• Sunday, March 03, 2024
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Cash-starved startups hunt revenues to woo investors

Tech startup founders should take visibility seriously

After seeing the slowest funding activities in any first quarter since 2021, Nigerian tech companies are turning to growing product and service sales to boost revenues and attract reluctant investors.

Data from Africa: The Big Deal shows that the number of deals from $100,000 (126 deals) and above declined by 30 percent in the first quarter of 2023 compared to the previous quarter, and 50 percent year-on-year, making it the slowest quarter since 2021. The report also said only 40 percent of the deals were not officially labelled by startups and investors, a trend that has grown recently. More than 50 percent of the deals were labelled in previous quarters.

“This slowdown feeds into a more global story of tech investments restabilising after a crazy period (mid-2021 to mid-2022 in Africa),” said Max Cuvellier, head of mobile for development, GSMA.

‘Restabilising’ is the same as tech ‘correction’, another word tech stakeholders use to make the point that the slowdown in funding activities is not a result of a crash; rather it is investors coming to terms with market realities and stepping down on the hype that has influenced many funding decisions in recent times.

In stock market terms, 2022 ended a long period of increasing dominance that Big Tech had exerted over leading indices. In that year, the total value of the five biggest tech companies – Alphabet, Amazon, Apple, Meta, and Microsoft – declined by nearly $3.7 trillion, a report by the Financial Times noted. The 38 percent drop was twice the 19 percent decline in the S&P 500 index.

“We have gotten to the peak of funding space, which is why it is difficult to raise money. Investors are opening their eyes and some of them are asking for bank statements, corporate internet banking, and other things which were not being checked before,” said Emaye Victor, co-founder and CEO of Chekker. “This is because investors do not know who to trust anymore. Some founders lie about their numbers. Investors are asking for data rolls that contain everything about your staff, etc. Due diligence has gotten stiffer or harsh.”

As investors began to tighten their deal-making process, tech workers took the hit as mass layoffs hit the industry. Over 155,000 workers were laid in 2022, making it a record year. Nonetheless, the record has already been wiped off in the first three months of 2023, with 184,573 employees losing their jobs within the period. At least 17,926 workers were laid off in April alone.

The African ecosystem has also not been immune. Affected tech companies are some of those that went on an aggressive expansion following the massive growth in digital adoption driven by the COVID-19 pandemic and the funding bubble of 2021. Nosakhare Oyegun, co-founder of EatDrinkLagos, said the hype did not just start.

“Tech ecosystem people have always seen themselves as some sort of isolated bubble since the CCHub says,” Oyegun said.

So far, the layoffs have affected nearly 1,000 tech workers in the Nigerian tech ecosystem. It has also led to the shuttering of a few companies while some have taken drastic steps including the removal of the founding CEO and salary cuts for remaining workers to give them a chance at survival.

Adedeji Olowe, founder of Lendsqr, a digital credit company, said hype in African tech is only an extension of what obtains in the global tech ecosystem. “It is in view of this that investors are now starting to prioritise their network to enable them to sift ideas and know which ones are going to be viable.”

“Truth is whether you are a Nigerian or foreign investor, it is better to invest in people you know,” Olowe said.

While some stakeholders see a tough year ahead, many tech founders are pulling out their old strategies of going to the market to sell their products and services, prioritising customer needs and leveraging growing revenue to push their expansion ambitions.

“More entrepreneurs are exploring several ways to raise money other than VCs. VCs are cutting down on check sizes and the number of deals. In all of these, I think it is just the time to really build what people want and build it as fast and cheaply as you can,” said Babatunde Lawal, co-founder and CEO of Aisiki, an agritech company based in Edo State.

Read also: Investors vie for control amid Africa’s tech funding drought

Fortune Ikokwu, founder of Ikokuonline, an autotech startup based in Port Harcourt, believes the investment landscape is maturing and investors are getting more aware of startups outside their usual space. “For example, there are investors who are more open to investing in startups that have shown much traction. This was not the case a few years ago.”

Nevertheless, these types of investors are very few and as the funding landscape gets more stringent, startups are required to show more efforts to grow revenue. Hence, Ikokwu sees his company’s attractiveness growing on increased traction.

“We are currently exploring other revenue-driving avenues like business-to-business sales,” he said.

Emaye Victor, co-founder and CEO of Chekker, a digital health platform that is democratising access to laboratory and diagnostics services, does not believe there is any more hype about the tech ecosystem based on the current slowdown in funding. Hence, startups need to learn to build conventional companies, he said.

“Build to be profitable. The moment you start to build like that you would have done 50 percent of the work,” Victor added.