilience Is Downstream of the Buyer on what bundled agricultural credit costs the farmer. To discuss a study, see Contact.