Naira’s Tumble Casts Shadow On Nigerian Startup Growth
The economic landscape for Nigerian startups has taken a sharp turn as the naira, the country’s currency, has been hit by a drastic depreciation following the Central Bank of Nigeria’s policy change in June.
This shift saw the naira’s value plummet from approximately 460 to nearly 800 naira per dollar by August, significantly impacting the economy and undermining businesses in general. And the financial health of the country’s burgeoning startup ecosystem is not spared.
Nigeria boasts the largest startup ecosystem in Africa and has been a magnet for venture capital investment on the continent. However, the sudden currency devaluation, which followed a series of slips over the past year, has introduced even more challenges for these startups. Many of these young companies raise capital in dollars from foreign investors but conduct their business operations and generate revenue in naira.
This currency misalignment has caused startups’ dollar-denominated revenues to shrink while their operational costs, particularly those associated with cloud servers and software, surge due to the devalued naira. Consequently, these businesses are grappling with reduced margins, decreased purchasing power, and mounting concerns about financial sustainability.
The situation has triggered a ripple effect, extending to the evaluation of startup valuations. Investors are scrutinizing the viability of these businesses in the face of the naira’s rapid decline, prompting discussions about potential shutdowns and market instability. All these concerns have emerged against the backdrop of a venture capital slowdown, exacerbating an already fraught situation in the tech markets.
The challenges have even compelled startups to rethink their operational strategies. Some are considering shifting their focus to the export of software and services in order to generate revenues in more stable currencies like the US dollar. This pivot reflects the urgency to mitigate the financial risks brought about by the currency instability and its adverse effects on business prospects.
Experts in the industry suggest that the naira’s ongoing depreciation, coupled with its implications for startups’ financials, will likely reshape the trajectory of Nigeria’s startup ecosystem. As startups manoeuvre through this challenging environment, many are reevaluating their strategies, seeking alternative revenue sources, and looking for ways to insulate themselves from the currency-related risks that threaten their existence and growth potential.
Long-standing difficulties in accessing foreign exchange access remain a major obstacle for investors, inhibiting Nigeria’s startup landscape. Over 80 percent of investors funding Nigerian companies prior to the currency market’s liberalization were international, illustrating foreign capital’s role.
While other emerging market currencies also face pressure from a strong US dollar, African countries such as Nigeria, Egypt, and Kenya struggle to obtain hard currencies. Limited dollar reserves complicate matters, impacting transactions like imports that require dollar payments.
Despite central bank efforts to stabilize the exchange rate, startups reliant on foreign capital must bolster earnings or devise strategies to counter currency risks if the situation remains dire.
