Entrepreneurship Industry News

Nigeria’s recession is holding back Africa’s startup ecosystem

The current recession in Nigeria is having a devastating effect not only on Nigerians and businesses of all kinds operating within the market, but also the whole of Africa’s tech startup ecosystem.

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Startups need capital to operate

Traditionally in the West, technology companies have always been risky investments – they either make it or not and there’s usually no middle ground.

In Africa, however, many tech startups are known to solve local niche problems and make a stable business out of it. Still – these businesses need money to start up the initial operations and they’re often un-validated concepts or solutions that pose risk.

In times of recession, investors are not keen to take big risks and in Nigeria generally there are plenty of other investment opportunities for the investors, such as real estate and agriculture businesses.

The recession is not only affecting the startups by limiting the funding opportunities, but also making it harder to find the initial clients and revenues. The Naira devaluations themselves have left the nation’s population, that depends so heavily on imports, with twice as little purchasing power.

Nigeria’s FOREX problem is also affecting many of the disruptive types of business models, especially in e-commerce, or any other businesses that depend on imported goods. The majority of the tech startups require experienced Western developers and must pay them in hard currencies – a direct pain felt by startups caused by the Naira devaluations.

The mythological unicorn

A unicorn, a term for a tech company valued at more than a billion dollars, requires massive capital injections to achieve its potential, usually in tens of millions. If a startup has proven a concept as a viable business, it must protect itself from copycats and scale to other markets very quickly – a pricey process.

The best VC’s (venture capitalists) thrive when they can find 8 companies with the potential of being massive, $1 billion businesses, and then by investing in all 8 of them. They would usually see nearly all of them fail and one succeed – returning all the capital plus a healthy return.

While Africa has a lot of potential for tech companies of this scale, it doesn’t have the fundamentals in place. Founders are chasing small, local opportunities and seed investors rarely take the risk.

There are local angel investment networks, but the angels investing with them are usually business savvy businesspeople and get the best terms for themselves and the founders are left with not-so-great terms. While the founders might be fine with such unfavourable terms, the potential future VC’s might not be okay with a seed stage investor having veto rights or non-dilutable shares.

So, while the Nigerian startup ecosystem has some activity, it’s mostly businesses that the big VC investors don’t find too exciting and the local angel networks offer unfavourable terms that don’t help the founders of the companies to attract the VC investors they so badly need to expand their companies.

Nigeria – the key to startup success across Africa

Investing, like many other aspects of the market, is perception based – with enough hype things can seem better than they are. This is very true for startups – it’s a lot easier to say that Google’s first investors are now sitting on billion dollar fortunes from that one investment alone than it is to pitch a massive return without a company that has done it before.

While there have been a few headlines of African startup success, most of the big success stories have come from existing corporates providing innovative solutions, such as M-Pesa. For the African startup ecosystem to pickup, a success story from a seemingly average entrepreneur must come.

Nigeria, with its 190 million population, remains the biggest market and the one most likely to give birth to a unicorn. For these companies to arise, someone needs to start funding them and pay for their products – which at the moment seems more unlikely than ever.

Read More: venturesafrica.com