Nigerian startups raise a lot of foreign cash, but how much impact do they have on the economy?
Nigerian entrepreneurs are known to be enthusiastic, hence the popular saying that if you can excel as an entrepreneur in Nigeria, you can excel anywhere else. However, the trait doesn’t come naturally. The hustle and bustle of the country sort of configure almost everyone to automatically be zealous hard workers. Andrew Akangbe could be regarded as one of such eager and enterprising Nigerians.
Early in 2015, he finally made headway with the prototype of an idea he’d conceived several months before. He couldn’t wait to get to his uncle who had promised him ₦1 million should he get the prototype right. Andrew’s uncle delivered on his promise and soon, J-gears was incorporated. Unfortunately, the startup barely lasted two years. Overhead costs, human resources, technology, logistics, and stringent economic policies are chief among the expenses that forced Andrew out of business in mid-2017.
“The economy wasn’t friendly and we also couldn’t raise more money,” Andrew laments.
Interestingly, Andrew isn’t the only one bearing this hit. Just 2 months before closure, he had signed an MoU with a company in Djibouti to expand J-gears operations across Africa on a 75-25% profit share. This alliance was supposed to employ over 450 workers in Nigeria and Djibouti. Also, a software development training programme J-gears was subsidising for 1000+ graduates is facing the threat of closure.
Obviously, foreign investments play a major role in averting situations similar to Andrew’s. However, this isn’t just about Andrew or J-gears, there’s a much bigger picture.
The Big Picture: Nigeria’s Economy vs. Startups’ Effect
The death of Andrew’s startup, J-gears, has had an indirect pervasive downturn on the economy — more than 1000 people have just lost the chance of getting jobs. And going by the fact that employment is one of the key drivers of a sustainable economy, this isn’t good news at all. As big as Nigeria is, its economy hasn’t had a linear growth. Rather it has only experienced fluctuations and imbalance for more than 3 decades, mostly due to the crude-oil market collapse of 1985.
Thankfully, Nigeria’s mixed economy gives entrepreneurs and businesses a free hand — despite government’s major income reliance being on oil — which explains why enthusiasts like Andrew do not think twice about launching potential businesses. The nation’s estimated 37 million SMEs contribute a lot to its economic growth (in terms of employment, logistics, and utility bills) and currently contribute 48% to its GDP.
However, in 2016, another situation surfaced as inflation and recession began romancing the economy, both further decreasing the GDP. But in what looked more like a pyrrhic victory, there was a triumphant cheer by all who bore the direct hit of the situation and a general relief when the Federal Government (FG) announced in 2017 that the monstrous recession had finally been conquered.
Again, if it wasn’t for SMEs which continually played major roles in advancing Nigeria’s economy with their activities, we might not have had such an announcement from the FG in such a short time. Currently, Nigeria’s 37 million SMEs (and counting) account for more than 80% of employment.
Just like Andrew, most SMEs rely on personal savings and money from friends and relatives to kick-start their businesses, but lately, there’s been a shift. Some SMEs (a slight percentage) have been able to continuously raise foreign capital to drive their businesses — these are startups. And it’s not so surprising that startups are able to woo investors more than traditional SMEs — they provide tech-driven solutions, which makes their potential to scale faster and globally more feasible than their counterparts.
In 2016, Quartz reported that Nigeria, South Africa, and Kenya got about 74.5% of the total funding received by African startups.
Interestingly, Nigeria, which had the highest investment focus (about $109.3 million), accounted for 29% of the total investments in African startups. The likes of ToLet, iROKOtv, Hotels.ng, Paystack, Flutterwave, Andela, FarmCrowdy, and many others are examples that depict the bliss of foreign recognition. Furthermore, they are indications that foreign investors aren’t withdrawing their interest in Nigeria — and Africa at large — anytime soon.
Given the way foreign investments rain on Nigerian startups, it’s normal to anticipate some tremendous impact, a spontaneous positive turnaround in Nigeria’s ailing economy, and possibly the appreciation of its currency. But, none of such has been visible; a big reason to worry. Could it be that these cash investments aren’t disbursed for operations locally or are there glitches that stifle startups’ impact on the Nigerian economy?
For all we know, startups undergo several stages of funding:
• Pre-seed: to build a prototype
• Seed fund: to test the model
• Series A: to consolidate the product and try an expansion
• Series B: for growth
• Series C: to establish a proper business.
• While the Nigerian startups scene hasn’t had exits, quite a few have achieved the series C funding round. But where do these monies go?
Following the money
A survey conducted by SMEDAN reveals that not all MSMEs are potential employers. According to the research, the initial start-up capital for micro enterprises is less than ₦50,000 while for small and medium enterprises it’s predominantly less than ₦10 million. Going by this stat, startups automatically fall within the latter category, and only about 60,000 of the 37 million MSMEs are actually businesses with significant employment potential. In other words, only approximately 0.2% of the 37 million MSMEs can employ people. Startups fall within this category of capable employers.
Currently, there are over 1,000 startups in Nigeria that have created more than 10,000 jobs. Also, Nigerian startups have changed the narrative of what salaries are meant to be, and certificates do not determine employees’ payroll. For example, internship averages ₦30,000 – ₦50,000 and full-time roles usually start at ₦70,000 – ₦400,000, depending on the role at most startups.
Like every other business, startups are prone to high-end expenses. Although each startup has its own peculiar needs, they all share these three expenditures: people, resources, and technology. A survey among local founders reveals that salaries are the biggest culprit.
