Funding into the country’s tech ecosystem slowed in mid-2022 because of a global economic crisis. This impacted the projections and expansion plans of many startups and led to layoffs in the space. In this piece, Temitayo Jaiyeola explores how startups can adjust to a new normal.
From 2019 to mid-2022, a fundraising wave swept across Africa. There was a boom and startups, founders, and tech talents were at the centre of it. The tech ecosystem flourished as many startups smiled to their banks. But in recent times, the boom period is over; investors are no longer signing cheques frequently.
With investors not willing to part with cash, startups are having to make tough decisions to stay afloat. Many cost-cutting measures such as layoffs, rollback on expansion plans, and salary slashes have been implemented.
Globally, 153,548 tech workers have been laid off. In the whole of 2022, 161,411 tech workers were laid off. While layoffs from Meta, Google, and Microsoft have dominated the global scene, Nigerian startups have not been isolated.
Jumia sacked 900 workers across its operations in 2022, with Chipper Cash, and Kuda among others joining in laying off workers. In 2023, Bolt sacked 17 workers (despite announcing plans to invest over €500m in Africa and employ about 300,000 drivers). Alerzo has also laid off about 15 per cent (400 workers) of its workforce, and many more local startups are laying off staff away from media attention.
Before the bubble burst, between 2019 and mid-2022, Nigerian startups raised $3.6bn, according to data from the ‘Africa: The Big Deal.’ By the end of 2022, Nigerian startups had raised $1.2bn for the year. A complete drop off from the over $1.7bn that was raised in 2021.
Uncertainty in the global market has dampened the celebratory mood that ushered in 2022 in the tech space. Since the second half of 2022, articles about funding doom have dominated the space.
The pandemic ushered in record valuations and deals in the startup space. But as the world continues to recover from the effects of the pandemic, compounded by the Russian-Ukraine war, a new normal typified by reduced funding has begun to shape the startup space.
This new reality is expected to cause the first overall funding dip in 2023, with Africa Big Deal saying, “So, yes, 2022 was definitely a good year, yet with talks of slowdown and uncertainty dominating the second half of the year, the mood isn’t always that celebratory.
“Not to mention that if the H2 trend were to continue, 2023 could be the first year of decline in absolute numbers for the ecosystem.”
Founding Partner at Ajim Capital, Eunice Ajim, in a recent interview with The PUNCH, blamed the fall in funding on the fear of recession in the global west. She explained that VCs were trying to conserve capital in case the world’s economy slumps into a recession.
She said, “The public market has been bloody because of economic instability around the world. All of these affect how much money VCs can invest.
“There has been so much talk about a recession in the US. And when anyone hears recession, they would want to be sure that they have enough cash at hand, and a lot of time, investing in the private market means going illiquid for at least five to ten years.”
The Founder of Pivo, Nkiru Amadi-Emina, expects this trend to persist for another 18 months. According to her, investors have become more conservative.
“I do think that this dynamic will continue for about 18 months,” Amadi-Emina said.
“What we are seeing is that a lot of big investors, a lot of them that principals in smaller funds are being a lot more conservative with the funds they deploy. Especially in lessons with what happened in the entire startup space last year, the crypto crash for instance, and more.”
She explained that at worse, the cloud hovering over the startup space will persist for 24 months. Discussing how local startups will need to adjust with The PUNCH, she said, “This dynamic will mean that a lot of businesses will have to prove themselves, prove their thesis, and prove the solution to the problem that they are solving.
“A lot of companies will have to prove and show that this is a real problem and if solved will be able to generate a lot of return on investment. What we are going to see is a conservative approach to how we utilise equity. We will see a lot more companies transition from less burn to more push for profitability while also pushing for growth.”
Amadi-Emina believes that this present difficult time will allow a lot of real businesses, solving actual problems, to be built. She stated that Africa has real problems and needs real solutions.
She added, “We will see a lot of real businesses being built. This change in dynamics is very key for the ecosystem that we are in because in Africa we have real problems, and we need real solutions. I think this is the trend we will observe while this trickle continues.
“We are likely to see more layoffs. We have seen a couple of them over the last couple of months. Companies are learning that we need to be more conservative.”
This is a sentiment that the Founder/Chief Executive Officer of Future Africa, Iyinoluwa Aboyeji, recently shared with The PUNCH, in an interview.
According to him, there was a startup industry before funding, a time when startups focused on their products and building their businesses.
He explained that productivity and profitability would shape the space in the absence of external funding. He said, “It is important that startups focus on products, and their customers during this period, rather than chasing after funding. I do not think that is the right approach for now, given the funding environment.
“I expect the challenges with the global market to get worse, so we might still have a significant uptake in labour action as we have seen with some startups. This is one of the reasons to focus on real business that is sustainable, has the potential to make a decent profit, and so on. Without that, there is no business,” he added.
The Co-founder of Dream VC, Mark Kleyner, explained to The PUNCH that fundraising was now dependent on global realities, and professionalism and that investors are becoming more particular about the profitability of startups before investing.
He said, “I would say the biggest change is the way investors are interacting with founders – the seriousness or professionalism around investing.
“2021-22 saw many investors back startups without doing proper due diligence and with limited oversight into the investee’s activities. The dynamics of raising funding are now substantially different as investors start to think about how global expectations, especially from late-stage investors, of startups, are changing.”
Kleyner explained that more startups are expected to have stronger traction across the funding stages (pre-seed, seed, to series rounds) with later-stage startups being pushed towards tangible strategies that can help them approach profitability.
He added, “What this means is that in 2023, and even into 2024, we will likely see a dynamic change, with investors having more power in negotiations, as investment decisions take longer and funding becomes harder to access.”
It is hard to run a business in Nigeria, more so a startup. A tough business climate, an unproven product, and a huge market with a large digital access deficit ensure that the market is rigged against startups in the country.
External funding from investors allows startups to grow their businesses without the need to quickly achieve profitability. But with foreign investors becoming increasingly more hesitant to sign cheques, startups are wading into the waters of local investors.
However, there are not enough local investors for startups to leverage.
The Founder of Clafiya, Jennie Nwokoye, told The PUNCH, “The ecosystem is maturing though and I am hoping to see more local investors invest in African-based startups but, there aren’t just a lot of local investors, to begin with.
“And even to be connected to the few existing ones is a challenge. You have to know where to find them. And there aren’t many of them and then you do not really know how to find the ones that exist. This becomes very challenging to raise funds locally.
“Chances are, it will become very hard to be connected to local investors if you don’t know who will refer you to these investors. Sometimes they don’t really have direct contact on how to reach them. Another thing is that there aren’t that many local investors unlike in the United States.”
She also explained that local investors do not have as many funds to invest in startups. Other founders that spoke to The PUNCH described some of the terms from local investors were more strenuous than those from foreign investors.
They explained that because the local funding scene is young, many investors were still trying to get the hang of it.
One founder said, “What we are seeing now is that a lot more local investors are interested in the early/seed stage.
“For them, the idea is because I am coming in so early, the idea is I am taking a larger risk. That is why typically, their terms are strenuous.”
The present funding winter in the startup space is expected to persist for a while, and startups have begun to realign their businesses and cut costs. 2023 is probably not going to be filled with as many fundraising announcements as the ecosystem has become accustomed to, but it will be a year that shapes the sustainability of the space.
The Nigerian tech ecosystem’s story is hewed on the stone of defiance, and experts expect the space to continue to thrive regardless of global realities.
