Many Nigerian startups could not secure funds from investors, who were cautious about bankrolling their operations. This made many of them stop operations, JUSTICE OKAMGBA writes
The Nigerian startup scene witnessed a mix of setbacks and successes in 2023, as some emerging enterprises faced closures, while others attracted significant funding.
However, foreign investors were cautious in funding startups last year for different reasons.
This reluctance had profound consequences, as numerous startups found themselves grappling with the challenge of securing the necessary funding, ultimately leading to a series of closures.
Among the noteworthy startups that closed shops last year were 54Gene, Pivo, Bundle, Vibra, Payday, Pillow, Lazerpay, Hytch, etc.
These closures were attributed to a myriad of factors, ranging from operational difficulties and co-founder conflicts to broader challenges of funding.
According to Briter Bridges, funding for African startups declined by 54 per cent to $2.5bn between January and October 2023 when compared to the same period in 2022,
Africa: The Big Deal disclosed that funding into Nigerian and other African countries’ startups may fall to $3bn by the end of 2023, representing a $1.5bn shortfall from what startups raised attracted in 2022.
The founder of Startup Arewa, Jega Mohammed, told The PUNCH that last year was tough for startups in the country, but was optimistic that 2024 will see lots of investment in subsector.
Mohammed said, “For startups in the tech ecosystem, venture capitalists are looking toward other verticals such as Artificial Intelligence, big data, cybersecurity, automation, and blockchain.”
He claimed that investors had observed significant developments in those verticals, with companies building different solutions that are catching the attention.
He stated, “This year will change the direction of investments; investors will start looking at the real solutions. They will also scrutinise founders who have invested their resources and time into the business.”
A report by Weetracker revealed startup failure rate of 61.07 per cent, positioning Nigeria at the apex among the three prominent tech ecosystems and investment hubs in Africa.
The data indicated that only 39 per cent of startups in Nigeria manage to endure beyond their initial years of operation.
According to Mohammed, investors are stepping up their game because it is no longer business as usual.
He said, “Attention will not be paid to those who do business on holidays or those who spend recklessly. Investors will focus on those who manage resources wisely and avoid unnecessary debts.”
Startup founders have been accused of mismanagement of funds, allegations of fraud, salary discrepancies, and product-market fit challenges.
Startup founders were found to have embraced an unsustainable lifestyle relative to their revenue and profitability, which has made foreign investors to be weary of funding new startups.
A business leader in mobility and supply chain, Seun Omotoso, told The PUNCH that many startup founders struggle to secure additional funding due to lack of prudence in their operations.
Omotoso noted, “There are cases of mismanagement of funds, and investors are now more careful. It was easy in those days to just put up a well-designed pitch deck and investors will give you money. They are now looking at more convincing investments.”
Experts said the 2023 general elections also dissuaded investors from funding startups in the country. Other issues that scared foreign investors from the Nigerian startup ecosystem included multiple exchange rates, widespread insecurity, etc.
“Many investors were all thinking about the 2023 general elections. They were sceptical about many things. Some startup founders were not thinking along that line. They felt like they could always get money from investors,” Omotosa declared.
According to the CEO of Workforce Group, Foluso Aribisala, “Some of the founders are often fuelled by overconfidence, arrogance, peer pressure, or vanity within the team, which lead to unnecessary expenses like extravagant offices, cars, travel, and parties, ultimately depleting the startup’s resources.”
Aribisala advised startups to mitigate that risk by establishing realistic budgets, practising frugality, prioritising needs over wants, adopting a viable revenue model, monitoring cash flow and burn rate regularly, seeking professional advice as necessary, and maintaining a lean and efficient operation.
Investors’ focus
Experts said investors were exploring other verticals in emerging technologies like blockchain, Artificial Intelligence, water, mobility, renewable energy, etc.
Economic and industry analytics firm, Stears, said, “The focus is shifting towards essential sectors like energy and water, recognising the fundamental importance of addressing basic needs for sustained economic growth.”
Similarly, Omotoso told The PUNCH, “If you are a startup and you are focusing on areas like energy, agriculture or even health, chances are that you are going to get funds from investors as long as you can.”
He highlighted the burgeoning investment opportunities in Nigeria, particularly in the logistics and mobility sector, alongside energy, health, and agriculture.
