Africa Eats is an investment holding company with numerous operational and financial innovations. Of the latter is our novel form of loans repayable with equity.
Typical early-stage and growth-stage investors focus on building a portfolio of equity investments or they provide debt, not both.
What is different about Africa Eats is that we intend to own our investees forever. We thus focuses on what is best for our companies, using a blend of debt and equity and leases, whichever is suited best for the use of funds.
For operational capital, funding growth through the pre-purchase of inputs and inventories, the answer is usually debt. However, a very common problem we see with the Africa Eats companies is demand well exceeding supply. It is not uncommon for more operational capital to be needed before the first payment is made on a loan.
Rather than hope the capital needs all balance out, and rather than risk our investees defaulting on a debt due to increased customer demand eating up the repayment capital, we found a unique and simple solution.
When Africa Eats lends money, it creates a repayment schedule as normal. But when those payments come due, the company can choose whether to make the payment as cash or whether to pay with preferred shares.
The price per share rises with growth in revenues. So if the company can use the loan to grow, the valuation goes up and they sell fewer shares than if the investment were equity at the start.
A typical venture capital fund or bank would think that odd, as they aim to maximize their return on investment. For Africa Eats this fits beautifully, as it exists to maximize the value of the investees. Ultimately, the more they grow the more valuable the investment holding company.
In the end, optional equity debt is a win-win, given our long-term vision and is just one more piece showing why holding companies are a superior investment structure.