The discontinuation of a contentious currency control regime that saw Nigeria operate a distorted multiple exchange rate system for years has sent the national currency, the naira, plunging to a record low. The impact of the shakeup is expected to reverberate across sectors of the economy, with the budding tech industry seeing its fair share, stakeholders and analysts reckon.
The country’s official exchange rate fell more than 20 percent from a day earlier to NGN 600.00 against the US dollar on Wednesday, per data cited by Bloomberg and FT. Other sources indicate an even deeper fall between NGN 700.00 to NGN 750.00 against the dollar at the official window, citing emails banks shared with their customers.
Local tech industry stakeholders and financial analysts are weighing up the potential impact of these unfolding seismic changes on Nigeria’s burgeoning startup scene, noting that the resultant currency devaluation would affect revenue, valuations, operating expenditure, and even business models.
“What now happens to revenue recognition across all Nigerian startups?” Jason Njoku, Founder/CEO of video-on-demand company, iROKOtv, asked in a tweet. “I guess investors are about to find out what emerging markets are really like…,” he added while expressing concern for what it would mean for the many naira-denominated startups in the country.
Revenues recognition in the mud.
H1 - N500m revs (reported as $1.11m at 450/$)
H2 - N600m revs (reported as $800k at 750/$)
with Inflation at ~20%🤢. This is a uniquely VC-backed phenom which calls into question the true risk-adjusted valuations on 🇳🇬 denominated startups
— JasonNjoku (@JasonNjoku) June 15, 2023
Njoku had seen his own business navigate a previous devaluation episode in 2016 that, as he put it, didn’t hurt too much only because iROKOtv earns the bulk of its revenue outside Nigeria.
A reform that could hurt
Investors have ploughed ~USD 4 B into hundreds of Nigerian startups since 2019, numbers from WT Data Labs show, backing tech businesses capturing value in underdeveloped yet promising markets with the potential for outsized upside. Notable breakthroughs have emerged as startups deployed disruptive tech solutions in financial services, commerce and mobility, among other sectors. But as growth metrics and startup valuations take a hit amid the global tech downturn, the shift in Nigeria’s foreign exchange (FX) market poses an additional venture headache.
“Currency devaluation is a big problem for startup valuations,” as Adedeji Olowe, CEO of Trium Networks, a Nigerian-based venture capital, had memorably put it in a 2020 interview with prominent local business publication BusinessDay.
“The valuations are usually anchored on revenue projections. Usually, valuations are multiples of EBITDA and when the underlying revenue is anchored on naira and naira goes into freefall against the USD, then the valuation goes down with it,” Olowe had added.
Since most startups in Nigeria earn revenue in naira, a slump in the value of the currency—amid economic struggles epitomised by rising inflation (~20 percent) that has eroded purchasing power significantly—is a bane as it represents deflated projections and rapidly shrinking returns in dollar terms.