According to Omotoso, startups from other African countries are actively entering the Nigerian market, recognising its substantial potential.
Despite challenges, Nigeria remained a significant and attractive market for entrepreneurs and investors alike, signalling a dynamic landscape for innovative ventures, Omotoso added.
More so, venture capitalists are also focusing on startups with clear signs of revenue growth or a path to profitability.
Investors are no longer interested in promises and are deciding which young companies are worth saving, leading to the shutdown of numerous startups.
This shift has emphasised the need for startups to demonstrate stronger viability and meet higher standards before receiving funding.
Startups built with profitable fundamentals still secured funding. For example, mobility startup Moove raised $76m and clean tech M-kopa raised $250m.
The co-founder and CEO of Rana Energy, Abraham Mohammed, attributed the decrease in funds available to startups to rising global interest rates.
He explained that venture capitalists were investing money for limited partners, such as larger institutional funds and family offices.
He said, “With the significant rise in interest rates last year, limited partners could make good returns in less risky investments, hence venture capitals had less money to invest and, in turn, less money to give to startups.
“The rules of startup investments are now being redrawn because of the reduction in capital available. Funds available have a higher barrier to disbursement, and venture capitals are now focused more on bottom-line growth, i.e., profitability, as opposed to transaction growth when those transactions are near unprofitable. This is a significant shift in the startup philosophy which was growth at all costs.”
Prospects
Amid global economic headwinds, Nigerian startups attracted over $1.2bn in funding in 2023, although slightly lower than the $1.5bn recorded in 2022.
Minister of Communications, Innovation and Digital Economy, Bosun Tijani, said the government had also set a plan to help startups raise their total yearly funding rounds to $5bn by 2027, aiming to elevate Nigeria as a global leader in technology and innovation
Tijani said, “Recognising the critical role of patient capital in the growth of startups, we are committed to increasing the local availability of patient capital.
“We intend to create an environment for startups to raise the funding they require to thrive locally and promote the domiciliation of startups within our nation.”
Startup pundits have noted that Africa’s largest economy still remained a preferred destination for global venture capital and angel investors.
Mohammed told The PUNCH, “When I think about what is the way forward, I find it very fascinating how well the Nigerian domestic equity market did.
“The NGX all-share index grew 45 per cent, with some companies growing triple digits. Transcorp Hotel grew 1,000 per cent, i.e., a 10 times growth in one year, whereas Nigerian VC is down 10 per cent.”
He highlighted a substantial disconnect between Nigerian VC and Nigerian stock money, attributing it to foreign investors dominating VC money, while local investors largely contributed to Nigerian stock money.
He urged local investors to take a bigger bet on Nigerian startups, emphasising the need for startups to position themselves for profitable growth and genuine innovation.
Mohammed provided an example, stating, “ARM is an excellent example. They have partnered with Techstars to invest over $2m in African-focused startups through two startup programes, largely dominated by Nigerian startups, for which my company Rana Energy is part of the second cohort this year.
“ARM support has gone beyond the investment, but they have leveraged their wide range of businesses to provide strategic support, ensuring we can grow sustainably.”
Weakest link
Experts said fintech is experiencing a decline in investment, emerging as the weakest link.
There are projections this downturn will persist through 2024, with a potential rebound remaining uncertain.
Omotoso told The PUNCH that said many startups raised funds in certain segments but investments in the once-burgeoning fintech space shrank.
“Startups now have a course to worry about in 2024, especially fintech because investors are now cherry-picking areas of investments,” Omotoso said.
On a global scale, funding in fintech dropped from $63.2bn across 2,885 deals in H2 ‘22 to $52.4bn across 2,153 deals in H1’23, according to the KPMG report.
Global Head of Financial Services at KPMG, Judd Caplain said, “It wasn’t a surprise to see fintech funding decline in the first six months of 2023, given the enormous headwinds pressuring the market at the moment.
Caplain said the enduring business case for numerous sub-sectors within fintech remained robust, with particular emphasis on areas such as payments, insurtech, and wealth tech.
He expressed optimism that, as market conditions stabilise, there is a probable resurgence in funding, albeit potentially not reaching the record levels observed in 2021.
