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Sunday, 5 June 2022

What’s next for Nigeria’s startup ecosystem — and how can startups expand there?

What’s next for Nigeria’s startup ecosystem — and how can startups expand there? Two weeks ago, we went on a trip to Lagos to explore Nigeria’s startup scene, along with CEO of the Cairo Angels Syndicate Fund (CASF) Aly Shalakany, Nawah Scientific CEO and founder Omar Shoukry, COO and co-founder of fintech Balad Adham Azzam, and FlexPay, one of CASF’s portfolio companies from Kenya. In last week’s What’s Next, we looked at how Nigerian startups managed to attract USD 1.8 bn in startup funding in 2021, based on insights of local and pan-African investors.

This week, we look at how the startup scene will develop, what challenges companies face, and how Egyptian startups can expand into the country. We talked to several local investors: Omobola Johnson, senior partner at VC firm TLcom Capital and former ICT minister of Nigeria; Biola Alabi, cofounder and GP of Atika Ventures and deputy chair of the Lagos Angel Network; Iyinoluwa Aboyeji, founder and GP of the Future Africa fund, and cofounder of two of Nigeria’s most successful startups, fintech Flutterwave and job placement network Andela; and Tomi Davies, angel investor, our chaperone, and collaborator-in-chief of TVC Labs.

And in case you’ve missed some our travel logs this week, catch up on them here: Enterprise is visiting Planet Startup — in Nigeria | Day one | Day two | Day three | Goodbye, Lagos.

While funding rounds were high last year, a correction may be in the cards, which will make valuations more sensible, Johnson tells us. What has been happening in the past couple of years was an inflation of valuations due to the availability of capital, and this had been going on in many countries. However, with the global recession, the Russia-Ukraine war, and high inflation rates globally, only investors who are truly interested in creating impact via their investments will be willing to write checks, she adds. This will tighten the pool of investors and reduce competition, causing valuations to normalize.

So far, the country has not seen any downrounds yet, but it is expecting them. “If you raised money last year, you’re probably at a third of what you were valued back then,” Davies tells us. Johnson expects to see downrounds coming as early as 2Q 2022 or 2H 2022.

Consolidation is needed in some sectors: There are a lot of companies replicating what others do, which is why there will be a correction in some sectors, especially in fintech and last-mile logistics, Alabi says.

Others aren’t yet diverse enough: There needs to be greater diversity in the healthtech and edtech sectors, for instance, before consolidation can take place, Alabi says. Others, such as the food sector, require new companies to offer solutions to pressing market problems. In Nigeria, people spend around 57% of their income on food, a problem which could be reduced by new food and agritech players entering the market, she says.

So what challenges do startups in Nigeria face? Talent flight, for one — or the lack of it in the first place. Some 75% of Nigeria’s talent ecosystem is self-taught, due to the lack of a world-class software engineering education program, Aboyeji tells us. To tackle that issue, Johnson launched the Nigerian University of Technology and Management (NUTM) two years ago, which offers academic and research offerings in STEM and management at the undergraduate, postgraduate, and doctoral levels. Accreditation is still pending.

Some leave for other countries where doing business is easier: “We see companies establishing themselves in other countries due to currency volatility” and the slow pace of regulators, Alabi says. Other activities sometimes don’t have the chance to be developed due to knee-jerk reactions by regulators, who outright ban them rather than considering how they can be regulated. “You can’t ban your way into a good ecosystem,” Alabi says. “We have a lot of work to do to build an environment that helps businesses thrive.”

On the plus side, there is a startup bill in the works, which is awaiting ratification by the National Assembly and Senate. “The bill is going in the right direction when it comes to creating an environment that helps startups thrive,” Alabi says. This would be the first time startups and investors would be recognized by the law, Davies tells us.

But the pace of the regulators is slow: Alabi shares her concern that regulators are unable to keep up with the dynamic and rapidly-changing global ecosystem. The pace of regulation needs to change, she says, adding that it may not be happening anytime soon.

So what do startups have to keep in mind before expanding to Nigeria?

#1- Find local partners. Businesses will have a hard time navigating the local market without partnering with someone who knows the lay of the land. “You need allies,” Alabi tells us. “Don’t ever come to Nigeria without a local partner,” Davies says.

#2- Your product works in your market, but that doesn’t mean it will work in Nigeria, Johnson tells us. Based on market feedback, the product might have to be tweaked to suit the local market.

#3 Competition is crazy. Nigeria has a sizable number of startups all competing for the same users, especially in the fintech space, Johnson says. A heavily saturated market does have its benefits, including reducing the customer acquisition cost (CAC), but retaining customers in a highly competitive environment can be difficult, she adds.

#4- Don’t subsidize your product. In the US, startups can more easily subsidize their products because they have more options when it comes to raising capital, Johnson says. In layman’s terms, this offering your product below cost to acquire more customers in the hope you can someday raise proses. This ultimately raises the cost burden on the business, and in Africa where the supply of capital is not as high, it can be a risky venture.

NEXT WEEK- We will give you a rundown of some of the smartest startups we’ve had the pleasure to meet while we were in Lagos.

Your top stories on future trends for the week:

  • Swvl slashes headcount: Nasdaq-listed mass transport startup Swvl is laying off 32% of its staff in a bid to turn cash flow positive by next year — but nevertheless plans to start operations in Mexico and the US soon.
  • GrubTech arrives in Egypt: Dubai-based foodtech startup GrubTech has launched in Egypt and plans to invest USD 5 mn over the next 12-18 months into its operations.
  • Cairo Angels invests in Africa-focused fintech startup: Cairo Angels Syndicate Fund (CASF) is making a USD six-figure investment in Africa-focused fintech startup Finclusion Group, which uses AI to provide financial services.

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