Why Rwanda’s development bank is backing a $6 million venture debt fund

The Development Bank of Rwanda is establishing a $6 million venture debt fund to address the challenges faced by startups in the country's market. Fund manager Magnifique Ishimwe explains that traditional venture capital models are not suitable for Rwanda's economy, where exit opportunities are limited. Instead, Ishimwe proposes a concentrated portfolio of eight to 12 businesses with the potential to reach $20 million to $50 million valuations.

The new fund will provide patient debt financing, allowing equity investors to focus on supporting the next stage of growth for these companies. The debt will range from $300,000 to nearly $1 million, without requiring collateral, and will come with lengthy repayment terms of six to eight years. The fund pricing is expected to be between 9% and 12%, significantly lower than the 18% to 22% charged by other private credit providers on the continent.

Ishimwe emphasizes that the fund will be evergreen, with capital coming from the development bank rather than limited partners seeking an exit within a decade. While the bank is the sole committed backer so far, with $6 million, Ishimwe is optimistic about attracting additional funding from a high-net-worth individual and two development finance institutions.

The primary challenge lies in structuring the fund, as banks are cautious about taking venture-style risk. Ishimwe is using special purpose vehicles and partnerships with Convergence Africa and the African Guarantee Fund to mitigate this risk. The fund's approach aims to address the mismatch between the typical venture capital fund cycle (10 years) and the extended maturation period of African startups (15 to 17 years).

By deploying capital and recycling repayments, the fund can remain active for a longer duration, maximizing the potential returns for investors.