Nigerian startups will be at the receiving end of a global credit crunch, reports Temitayo Jaiyeola
African startups are proving to be game-changers. Apart from their capacities to scale, they are attractive to investors owing to innovations and the ability to move into uncharted waters.
In 2021, startups in Africa raised about $4.3bn from 818 deals that were above $100,000, according to ‘Africa: The Big Deal’, a database and insights firm which focuses on startup funding above $100,000 on the continent.
Startups in Nigeria raised about $1.5bn. Thirty of the 54 countries on the continent raised at least one $100,000 deal during the year. Since 2019, startups in Nigeria have raised more than $3.5bn, 36 per cent of the total funds on the continent.
According to the firm, an average of one $1m+ deal had been announced every week (192 in total), and $20m was raised weekly on average in Nigeria since 2019.
However, the global tech ecosystem has been witnessing a funding squeeze. Data from the firm revealed that in the first quarter of 2022, both the US and Asia recorded negative year-on-year growths while Europe and Latin America managed to hold a Y-o-Y growth of over 30 per cent.
This indicates that three-digit year-on-year growths are becoming a thing of the past, except in Nigeria and Africa. In Q1 2022, funding into startups in Nigeria and Africa grew by 150 per cent year on year, indicating a fourth consecutive quarter of 3-digit growth.
In the quarter under review, startups raised $1.8bn in Nigeria and other African countries. This squeeze and uncertainty in funding are causing startups in the global west to halt expansion plans and lay off workers.
According to www.layoffs.fyi, a global tech and startup layoff website, 31,707 employees were laid off from startups in the first two quarters of 2022. This is a 229.49 per cent increase from 9,623 that were sacked in the preceding quarters of 2021.
Venture Capital funding has paved the way for scale on the continent, according to experts in the startup space, as most startups would have struggled to grow without VC funds.
Analysts said any negative impact on VC funding might affect the nation’s tech ecosystem, although the sector had shown resilience to be where it was today.
According to the founder of Lendsqr and a trustee of Open Banking Nigeria, Adedeji Olowe, funding raised on the continent had started to slow down and might dip from July.
He said, “The funding raises have started reducing from Q2. If we wait till July when the quarterly numbers come, we will see the dip. The dip is affecting everyone. We are going to witness a reduction in funding raises.”
He explained how money flew into VCs before they were redistributed to startups and what was influencing a global squeeze in funding raises. He stated that funding often came from limited partners or institutional investors with huge finances in their trusts.
Olowe said, “When an institutional investor that has about $100bn, for example, wants to invest money, they do so by looking at risks and rewards. For example, if they put money in junk bonds, Russian bonds, and the like, the interest rate is very high because the money might not come back.
“There is a risk of default. But when they put money in US treasury bills, the interest rates are poor, but the money will come back. Investors weigh their money in terms of risks and rewards. For example, if they put a large amount of money in a place where the risk of return is 50 per cent, the interest is high, and the investors know their numbers.
“That was how things were going. Start-ups were returning plenty of money and the US interest rate was very low. That was before the world went bonkers. Russia has since invaded Ukraine on one side, food supply has gotten scattered, and petroleum prices increased, all cumulating in the disruption of the global supply chain.
“Also, in 2020, the US government also gave a lot of money to people for palliatives in the heat of COVID-19. Every family was getting money every month. People had a lot of money to spend, leading to a rise in inflation. The US inflation rose to about 8 per cent, the highest in its history.”
He said with high inflation rates, the US had to increase its interest rate, a move that suddenly made US treasury bills more attractive than investing in startups. He stated that the predictability of returns was making investors divert their funds to a safe place, such as US treasury bills, in an uncertain market.
He added, “These are factors that are influencing the movement of money away. This cycle, that is, funding scarcity isn’t going to last forever. It is likely to get worse towards the end of the year, although by next year it will start shaping up again. Between now and when things start getting better, startups without solid bases are at risk.
“A lot of this is already happening in the US. Startups are struggling and laying off staff, and when this is happening, it mirrors what might happen here too. Because when startups here raise funds, they also raise overheads, and this is not sustainable without VC funds. Startups here are likely going to start laying off staff in a bid to cut costs.”
He further explained that local and foreign VCs invested in Nigeria and Africa, noting that almost 90 per cent or more of investments were made by foreign VCs.
According to him, VCs often started out by investing in a pool of startups after raising funds. He added that the startups returning significant promise were then helped with extra funding. After these few startups became successful, VCs would sell their equity for a larger sum than it invested.
