Nigeria: Funding Challenges Hit Nigerian Startups as Investors Exercise Caution

Startups struggle as investors cut funding
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The Nigerian startup ecosystem faced a rollercoaster of challenges and successes in 2023, with funding becoming a critical factor influencing their trajectory. Investors, both local and foreign, exhibited caution in backing various ventures, resulting in a number of startups ceasing operations.

Several notable startups, including 54Gene, Pivo, Bundle, Vibra, Payday, Pillow, Lazerpay, and Hytch, faced closures, attributing their financial struggles to operational difficulties, co-founder conflicts, and a broader funding crisis.

According to data from Briter Bridges, funding for African startups experienced a 54% decline to $2.5 billion between January and October 2023 compared to the same period in 2022. Africa: The Big Deal projected that funding for Nigerian and African startups might fall to $3 billion by the end of 2023, marking a $1.5 billion shortfall from the previous year.

Jega Mohammed, the founder of Startup Arewa, acknowledged the tough year for startups in 2023 but expressed optimism for increased investments in 2024. He highlighted a shift in investor focus towards verticals such as Artificial Intelligence, big data, cybersecurity, automation, and blockchain.

A report by Weetracker revealed a startup failure rate of 61.07%, positioning Nigeria at the top among the prominent tech ecosystems in Africa. Only 39% of startups in Nigeria managed to endure beyond their initial years.

Investors became more discerning, considering factors such as prudent financial management, realistic budgets, and a viable revenue model. Mismanagement of funds, allegations of fraud, and unsustainable lifestyles by startup founders contributed to investor skepticism.

Seun Omotoso, a business leader in mobility and supply chain, emphasized the need for startups to demonstrate prudence in operations. He noted that investors were now scrutinizing investments more thoroughly, focusing on convincing and sustainable business models.

The 2023 general elections, multiple exchange rates, and widespread insecurity were identified as factors that deterred foreign investors from the Nigerian startup ecosystem. Investors were cautious about uncertainties surrounding the elections, leading to a decline in funding for startups.

Despite the challenges, certain sectors like energy, agriculture, health, and logistics continued to attract investments. Investors, both local and international, recognized Nigeria as a significant market for innovative ventures.

The decline in available funds was attributed to rising global interest rates, prompting venture capitalists to be more selective in their investments. Startups built with profitable fundamentals continued to secure funding, while those relying on promises faced closures.

The Minister of Communications, Innovation, and Digital Economy, Bosun Tijani, outlined the government’s plan to help startups raise yearly funding rounds to $5 billion by 2027. Nigeria remained a preferred destination for global venture capital and angel investors.

However, fintech emerged as the weakest link, experiencing a decline in investment. Global fintech funding dropped from $63.2 billion in H2 2022 to $52.4 billion in H1 2023, according to a KPMG report. Investors were observed cherry-picking areas of investment, and the outlook for fintech funding in 2024 remained uncertain.

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