Nigerian Startups Should Explore Different Ways to Get Money, Advises Stears
In a recent report, Stears, a trusted source for economic insights, shed light on the challenges facing Nigerian startups in securing funds and proposed a shift towards diversified funding sources. The report suggests that the dependence on foreign venture capital (VC) has left startups vulnerable to global economic shocks, with the ongoing impact of COVID-19 and rising interest rates shaping the funding landscape.
The ‘Stears 2024 Outlook’ highlights a trend where foreign investors are becoming cautious, leading to a slowdown in equity investments into Sub-Saharan Africa (SSA). The report emphasizes the need for startups in Nigeria to explore alternative funding avenues to ensure their long-term sustainability.
Traditionally, fintech startups in Nigeria enjoyed significant attention from investors. However, this focus on foreign VC capital has proven to be a double-edged sword. While it provided initial support, it also made funding volatile and susceptible to global uncertainties.
Stears notes that the recent funding rounds have been influenced by factors such as COVID-19 and rising interest rates. Asset-light startups may weather the short-term storm, thanks to funding rounds covering a 12-18 month runway. Still, the report warns of potential longer-term sustainability risks for asset-heavy startups, particularly those involved in B2B commerce and e-commerce.
Stears makes a compelling case for diversifying funding sources, emphasizing the urgency for Nigeria to explore options beyond foreign VC capital. The report suggests that the drying up of capital pools has prompted foreign investors to step away from risky assets, creating difficulties in raising follow-on rounds or securing seed capital.
The outlook, however, isn’t entirely bleak. Stears suggests that debt financing, local investors, and crowdfunding present viable alternatives for startups looking to secure funding. The report acknowledges that while debt financing may be more expensive, it allows founders to retain ownership and access much-needed capital during a VC funding slump.
In a notable shift, the report predicts that debt financing will continue to grow, becoming a prominent funding option for startups. As global interest rates tighten, currency volatility in markets like Nigeria remains a concern for investors. This, coupled with a downturn in the venture market, makes debt financing a practical solution to bridge funding gaps.
The report anticipates a slower recovery in equity flows, making debt a crucial component in sustaining startup growth. Additionally, other funding options like crowdfunding and diaspora funding are expected to gain traction, providing startups with diverse channels for financial support.
Stears goes further to predict the repercussions of weakening consumer spending power. The report anticipates a rise in buy-now-pay-later and save-now-pay-later models, along with an increased reliance on digital lending apps. Furthermore, the expected increase in layoffs and business closures in 2024 is set to drive more acquisitions, mergers, and the availability of talent in the market.
Highlighting data from ‘Africa: The Big Deal,’ the report indicates that startups in Nigeria and other African countries borrowed $1.1 billion in 2023, underlining a significant shift towards debt financing due to the drying up of equity funding. Total funding ($100,000 and above) witnessed a decline of 39 percent to $2.9 billion in 2023.
Stears points out the remarkable growth in the amount of debt raised, which saw a 47 percent year-on-year increase. In comparison, equity funding fell by 57 percent during the same period. The report reveals a shift in the debt-to-equity ratio, with startups in Africa raising 65 percent of debt in 2023, compared to 19 percent in 2022
In conclusion, the Stears 2024 Outlook paints a challenging yet optimistic picture for Nigerian startups. The call to diversify funding sources comes at a critical time, urging entrepreneurs to explore debt financing, engage local investors, and leverage crowdfunding. As the funding landscape evolves, startups must adapt to these changes to ensure their resilience and long-term success in a dynamic and ever-changing market
