BusinessDay
NigeriaDecides2023

Nigerian tech startups face global capital slowdown

Since the middle of 2021, Nigerian tech startups have raised more funding from venture capital (VC) annually than the whole ecosystem in Africa has done in a year. However, experts say the global funding correction, which has seen VC firms around the world withhold signatures on many funding deals, will soon affect tech startups in […]

Since the middle of 2021, Nigerian tech startups have raised more funding from venture capital (VC) annually than the whole ecosystem in Africa has done in a year. However, experts say the global funding correction, which has seen VC firms around the world withhold signatures on many funding deals, will soon affect tech startups in Nigeria.

New data from Crunchbase showed that global venture funding totalled $47 billion in April, making it the lowest amount invested in private companies in the past 12 months. April funding dropped by 10 percent month-on-month from $52 billion in March and 12 percent from $53.5 billion in April 2021. Crunchbase said this was a clear indication that the environment was moving away from the record-setting peaks of 2021 when global funding doubled.

2021 was a record-setting year for tech companies around the world in terms of raising money from VCs. Funding rose to $620 billion, which was more than double the previous year. Before 2021, the global tech ecosystem was averaging 150 unicorns annually. However, more than that number was created every quarter of 2021, and companies were being funded as unicorns earlier than ever.

In Africa, a record five unicorns, namely Flutterwave, Opay, Chipper Cash, Flawry, and Andela, were born in 2021, with three of them claiming their roots in Nigeria.

Part of the concerns behind investors’ pull-back is an increasing drop in startup valuations at most stages. Data from Carta, a platform that helps companies manage their cap table, showed that valuations are in decline.

Adedeji Olowe, founder and CEO of Lendsqr and Trustee of Open Banking Nigeria, said the global economic downturn was triggered by high inflation in the US and the Russian invasion of Ukraine. This led to the Federal Reserve raising interest rates. Consequently, a lot of funds started rushing to safer grounds, and funds to VCs from limited partners dried up.

Experts also say the rout of the global stock markets is also taking a toll on investors.

Investors who also ignored exit strategies while investing in startups in the early stages are also nursing their bruises as most of those startups go from boom to massive drop in revenue or even closure. For example, Fast, a San Francisco-based startup that raised $100 million funding round in 2021, abruptly shut down in April 2022.

Henry Ojuor, founder in residence with Startupbootcamp, a global startup and innovation accelerator for startups, corporates, and governments, told BusinessDay that investors that ignore exit while investing in the early stage, often believe the next round will probably help them exit should they hit the target exit rate.

He noted that a lot of funding announcements were conversations that happened a long time ago, like four to six months ago.

“And maybe the funds were actually closed last month and it gets announced today. If we see things start slowing down now, it means that conversations are also not happening,” he said.

Sun King and Flutterwave have raised $260 million and $250 million respectively, which bolstered the record $2.25 billion raised in funding activities by tech companies in Africa between January and April.

The $2.25 billion raised, according to data compiled by Max Cuvellier, head of mobile for development at GSMA, and Maxime Bayen, senior venture builder for BFA Global, represents 2.5 times the amount the startups raised by the end of April 2021, five times the amount raised in 2020 and eight times the amount raised in 2019.

It is also already more than half of the total amount that was raised in 2021 at $4.4 billion. The $2 billion milestone was reached in 17 weeks, almost twice as fast as in 2021 which took 30 weeks.

The record, notwithstanding, the continent has yet to record a new unicorn. In the previous year, the tech ecosystem recorded one unicorn in the first quarter of 2021.

According to Olowe, the African tech ecosystem is not immune to the global funding slowdown. The hit, however, may come to the continent later than expected because the market is less sophisticated compared to global peers. But when it does come, Olowe sees a brutal impact.

While the African tech scene appears to be holding up at the moment, some founders are mulling the impact a slowdown in funding will have on their operations.

“(I am) not going to lie, as a founder, I am having mixed feelings about this market downturn,” tweeted Ngozi Dozie, co-founder of Carbon, a digital bank and one of the biggest players in the digital lending landscape. “There are tough times ahead, especially for those like @get_carbon whose last raise was in 2015. COVID was tough for credit-led digital banks and just when we are coming up market tanks.”

Pending when the tide turns to Africa, experts do not see funding drying up totally. Collins Onuegbu, executive vice chairman of Signal Alliance and a serial investor, said most Africa-focused venture capitalists had already raised funds, and hence would have to invest in startups.

“However, those VCs raising new money may have issues doing so and this will affect the amount of money available for investment into the Africa startup ecosystem in the medium term,” Onuegbu said.

Y Combinator, one of the largest Silicon Valley accelerators, recently advised tech startups under its portfolio to expect the worst. According to the global accelerator, which also boasts of more than 20 Nigerian tech startups under its portfolio, the best way to prepare for the downturn is to cut costs and extend the runway within the next 30 days. In other words, tech companies should do everything they can to survive.

Tech companies that do not have enough cash to last them for 30 days but have existing investors or new investors willing to give them more money right now – even on the same terms as their last rounds – should strongly consider taking it, Y Combinator said.

Some experts say the downturn may be an opportunity to correct some of the perceived anomalies in the tech ecosystem. Iyinoluwa Aboyeji, founder and CEO of Future Africa, a venture capital fund targeting African tech companies, said the downturn would likely bring sanity to what he described as the “recklessness and excess of the last few years.” Many entrepreneurs who came into the industry for the money instead of the mission are likely to leave.

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“One big thing I have noticed is that all of a sudden, investors care a lot about governance and ethics. Indiscretions that were overlooked when things were up and to the right are being scrutinised. Don’t be surprised to hear about a lot of scandals over the next few months,” Aboyeji noted on a Twitter thread.

Founders that are willing to survive the downturn, he said, must not only keep their reputation intact but also continue to underpromise and overdeliver.

Accelerators like Startupbootcamp are exploring new crowd-funding options including debt funding. According to Ojuor, the accelerator is looking at building vehicles that allow other smaller angels to put funds together and deploy.

He said: “It boils down to startup founders understanding that this is business and they are able to provide a lot of values because there was a gap. If the banks were doing what they are supposed to be doing then this would not be special. It basically will compare and contrast and have a choice.

“There are a lot of options available, one of the startups has tried crowdfunding and is able to raise a sum of $500,000 and there are so many approaches to take as long as the regulation is clear about what is possible and acceptable.”

Onuegbu said tech startups could consider bootstrapping a bit longer before raising money and also models that generate cash flow as part of their funding.

“There will still be early-stage VC funding in the system. And for those that have very good business models, there will be funding out there. But I suspect that the recent situation of too much funding rushing after a few startups may be on pause for a while,” he said.

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