Making investment decisions is often tricky because of uncertainty. FX volatility presents a significant challenge for investors and Nigerian startups, impacting the cost of capital and hindering investment opportunities.
In Nigeria, where FX volatility is a prevalent issue, investors often factor in a premium to mitigate the risks associated with currency fluctuations.
Now, let’s talk about the Naira. Over the past five years, its value has dropped significantly. For instance, at the start of 2019, you could exchange 306.45 Nigerian Naira for 1 US dollar. But now, it takes about 1450 Nigerian Naira to get that same dollar in official markets. That is over a 400% increase in the dollar value compared to the Naira.
Raising capital, whether through debt or equity, becomes more expensive due to this premium. For debt financing, startups may face higher interest rates on loans, increasing their cost of borrowing.
Similarly, when raising equity capital, startups may receive lower valuations from investors, impacting their ability to secure funding at favorable terms.
January Statistic
African startups continued to attract investment, albeit with variations across regions and financing types. The region witnessed a moderate level of funding activity for African startups, with 38 deals surpassing the $100,000 mark, resulting in a total funding amount of $77 million.
Equity financing remained the preferred choice for investors, comprising 74% of the total funding secured by African startups in January.
This underscores investor confidence in the long-term growth prospects of these startups, as equity investments provide not only capital but also strategic support and alignment of interests between investors and founders.
Although debt financing constituted a smaller portion of the overall funding landscape, it still played a significant role, accounting for $20 million.
Debt financing offers startups an alternative avenue for raising capital while minimizing equity dilution, making it an attractive option for certain business models and stages of growth.
This situation hits Nigerian businesses hard, especially startups trying to raise equity or debt funding, with FX volatility placing huge fundraising strain.
Geographically, Egypt and Kenya emerged as frontrunners in terms of funding, with each country securing $24 million in investment. South Africa followed closely behind with $7 million, while Nigeria garnered $5 million in funding. Collectively, these four countries accounted for a substantial 90% of the total funding, highlighting their prominence in the African startup ecosystem.
Nigerian Startups Problem?
News of the unification of the exchange rate has been met with mixed feelings. For venture capitalists investing in Nigeria, it is supposed to be a welcome development, stimulating investor interest in the country as they can potentially earn higher returns.
That has not been the case. The African funding slump has been more exasperating in Nigeria. The instability in the foreign exchange (FX) market has not significantly impacted investors’ interest in Nigerian startups.
The instability in the FX market makes it difficult for Nigerian startups to access foreign capital. Foreign investors are often hesitant to invest in countries with volatile currencies, as they are concerned about the potential devaluation of their investments. This has made it challenging for Nigerian startups to raise the necessary funding to scale their operations and compete in the global market.
With the largest startup ecosystem on the African continent, Nigeria has garnered attention as a hub for innovation and entrepreneurship. The country’s dynamic market, coupled with a burgeoning tech-savvy population, has fueled the emergence of diverse startups across various sectors.
Despite the promising landscape, Nigeria’s startups now face the ramifications of currency devaluation, which has been broadened by a reoccurring increase in inflation.
Investors are carefully looking at whether these businesses can keep going as the naira loses value quickly. This is leading to talks about the chance of some businesses closing down and causing chaos in the market. Investors can’t abandon Nigerian startups. Or are they?
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