• Saturday, February 24, 2024
businessday logo

BusinessDay

Startups struggle to raise funds amid economic shocks

Nigeria’s tech start-ups

This year, Nigerian tech startups have had to deal with a series of economic shocks, ranging from currency redesign to naira devaluation and the removal of petrol subsidy.

Nigeria, Africa’s biggest economy with more than 220 million people, is the continent’s leading destination for startup funding. In 2022, Africa’s startup ecosystem broke records in terms of funding raised, the number of deals, and the number of investors, data from Africa: The Big Deal has shown.

“The total amount of funding recorded by African startups amounted to $4.84 billion in 2022, a 7.62 percent increase from $4.46 billion recorded in 2021,” the report said.

However, with the economy undergoing major setbacks as a result of major policies being put in place, funding from investors to startups have dropped this year.

Data from Africa Technology Research revealed that equity funding in 2023 declined significantly, dropping from $3.2 billion in 2022 to $1.4 billion over the nine-month period.

“What is particularly pulling the numbers down is the fact that it has now been more than a quarter since the last $100m+ transaction was recorded and that there have been many fewer of those in 2023 so far compared to the previous two years,” it said in a report.

As a result of the drought in the funding market, many startups have been forced to take write-downs on their valuations and make deep cuts to their teams.

Briter Bridge said in a recent report that with regard to deals valued at $100 million or more, startup funding in Africa saw a decline to $1 billion during the first half of 2023, compared to $1.5 billion in the second half of 2022 and $1.8 billion in the first half of 2022.

With many startups struggling to stay afloat, mass layoffs, decreased investment levels, hiring freezes, and slashed valuations globally, this funding crunch has caused startups like Hytch, Wabi, Zumi, Dash, Sendy, Lazerpay, and 54gene to shut down operations.

The cash scarcity caused by the naira redesign introduced in October last year by the Central Bank of Nigeria (CBN) took a toll on many startups operating in Nigeria, a nation where cash transactions are favoured because 49 percent of the population are still unbanked and 32 percent are financially excluded, according to a report by EFinA.

Some startups benefitted significantly as electronic transactions surged during the cash scarcity.

BusinessDay reported that electronic payment transactions hit N123.8 trillion in the first three months of 2023.

“NIBSS-instant payment (NIP) set a record as a transaction value of N123.8 trillion was reported in the first quarter of 2023, a 44.6 percent increase from N85.6 trillion reported in 2022,” data from the Nigeria Inter-Bank Settlement System shows.

Other events that shaped the tech industry

The fuel subsidy removal announced by President Bola Tinubu in May this year impacted startups. Many startups that relied on fuel-powered generators due to unreliable power supply had to reduce work times, which affected their budgets and profits.

The operational costs of these startups skyrocketed as the prices of petrol and diesel ballooned. Due to the unreliability of the electricity grid, startups frequently rely on generators as backup power sources. Fuel price hike also increased the overhead costs, putting a strain on the limited resources of these startups.

Also, commuting costs became more expensive as ride-hailing startups also had to review their prices because of the hike in fuel prices, making it harder for startups to attract and retain talent.

Similarly, in June, the naira went into a tailspin after the CBN loosened its control of the exchange rate.

In the past, CBN had followed a fixed foreign exchange policy that pegged the local currency at around N460 to a dollar. Under the new rule, CBN allowed the market to determine the exchange rate. This led to the naira’s official rate jumping to over N770 per dollar by mid-July.

This has wreaked havoc for startups, which need to translate their financial figures into dollars for international investors. Their revenue in dollar terms has almost halved — even as their businesses are actually growing.

In a report by Rest of World, high exchange rates also mean that startups have to spend more on operations as the costs of imported items have seen a steep increase, Temitope Ekundayo, co-founder and CEO of online printing startup Printivo, said.

He said some startups have been paying 200 percent more for cloud servers and software after the new foreign exchange norms were implemented. The costs of diesel, power printing machines, new machine parts, logistics, and raw materials such as paper and ink have also gone up by 300 percent.

Ekundayo, the co-founder of digital investment platform GetEquity, said: “It’s one of the battles I am dealing with. Customers are now negotiating tighter but we have not seen any drop in demand [yet], just more margin shifts. [But] receivables are now longer to collect than before and even foreign customers find it harder to pay.”