He said, “The difference is usually enough to cover for losses elsewhere and still return a profit. Without VC’s money, the tech ecosystem is probably going to suffer because money is needed to scale. Without money to scale, businesses cannot scale.
“Some companies may be lucky to be in some sectors that can bootstrap. But often, companies need extra funding to grow. The company might be able to develop the idea and show that it works, but they need money for it to grow. If your tech works, you need money to drive sales.”
According to the Chief Executive Officer, StartupBlink, Eli David, 2022 will be the year of global startup ecosystem uncertainty.
The CEO of the firm in charge of ‘Global Startup Ecosystem Index,’ a comprehensive startup ecosystem ranking, said, “Beyond the psychology of ecosystems, there are some economic elements which currently challenge the growth of tech ecosystems around the world.
“Inflation, tech sector wage increases, company devaluations, and increasing interest rates will all challenge short-term economic growth and make it harder to raise capital. For founders, it could mean a return to beautiful origins; the self-funded bootstrapped path may become a necessity again.”
The Global Startup Ecosystem Index ranked the Nigerian startup ecosystem 61st globally. This, according to the assistant general manager, projects and relationships, of the Fintech Association of Nigeria, Seun Folorunso, was being driven by the nation’s need for innovation.
He stated that the country had numerous challenges begging for innovation.
He said, “So, in trying to solve our challenges, there are numerous opportunities to unleash creativity, which is the key driver of fintechs, startups, and the boom in our nation.
“Secondly, our population and its youthfulness. The energy of youths has been driven towards solving challenges and more, and these things are very key, and people see that some fintechs are doing very well in terms of valuation which also makes our ecosystem attractive to investors.
“We are likely going to see more funding despite what is happening in the global west. If you look at digital finance adoption across Africa, Nigeria is leading the chart. Even in crypto trading, and P2P levels, Nigeria is leading.
“We have seen a growth of about 1200 per cent in the last two years. I think this trend will continue for the foreseeable year as long as we have this population, and our challenges exist.”
While he did not see funding into the nation and continent reducing, he added that the startup economy was evolving and growing. According to him, it was evolving because there were still many unchartered areas by tech in the nation and growing because the ecosystem was sustaining its gains in areas it had a stronghold in such as payment, blockchain, and more.
Folorunso stated, “Our startup economy is evolving and growing. It is evolving in the sense that we have seen a lot of things done in the payment, in terms of mobile money and the likes. Africa is leading the rest of the world. But it means that there are still many uncharted areas. We need creativity in healthtech, in welltech, in transport, e-government, and more.”
He further said that while VC funding was crucial, the survival of the tech ecosystem was not solely dependent on it. According to him, funding was used to scale but the survival of the ecosystem would be dependent on the ingenuity of innovation and whether it was solving real and critical problems.
He added, “As far as I am concerned, you only need funding to scale. There are many things that are essential for an ecosystem to thrive, regulation, availability of skill and talents, funding, and collaboration in the ecosystems. The ecosystem can always find its way to survival. Funding is only needed to scale.
“While there are many issues affecting the world, we also have many unsolved issues in Africa. And this creates a platform for us to innovate and if you have germane innovation, it will always be funded. The way to sustain funding to Africa is to sustain our creativity, spirit of innovation, and leverage emerging tech very well.”
He also said there was a need for local VCs to step up to the mandate of raising more funding for local firms. This is a sentiment echoed by a fintech expert, Rarzack Olaegbe.
According to him, local venture capitalists had not played a vital role in the funding of local fintech.
He said, “Majority of the local fintechs have been able to attract foreign investments, notably from LeapFrom, Tana, Y-Combinator from Silicon Valley, etc.
“Granted, funds from venture capitalists are vital for the development and survival of fintech startups. But the local venture capitalists will need to do more.”
He added that funding in Nigeria was unlikely to be affected by global issues as the West and East continued to move funds in its direction since Interswitch, Flutterwave, Paystack, Paga, and more had proven to be viable investments.
A report by Weetracker, an African digital media company, The Better Africa report, estimated that 61 per cent of startups in Nigeria failed from 2010 to 2018. Access to funding was one of the issues responsible for the failures as highlighted by experts.
Nigeria doesn’t have a funding safety net for startups, a gap VCs have been filling. It remains to be seen whether the global cash shortages would affect startups in the country, but as the experts have said, the startup ecosystem is resilient enough to weather any storm that comes its way.