A lack of finance at the moment has led to a crackdown on the level of Nigeria’s funding for startups. In addition, several other payment-related firms had to shut down. Numerous firms in the cryptocurrency sector have run into problems and distrust due to FTX’s demise.
Consumers are losing interest in cryptocurrencies and confidence in the sector, as are VCs in Nigeria’s startup ecosystem. This general fall in venture capital funding reflects Mara and Chipper Cash’s tumultuous times, marked by multiple rounds of layoffs.
Due to recent legal proceedings taken by US regulators against significant exchanges like Binance and Coinbase, the cryptocurrency industry has been severely affected. The crypto business now operates in a turbulent climate as a result of these activities.
Binance recently distanced itself from Binance Nigeria Limited, clarifying that the recent ban imposed by the Nigerian Securities Exchange Commission (SEC) on the Nigerian firm does not affect its operations. This issue points to the growing number of challenges facing the cryptocurrency space in Nigeria.
In the periods that followed the global financial inflation and FTX shutdown, Nestcoin laid off around 30 employees after $4 million in operational capital was reportedly held by FTX; Pan-African fintech company Chipper Cash reportedly laid off a third of its employees; and over 1.5 million Nigerians using the U.S.-registered cryptocurrency exchange, Paxful were thrown into shock after the company temporarily shut down its market owing to “key staff departures” and “regulatory challenges in the industry.” Suddenly, the crypto narrative is not satisfying.
Significantly, the level of blockchain regulation and reduced faith have made investors more skeptical regarding where they invest their money.
Crypto X Venture Capital in Nigeria
The movement in venture capital funding away from cryptocurrency initiatives has grown significantly and is now very obvious.
Compared to the prior year, blockchain-related venture capital investment globally saw a huge fall of 82%. As a result, funding decreased to just $1.7 billion from $9.1 billion in the first quarter of 2022. Additionally, compared to the final quarter of the previous year, the financing amount shows a 30% decline.
This sum also represents the lowest total since the pitiful $1.1 billion in funding that was reported for the fourth quarter of 2020. It is important to note that at that time, a lot of people weren’t familiar with the idea of Web3.
According to data from Disrupt Africa’s most recent report, financing for African digital startups fell by 57% in the first quarter of 2023, particularly in Nigeria. Deal volumes were only 87, or half of the 175 from last year, which was not much better. In contrast, more than half of the entire money raised by African businesses in 2022 came from fundraising in Q1.
Source: The Big Deal
The Big Deal’s report followed a similar pattern and showed a 52% YoY reduction. Investors only transacted business in March for $66 million. Simply put, since 2020 ($39.6 million—an outlier year due to the COVID-19 epidemic), we haven’t experienced a March this awful like we had this year. It represents a 91% decrease from the $696.3 million that companies raised in February. It also shows that investors made fewer and smaller deals in Q1 2023.
Venture investors have adopted a cautious stance and have scaled back on sizable investments in the industry.
Showing Concern
According to consulting firm McKinsey, around 70% of fintech startup deals are being funded by investors with headquarters outside of Africa, most often in North America. It is anticipated that investment will slow because Africa’s issues mirror those of North America and Europe’s economies.
Comparatively, startup funding in the US and Europe decreased by more than half in the first quarter of 2023, to -54% and -60%, respectively, while it decreased by -65% and 80% in Asia and Latin America.
Given the current financial crisis, US crypto legislation, and the loss of Silicon Valley Bank and First Republic Bank, both significantly invested in the tech blockchain sector, the dependence on American VCs to fund African businesses is becoming increasingly doubtful.
Alternative funding sources, including local investors and the government, are anticipated to support the continent’s entrepreneurial environment more heavily. A $618 million investment in digital and creative businesses (iDICE) for startups and creatives was recently announced by Nigeria, which is encouraging. The fund size is equal to 50% of all VC funding that Nigeria received in 2022. This is a fantastic place to start.
