Tech startups battling rising energy cost, inflation
As Nigeria’s energy crisis continues to bites deeper, technology startups in the country are battling to curtail inflationary pressures eroding profitability margins, according to BusinessDay’s findings.
In Africa’s biggest economy, many tech startups are on death throes as most of them are losing investments due to power shortage.
“The burn rate is on the high side; we have high cost of electricity bills. Imagine us paying as high as N500,000 on a monthly basis at our Lagos office apartments on the island just in a bid to have constant electric supply to make work easy, which is totally outside of the rental cost of the apartment and service charges,” David Adeleke, founder of Zeeh Africa, said.
Adeleke said these challenges had forced a number of founders and their teams to relocate to the United Kingdom, the United States and Dubai. “This is done mostly after they have successfully closed a round,” he said.
He said: “Imagine after spending a crazy amount of money and we are getting little or no value in return in proportion to the money spent, as everything here in Nigeria is way overpriced.
“Starting with terrible network coverage that we can’t boast of 10 megabits per second (mbps) compared to running a 200 mbps in other countries even at the same or lesser cost when converted.”
For Dukka, a digital bookkeeping and payments solution for small businesses in Nigeria, the rise in diesel prices and fuel scarcity has been problematic. It started experiencing power outages in December 2021.
“This forced us to provide for ourselves sustainable alternative sources of power supply to power our switches, lights, and fans. We also got rechargeable fans and uninterrupted power supply to ensure cooling systems and the internet are uninterrupted during switch times from one power supply to another. The first quarter of 2022 was quite chaotic for us,” Keturah Ovio, founder of Dukka, said.
The high cost of living in the country is taking a toll on the ability of some startups to hire skilled employees.
“Due to the steady rise in inflation coupled with high cost of living, getting good developers and IT staff members doesn’t come cheaper at all. During an interview with prospective employees when I started building Zeeh Africa, the figures I was hearing were a lot, ranging from $1,000-$7,000 monthly as salary expectation,” Adeleke said.
The price of petrol has surged to N200 per litre from N165 per litre in many parts of the country as consumers battle with the ongoing fuel shortage caused by the Russia-Ukraine crisis, bridging cost issues between the federal government and marketers, as well as foreign exchange scarcity, among others.
Also, the price of diesel has gone up continually since the beginning of the year, moving from an average of N288 per litre in January 2022 to over N800 per litre this month. Companies that depend almost entirely on diesel-powered generators have been forced to adjust their operating hours to reduce their operating costs.
Traffic congestion resulting from fuel scarcity in major cities is affecting employees’ productivity.
Ovio said the traffic experienced by her team members commuting to and from work took a terrible toll on the company’s overall productivity as it created uncomfortable working conditions they all had to deal with.
She said Dukka swiftly adopted a temporary remote work culture to ensure its team members were not stuck for long hours in traffic just to get to work.
“Traffic is something that is akin to life in Lagos. We’ve had to make arrangements for a safe and comfortable transportation means for all employees so as to eliminate the stress of commuting to and from work. Our goal is to always try to create a level of comfort that increases productivity in teams as much as possible,” Ovio said.
Amid all these challenges, companies still strive to ensure smooth business operations as they proffer alternatives including right business models and a well-structured execution plan.
Adeleke said: “One of the major ways we tackle this is basically by raising funds in both debt funding and equity funding from angel investors, venture capitals, etc. This has really been a saving grace as funds are raised in dollars and we know the current exchange rate of dollar to naira, N615 as at today.
“This gives us leverage and cash power to push and scale through the harsh and hard economy of the country.
However, most startups that don’t have the opportunity or access to fund raising mostly do not see the light of the day which is sad as so many products are out there with massive potential of revolutionising the industry at large.”
Simeon Nofa Ogunnibi, chief operating officer of Ajocash, said things had never been this tough for them.
“First of all, the cost of finance is killing us, and when you add cost of operations, salaries and other expenses, that’s triple jeopardy. Last year we spent an average of N156,000 on diesel and logistics cost per month; this year that amount tripled and we couldn’t cope anymore,” he said.
To survive in the midst of all these, Ajocash had to downsize to reduce the overhead cost, embrace hybrid mode of work to cut down operational expenses, and reduce the size of its loan portfolio to still remain in business.
According to Ogunnibi, the best way for finance businesses to operate in this stifling business climate is to access cheaper finance, that is, convertible debt at single digit per annum which is not easy to come by from local investors.
“Amidst all of these, we are resilient as an organisation to rise above the challenges. Our flexibility to work styles, employee welfare, innovation in acquiring new customers and monetisation is paramount to us,” Ovio said.