Startups are making a lot of money but can the Nigerian economy sustain them?

In Nigeria, there are debates and public statements circulating on how to revive the faltering economy by utilizing the non-oil industries as a base in the context of increasing economic issues. The ongoing devaluation of the national economy, which is mostly due to the drastic ups and downs in the price of crude oil on the global market, serves as a stark reminder of the need to revitalize Nigeria's economy.  Some critics and economic experts believe that Nigeria's economy has suffered greatly as a result of the recent decline in oil prices on the global market, which has been the country's economic mainstay. It has become increasingly challenging to sustain growth in other non-oil-producing sectors as a result of this internal economic meltdown.

Nigeria’s economy’s dependence on Startups

With 86.9 million people living below the poverty line and an unemployment rate of 18.8%, Nigeria has been dubbed the poverty capital of the world. The operations of startups have remained relatively unsustainable despite their contribution to economic growth. They play a major role in job creation, poverty alleviation, economic development, and income and revenue generation, among others. Numerous socio-economic and cultural obstacles limit the growth of startups in Nigeria and Africa as a whole. Increasing interest rates, high production costs, limited access to resources, and high risk are a few of these difficulties. 

It can be argued that the overall impact of the Nigerian economy on the sustenance of startups in the country has continued to be challenging to precisely measure, despite the clear successes through entrepreneurship innovations in the past as asserted by several development researchers. Numerous studies have suggested that between 45 and 60 percent of urban workers are employed by private businesses, or what are typically referred to as SMEs. According to another analysis, entrepreneurship has significantly aided the Nigerian private sector, which is made up of SMEs. These SMEs are thought to have contributed to 50% of the country's job prospects and another 50% of its industrial output. 

Given that these businesses have the potential to help the country achieve the Sustainable Development Goals (SDGs), which include establishing adequate employment along with decent jobs, it is crucial that the issues limiting the advancement of this sector are resolved.

Despite all of these apparent benefits, government negligence has plagued Nigerian entrepreneurial development over the years. This is partly due to a number of problems, including a lack of sufficient political will, a corruption problem, a lack of funding for growth, and the politicization of issues surrounding Nigeria's economy.

In 2016, the Nigerian economy began to experience both recession and inflation, both of which significantly reduced GDP. However, in what appeared to be a symbolic victory, individuals who had been directly affected by the crisis cheered triumphantly, and a great relief when the Federal Government (FG) declared in 2017 that the terrifying recession had finally been vanquished. A quick economic recovery would never have been possible without the significant contribution of SMEs in the country. 

According to a Quartz article from 2016, over 74.5% of the financing that African startups received came from Nigeria, South Africa, and Kenya.

Notably, Nigeria accounted for 29% of all investments made in African startups and had the biggest investment focus (approximately $109.3 million). Some of those startups included Flutterwave, Paystack,  ToLet, Andela, iROKOtv, Hotels.ng, FarmCrowdy, and many more. Likewise, foreign investors have aggressively invested millions of dollars into Nigerian and African startups as an indication that they have no plans or intentions to exit the African ecosystem. But can the governments sustain a conducive environment for these startups?

Considering the way foreign investments pour into Nigerian startups, it is reasonable to expect a significant impact, a sudden improvement in the country's struggling economy, and perhaps even a rise in the value of its currency.

Although there are currently no exits in the Nigerian startup ecosystem, many have received series C funding. However, where do these funds go?

Is the Nigerian economy choking startups?

According to a SMEDAN survey, not all MSMEs are likely candidates for employment. The study found that the initial start-up capital for micro firms is less than N50,000 while it is often less than 10 million for small and medium enterprises. According to this statistic, startups inherently fall into the latter category, and only around 60,000 of the 37 million MSMEs genuinely have a high potential for employment. Therefore, just about 0.2% of the 37 million MSMEs can provide employment. In this group of capable employers are startups.

Like any business, startups are susceptible to excessive overhead costs. Even though every business has unique requirements, they all incur the same costs for people, resources, and technology. However, the money that local companies spend on employees, overhead fees, internet and logistics, and other expenses finds a way to return to them.

According to African Round Business Table, a typical example of the Nigerian economy suffocating startups can be seen in the company life of J-gears. After the prototype of an idea that Andrew Akangbe, a talented Nigerian entrepreneur, eventually made progress, he was able to secure N1 million in startup capital with the assistance of family members, which allowed him to launch J-gears. Sadly, the startup was only successful for about two years. He was forced out of business in the middle of 2017 by expenses related to overhead, human resources, technology, logistics, and strict economic regulations.