Of course, all the money expended by startups locally — paying of electricity bills, internet facilities, logistics and overhead costs, as well as salaries — has a way of circulating around the economy. While salaries increase employees’ purchase power and living standards, other significant amounts are spent locally on fuel, electricity, logistics, as well as taxes — which go straight to the government. But could startups do more?
Jones Emeka (not real name), a Nigerian startup founder, explains that funds raised aren’t necessarily deposited outright into Nigerian banks. Depending on the startup’s needs or agreements with investors, funding could either be given in tranches or issued any time the founder deems fit.
A lot of ‘wise’ founders would rather the money remain in foreign accounts than risk stocking cash in Nigerian accounts when naira devaluation is totally inevitable and then what happens? The value of the money you spend so much time and energy to raise diminishes. It’s not worth the risk,” he remarks.
The Legal Drawbacks (Wolves) vs. Economic Freedom Fighters
Pleading anonymity, an economist and stock exchange broker, believes the retarder of Nigeria’s economy lies within. “The Nigerian economy only has one wolf which saps its life — the CBN itself.”
According to him, the Central Bank of Nigeria, which is supposed to be the wheel that pioneers economic growth, has a critical level of rigidity and extreme bureaucracy. As such, certain policies restrain the dealings of entrepreneurs raising millions of dollars with local banks. Unfortunately, commercial banks tend to be worse.
For instance, he continues, “why can’t our local banks give loans to Internet startups? No, they’d rather buy government bonds and impose several hidden charges even on SMEs”.
If one is to go by Tunde’s reasoning, startups registering their companies outside of Nigeria might be justified. At the maiden edition of Techpoint Inspired, Iyin Aboyeji was asked if the registration of Flutterwave in the US gave it any edge in securing international investments; he didn’t dispute. In fact, he admitted that bureaucracy of Nigerian financial agencies is a clog that blocks smooth sailing of Internet startups with high potential.
James, another local startup founder agrees with Iyin’s thesis.
“He is right. Startups that have particularly gone beyond the seed funding round can’t afford to risk dealing with Nigerian banks. When we saw how difficult they proved, we had to register in Finland.”
Pleading anonymity, an entrepreneur playing in the fintech space says, “So, if our impact as startups is not vivid on the economy, blame the banks, not the investors, not the startups, but the banks. Startups are more like the economic freedom fighters, while our banks are the wolves”.
All of these coincide with Jason Njoku’s Medium post that addresses his frustration with Nigerian banks, which forced him to close out his account with one of the banks to seek a better alternative.
A lot of startups still import (usually) very expensive foreign infrastructure and technology to power their operations. From all indications, Nigeria hasn’t gotten to the stage where it will be solely reliant on consumption of local technology. Nkemdilim Begho, MD, Futuresoft Nigeria affirms this.
“There are a lot of local solutions,” she remarks, “however, oftentimes, companies with local solutions lack in support, customer care, and other service delivery areas where their foreign counterparts are good. For clients, these count more.”
According to Nkemdilim, infrastructure and poor policy are key problems that impede the thriving of local software. Onyeka Akumah, founder of FarmCrowdy, has a similar opinion.
“Startups impact the economy by creating jobs. However, the bulk of the money could go to purchasing the technology and software needed by the startups to function, which might not be present in Nigeria. Therefore the money which comes in, still goes out.”
The scale of a balanced and prosperous national economy is hinged on several constituents. They include education, electricity, infrastructure, and foreign investment. Collectively, they drive the effectiveness and efficiency of a nation’s economy. It is however unfortunate that Nigeria is among the third world countries struggling to find their feet in these areas.
Here’s the consequence: despite the huge foreign investment local startups get, non-availability of these other constituents frustrates their efforts. Amaka Johnson, who runs a hub in Maryland is so particular about electricity.
“Our burn rate is so high, especially on diesel. And the government seems not to be keen on solving this problem yet.”
According to her, even if she got an international grant, half of it may be spent on generating power privately.
Startups aren’t the only victims of Nigeria’s challenging power situation. Raymond, who runs an online radio station in Lekki, can barely withhold his displeasure.
“Nigeria is a very funny place to do business,” he laments, “that’s why I cannot rely on the country. So in our establishment, we had to buy a small generator, to back up our big generator, which backs up NEPA!”
Asides electricity, lack of infrastructure is another major killer of local Internet startups. For instance, Mr Salami was pushed to get a workspace for his startup in a really expensive environment simply because the road to the first workspace he got isn’t just motorable.
A possible way out (the startup power)
Nigeria is renowned for its entrepreneurial culture, and local founders aren’t resting on their laurels, yet there are not so many investible startups.
And while the government has started taking note of the activities of Internet startups, acknowledgement isn’t the prerequisite of building a stable economy. There is a need to mitigate the drawbacks threatening the longevity of local startups, starting with the restructure of bureaucratic processes financial institutions impose.
The reason the Silicon Valley (which Nigerian startups look to model) now ranks third in the global GDP isn’t farfetched. Constituents needed to achieve a balanced economy are in place. From all indications, Internet startups will have more significant impact on the Nigerian economy if these challenges are mitigated.
However, what most Nigerians have learnt over time is it’s foolhardy to place absolute trust in government. Therefore, while we continue to anticipate the fix for these drawbacks, the possible way for startups to keep adding their quota to the national cake is continuity.
Michael Cohn’s (MD, Techstars Atlanta) words give the final stamp:
“Startups need to demonstrate continuous progress, or traction in order to attract investment.”