Voices from the USAID Finance and Investment Network: Linea Capital
Linea Capital is a capital provider that aims to raise funds for high-growth entrepreneurs in Southern Africa using non-traditional funding models. Co-Founder and Director Julia Price discusses Linea’s unique funding model and the importance of keeping equity in the hands of founders.
Written by Carolanne Chanik, INVEST Communications Coordinator, and Matthew Mitchell, INVEST Senior Partnership Specialist
“Let me start with an example of a challenge facing businesses in Southern Africa,” begins Julia Price, Co-Founder and Director of Linea Capital Partners.
She explains that the founders of a high growth start-up in the industrial tech space of Southern Africa have begun to land contracts to sell innovative technology to some of the top corporate entities from around the world. However, the development of their product and management time required to sell into corporate procurement channels requires significant funding upfront.
“The question is where does that upfront money come from?” says Price. Entrepreneurs have limited access to debt, which is unavailable or very expensive for new start-ups in emerging markets that may lack access to meaningful cash flow or assets. Often in the early stages of a business’s life cycle, due to a lack of scale, it’s hard for start-ups to secure attractive equity valuations. The capital required for this development comes largely from the founders themselves. “This is a game of survival for the company until their product or service offering is fully fledged and gains traction in corporate procurement channels.”
Because local banks have strict collateral requirements for lending to early-stage companies, founders often turn to expensively priced equity rounds and forfeit large shares of ownership in their companies. The perception of risk in emerging and frontier markets, like those in Southern Africa, lead equity investors to ask for even more real estate in a company’s ownership than usual. “As a founder myself, I understand how tough it is to secure the right type of funding while also wanting to hold on to equity and share it with the staff you’ve built the business with,” says Price.
This gap in bridge funding is where a lot of promising start-ups fail, but it’s also the space where Linea Capital is attempting to create meaningful impact. Through support from the USAID Southern Africa Regional Missionand the INVEST initiative, Linea is offering high-growth entrepreneurs the opportunity to access non-dilutive financing through a revenue-based financing (RBF) model. RBF is an alternative to traditional debt and equity financing for small or growing businesses, in which investors inject capital into a company in return for a fixed percentage of its future revenues. The time to repay depends on how much revenue the company generates over time. Linea hypothesizes that, by keeping equity in the hands of founders, this model will create jobs, drive revenue, and significantly contribute to economic growth across Southern Africa.
USAID’s support has enabled Linea to build a first-loss layer into its vehicle, which offers investors protection in case the investment does not turn out as forecasted, and an additional catalytic contribution to subsidize the model’s operating costs. This catalytic funding will enable Linea to pilot its unique model and crowd-in additional private capital from private investors and venture capital funds.
“We have a highly innovative model that blazes a new path to previously untapped capital sources for growing businesses, and we understand that USAID is deeply invested in finding and catalyzing new sources of capital for entrepreneurs in the region,” says Price.
An alignment in vision has led to a meaningful partnership between USAID and Linea. “We both want to build a self-sustaining feedback loop that helps us as investors, and USAID as a development agency, keep track of what works and what doesn’t,” explains Price. “We are constantly learning, garnering support from many different players within the ecosystem, convening the right minds around the table, and then feeding back those learnings to USAID to be used and shared.”
To hear more from Price on challenges facing start-ups across Southern Africa and advice to firms new to USAID, watch the video below.