Nigeria’s deepening foreign exchange crisis could see startups in the tech ecosystem that plan to raise foreign debt paying more on interest, according to some leaders who spoke to BusinessDay on Monday.
Nigeria’s economy has been reeling partly from scarcity in foreign exchange due to the collapse in international oil prices. BusinessDay had reported that oil exports account for over 80 percent of dollar inflows into Nigeria making it the largest source of the greenback into the country.
Although the CBN has weakened the official rate to N360 from N306 and allowed the rate at which investors and exporters bought dollars to weaken to N380/$, the naira still trades 20 percent weaker in the parallel market.
The disparity between the FX rates in the country has deterred foreign portfolio inflows, another main source of dollars into the economy.
For the Nigerian tech community where foreign investments account for over 90 percent of funding sources, this is a big problem.
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“Currency devaluation is a big problem for start-up valuations,” Adedeji Olowe, CEO of Trium Networks, a Nigerian-based venture capital, told BusinessDay.
“The valuations are usually anchored on revenue projections. Usually, valuations are multiples of EBITDA and when the underlying revenue is anchored on naira and naira goes into freefall against the USD, then the valuation goes down with it,” Olowe said.
In 2016, Interswitch went through a similar situation. The company was going to IPO at $1 billion where the USD was pegged at N200 until the recession set in and naira went down as much as N510/USD. The payment company’s valuation tanked to a little over $400m and it had to pull it.
“Exactly the same problem has happened to the same Interswitch this year as well; they delayed their IPO from late last year, now that naira has tanked again, the listing may not happen,” Olowe said.
Nigerian tech start-ups closed the biggest funding on the African continent in 2019 raising $377 million, more than twice what they did in 2018. Startups like OPay and Interswitch led the leaders’ table as investors poured in capital into the ecosystem. While 2020 has only gone halfway and has seen a few startup investments, the impact of the COVID-19 has largely dampened investors’ appetite in the space. Part of the challenge is the unwieldy exchange rate regime in Nigeria which has created uncertainties in foreign investors. To be sure, foreign investors contribute over 90 percent of the funding that has come to the tech ecosystem so far.
“This is one of the key reasons we have to identify and support ventures that create value that can be consumed internationally in addition to saturating our local market,” said Tomi Davies, co-founder of Lagos Angels Network and president, Africa Business Angels Network (ABAN).
Collins Onuegbu, a director at Lagos Angels Network and executive vice-chairman, Signal Alliance, told BusinessDay that the impact of the exchange rate would be more on startups whose products are local and priced in naira. For this category of startups, the current exchange rate at over N400 means that the fundamentals of their valuation would likely change.
“There are those that the pandemic has made their model risky; investors will be cautious with such startups,” Onuegbu said. “But COVID-19 pandemic also creates new opportunities that may favour some startups. For such companies, you may be surprised that valuations may favour them. But in all, an investor at this point must be evaluating deals on a case-by-case basis.”
Apart from assessing the startups as individual risk, there is also the contraction in the economy as a result of the pandemic. Onuegbu sees this affecting the majority of tech companies in Nigeria. He said that most startups would not be able to escape the negative impact. The fast growth that helps startup valuation will in lots of cases be halted by this economic contraction.
“And for those who have previously raised money, to keep foreign investors happy, who would do all to prevent a down valuation, the founders would be under tremendous pressure to jack up revenue. And in a recession, where will this come from? Expect many to end up with high blood pressure,” said Olowe.
Abiola Olajide, the founder of Kiakia, a digital lending platform, sees light at the end of the tunnel before the end of the year. He pointed to the fact that the market has known stability over the last four years.
“There are a lot of macroeconomic factors and indicators which still point to imminent stability within the forex market,” Olajide said. “Our manufacturing sector is growing and so also is the agricultural sector. The Dangote refinery is almost completed. The fertiliser aspect is done. All of these will help ease pressure on the naira. In the interim, raising foreign debt or equity will mean tech startups have to pay more in interest and generate higher IRR in order to deliver value on the cash.”
