If given the option to either invest in Nigeria’s growing start-ups or leave their cash idle, many investors in Africa’s largest economy will overlook the potential of the young companies and choose the latter.
This can be confirmed from the analysis of the June 30 Treasury Bills (T-Bills) auction result by the Central Bank of Nigeria (CBN), which revealed that fixed-income investors recorded over N282.46 billion worth of unsuccessful transactions.
The CBN raised N163.55 billion from the last T-bills auction but investors were willing to invest N446.01 billion, almost three times more than the amount the apex bank raised at the primary market. The CBN had initially planned to issue N81.74 billion but following the high demand, it allotted N163.55 billion more.
Local investors’ risk perception about investing in start-ups and other opportunities in a country like Nigeria where infrastructure, policy inconsistencies and insecurity have remained a challenge, is the reason analysts cited for local investors’ increased appetite for a risk-free instrument like T-Bills and not start-ups.
“The domestic investor landscape is more risk-averse, which explains why they are reluctant to invest in start-ups, which are considered risky. This is a stark contrast to the foreign investor landscape,” Ayorinde Akinloye, investment research analyst at United Capital, says.
Risk-averse investors, according to analysts, prefer lower returns with known risks to higher returns with unknown risks. In other words, among various investments giving the same return with different levels of risks, these investors always prefer the alternative with the least interest.
Despite a four successive rate decline from 9.75 percent in May to 9.15 percent in June, Nigerian fixed-income investors increased their interest in the longer 364-day T-bill paper. While the CBN sought to raise N58.86 billion through the 364-day Treasury bill, investors said they were willing to invest N435.85 billion. The apex bank later raised N158.04 billion, N99.18 billion more than its initial offer. Investors reported N277.81 billion worth of unsuccessful bids.
According to market analysts, as the rate on the government instrument is expected to decline on account of the huge maturity next month, investors’ appetite for the risk-free instrument is also expected to increase as local investors pick T-bills over start-ups.
While Nigeria can boast of the largest number of start-ups in West Africa and the third highest-ranking country in Africa, data by StartupBlink show Africa’s top crude producing nation faces some major challenges, such as a lack of financing options and even a lack of broadband internet infrastructure.
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“Government entrepreneurship programmes are present but need to be developed, as does legislation and public sector support,” research analysts at the world’s most comprehensive start-up ecosystem map and research centre, StartupBlink, states.
Nigerian and Kenyan start-ups accounted for over 77 percent of the total investment attracted in 2020. Nigeria alone was estimated to have been backed by more than $600 million in venture capital funding in 2019.
According to market analysts, investment in Africa’s start-up space (Nigeria attracts one of the highest chunks) is tiny in comparison with the global north. For example, US startups raised $156.2 billion in venture capital last year, by comparison, African start-ups have raised just more than $2 billion in the past two years, according to data from Briter Bridges (the amount of funding varies slightly depending on the metrics used).
Access to funding for many of the smaller start-ups in Africa’s largest economy remains a key challenge that is crippling their growth potential.
Like in other African countries, Nigerian start-ups that have attracted investments have done so mainly from foreign investors. Their local counterparts have mostly been silent and turned a blind eye to the opportunities in, for example, the Fintech industry, a goldmine that is being harnessed by mostly foreign investors.
“The local investors probably see the risk more than the foreign guys. They are scared mainly because they don’t know what the government will come up with tomorrow,” an investment analyst with one of the big four, told BusinessDay in London.
With a massive consumer market, Nigeria’s busiest city, Lagos, which is home to most of the country’s over 500 active start-ups, displaced Kenyan’s Nairobi to emerge as Africa’s top destination for start-ups.
The most populous city in Nigeria gained five spots in 2021 to attain a global ranking of 122nd in 2020 after switching places with Nairobi, which now ranks 136th, according to the Global Startup Ecosystem Index 2021 by StartupBlink that ranked 1,000 cities and 100 countries.
The large population of Lagos, which second as Nigeria’s commercial hub, is one of the reasons for the rise in start-ups in the city.
Access to early-stage finance is one of the critical challenges of small and medium-sized enterprises (MSMEs) in Nigeria. The impact of COVID-19 has been mostly felt by the start-ups who, before the pandemic, were struggling to survive amid the fragile state of Africa’s largest economy.
Hit by the double challenge of COVID-19 and slow economic growth, small businesses in Africa’s most populous nation are now more vulnerable as constraints in liquidity and cash flow coupled with increased payments delays have resulted in endemic depletion of working capital.
The opportunity for impact capital in a COVID-19 era is one of the catalysts needed to ensure Nigeria’s 41.5 million MSMEs survive the pandemic, analysts say.
MSMEs are the bedrock of the Nigerian economy as they account for over 95 percent of all businesses and contribute over 50 percent to the economy.
“The uncertain regulatory environment in Nigeria is a major headache for investors,” Tosin Oni, a principal at Nigerian VC firm EchoVC, says.
According to Oni, “Many investors are worried about any clampdowns by governments in emerging markets where they operate.”