Just two months prior to closure, he signed a MoU to expand the startup's operations across Africa with a company in Djibouti. This deal was supposed to employ more than 450 people in Nigeria and Djinouti, collectively. It was also expected to empower over 10,000 people through its software programming training. All these as a result of the demise of a startup.

Nigeria’s move to sustain startups

The startup ecosystem in Nigeria is developing. Due to a combination of factors, including a growing number of enthusiastic foreign investors, a sizable population with access to modern technology, and a rising number of startup support groups operating in the ecosystem, it is a prominent center for entrepreneurship in Africa.

For emerging economies seeking ways to improve growth and development, scalable startups are essential.  Nigeria's startup ecosystem must be well-positioned for investments if it must support the growth cycle, employment, and export operations within the country. The Nigeria Startup Bill idea was consequently proposed as a result of this. The Nigeria Startup Bill is a cooperative effort by Nigeria's tech startup sector and the Presidency. The project aims to capitalize on the potential of the nation's digital economy using jointly developed regulations. The Bill will ensure that the country's laws and regulations are explicit, well-thought-out, and beneficial to the ICT sector. This will help to create a favorable atmosphere, conducive enough for startup investment growth, attractiveness, and security.

This type of targeted startup legislation is a growing instrument for assisting high-growth companies and promoting regional economic development. Apart from Tunisia and Senegal, both of which have already approved their startup bills, about 15 other nations are either creating or adopting Startup Acts at the moment.

Although there is considerable friction in the relationship between regulators and the startup community on a global scale, the Bill now establishes processes and provides avenues for ongoing engagement among stakeholders. Government officials will need startups as a resource in policy discussions, and they should be aware of any obstacles to policy creation that could affect their company. It addresses stakeholders and facilitates the construction of the best legislation by outlining trade-offs.

What does the new Bill mean for investors and the startup ecosystem?

·        Investors can conduct more accurate analyses and adhere to established guidelines, improving ecosystem fundraising.

·        Additionally, it promotes new market entries and draws huge corporations and multinationals to operate in the country, expanding Nigeria's tax base, government revenue, and contribution to its GDP (GDP).

·        Startups can now operate without the uncertainty of unclear regulations, allowing them to better plan for growth and expansion as they increase employment, add to the tax base, and promote economic activity.

·        Startup labeling, as specified by the Bill, enables the government to recognize these creative enterprises and grant them access to related incentives. For startups, their employees, and investors, these include tax breaks and incentives. Access to special seed funding for early-stage firms established under the Bill will also be available to labeled startups.

Given the nation's expanding population, this substantial contribution justifies additional investments in the expansion and growth of the startup ecosystem and the business owners it supports.

The increase in the average investments that Nigerian businesses have received in comparison to a VC4A survey from the previous year is another sign of improvement. The average amount recorded this year is USD $93,651, which is 22% more than the average amount reported last year. This demonstrates that despite economic difficulties, Nigerian startups' quality keeps rising over time, leading to better valuations and bigger financing rounds. By building on this impetus, it will be possible to get a number of success stories that serve as examples of what is feasible in the nation's rapidly expanding markets.

The Startup Bill presents Nigeria as an economically dynamic nation and a rising powerhouse in global technology, enhancing soft power and boosting the country's reputation.

This bill offers incubator and accelerator programs that present early-stage business owners and innovators with favorable prospects. In a bid to accelerate growth and improve their prospects of obtaining investment, founders receive assistance, mentoring, and strategic guidance. The government believes that doing so will improve talent and foster networks where nascent digital entrepreneurs can interact and fulfill unmet requirements, creating demand for the Nigerian markets, according to the Nigerian Startup Bill.

Conclusion

In the last five years, Nigeria's startup ecosystem has developed remarkably rapidly. The expansion and development of Nigeria's entrepreneurial network can be directly attributed to the influence that domestic and foreign allies have had on the startup ecosystem. Local entrepreneurs' in-depth knowledge of the ecosystem and assistance from foreign efforts have given rise to and enhanced the implementation of solutions specifically designed for the Nigerian tech ecosystem. The subsequent wave of entrepreneurs are being inspired by their continuous cooperation and dedication.

Nigeria's tech sector is primed for investment. There is never a better moment to start than now. The caliber of startups that the economy has been able to create over the last few years is evidence of its ability to successfully compete with global giants.

A huge influx of marketplace platforms that have the ability to alter the future of the nation has been created in Nigeria as a result of the country's rapid expansion in internet users and the fintech industry transformation. This possibility is dependent on overcoming the ecosystem's obstacles through ongoing innovation and policy changes.

Top performing Nigerian startups in 2022

Source: Startup list Africa