By: OLIVIA NNOROM
Early this year, the world bank predicted that Nigeria’s economic growth is expected to accelerate slightly to an average annual rate of 3 percent between 2024 and 2025, representing a growth per capita of 0.2 percent in 2023 and 0.4 percent respectively.
However, this is insufficient to mitigate the effect of the existing damage in the country’s economy and financial sector as a whole.
As more Nigerians continue to embrace entrepreneurship, we will likely see more startups springing up by the day. However, given the current macroeconomic trends in the country, starting and running a startup will become more expensive in 2023.
In addition to the start-up related problem where the cost of capital for a startup is typically higher than the cost of capital for a more established company because Investors require a higher return to compensate them for the risks involved, rising cost of capital due to the country’s economic and market situation has become a cause for concern.
Some of the factors contributing to the rising cost of capital include inflation, foreign exchange fluctuations, and high-interest rates.
Inflation is a problem that has plagued the Nigerian economy for many years. It reduces the value of the local currency, raises the cost of goods and services, and has constantly reduced the purchasing power of an increasing Nigerian population. This inflationary pressure makes it more expensive for startups to operate, as they have to pay more for inputs, such as raw materials and labour, which inturn reduces their profit levels.
Foreign exchange fluctuations also pose a significant challenge to Nigerian startups. The country is heavily reliant on imports for many of its goods and services, particularly in the technology sector. When the value of the local currency depreciates against foreign currencies, the cost of these imports increases, making it more expensive for startups to operate.
Although the CBN is finding effective measures to regulate this, It is worthy to note that the country has over time recorded depleting foreign reserves and rising demand for the dollar, which contributed to the naira falling by 6.1% on the official market and by 32% on the black market. This poses a big problem for startups.
High-interest rates are another challenge faced by Nigerian startups. The Central Bank of Nigeria has kept interest rates high in recent years to combat inflation. However, this makes it more expensive for startups to borrow money to finance their operations or expand their businesses.
To this effect, President Tinubu’s administration has pledged to regulate this by reducing the monetary policy rate (MPR) and making borrowing more accessible to Nigerians.
The issue of poor electricity supply increases the cost of capital since businesses resort to spending more on alternative power supply, to access light which is needed for the success of a business.
Also, the government has not made supporting startups a top priority, consequently, there are limited incentive schemes that could potentially fund startup businesses.
All of these factors contribute to the rising cost of capital for Nigerian startups. As a result, many startups struggle to raise the funds they need to grow their businesses and compete in the market. This challenge is particularly acute for early-stage startups that lack a track record and are seen as high-risk investments by lenders and investors.
To navigate these challenges, Nigerian startups are expected to employ more affordable means to fund their startups;
- Creating a scalable business model to attract more investors. This is to say that investors are more attracted to business models that show the potential to increase the revenue with minimal expenditure in the coming months or years.
- Seek alternative financing options such as crowdfunding, grants, and venture capital.
- Identify strategic partners, including angel investors, who can offer relevant expertise and resources while potentially providing funding.
- Explore the growing number of incubators, accelerators, and co-working spaces to access broader funding resources, coaching and mentorship.
- Mitigate foreign exchange risks by seeking to purchase equipments locally, or exploring alternative currency payment options, and try to plan foreign currency payments ahead,
While economic pressures might not be in their control to regulate, Startups in Nigeria should explore various means to initiate and remain in business for as long as they want to be.
They can overcome some of the rising cost of capital challenges they face by increasing scalability of their business, using a more affordable means to access funds and creating the necessary foundation for scaling their businesses sustainably.
