Imagine you’re the founder of a promising tech startup in Lagos. You’ve just secured a huge investment from a foreign venture capital firm, and you’re ready to scale your operations.
However, within a few months, the Naira depreciates by 20% against the Dollar. Suddenly, your imported software licenses, hardware, and other essential resources become way more expensive, squeezing your budget and threatening your growth plans.
This has become the usual situation in Nigeria, where the Naira’s fluctuations have become alarming. In fact, between January 2020 and January 2024, the Naira depreciated by over 200% against the Dollar. For startups, which usually rely on imported goods and foreign investments, such fluctuations have had huge negative impacts on their operational expenses and financial stability.
The Naira was introduced in 1973, replacing the Nigerian pound at a rate of 2 Naira to 1 pound. Initially, the Naira was relatively strong. However, in the 1980s, the global oil glut led to a sharp decline in oil prices—Nigeria’s main export—causing economic downturn and devaluation of the Naira.
The Structural Adjustment Program (SAP) implemented by the IMF in 1986 aimed to stabilize the economy but resulted in further devaluation and inflation. This was the beginning of a long regime of instability for the Naira, with its value continuing to depreciate through the 1990s and 2000s due to political instability, corruption, and mismanagement of oil revenues.
The introduction of multiple exchange rates by the Central Bank of Nigeria (CBN) in an attempt to stabilize the economy only added to the issues, creating differences between the official and black market rates.
More recently, the 2016 recession, triggered by a drop in oil prices and production, caused the Naira’s value to plummet, leading to high inflation and economic hardship. The COVID-19 pandemic further weakened the Naira, worsening existing economic challenges due to the global economic slowdown and reduced oil demand.
Link to Startups: The Impact of Currency Fluctuations
Nigeria’s startup sector keeps expanding, with estimates revealing between 3,000 and 5,000 active startups across sectors like fintech, agritech, healthtech, and edtech.
In 2022 alone, Nigerian startups attracted approximately $1.2 billion in venture capital. Reports from sources such as the Startup Genome Report and the African Development Bank highlight Nigeria as a leading startup hub in Africa.
One of the most immediate effects of Naira fluctuations on these startups is on input costs. Startups that rely on imported goods or services, such as tech hardware or software subscriptions, face high expenses as the Naira depreciates. This slowly kills profit margins, forcing startups to either absorb the cost, which may not be sustainable, or pass it on to customers through price hikes, potentially reducing demand.
These include decisions on pricing, cost-cutting measures, and whether to pivot business models. The stress of operating in such an unpredictable environment can lead to burnout, affecting team morale and productivity, and ultimately, layoffs.
Securing funding becomes more challenging in a fluctuating currency environment. Foreign investors may be wary of investing in Naira-denominated ventures due to the possibility of losing value, while local funding options may be limited or come with high interest rates, revealing the perceived risk.
Some Nigerian fintech companies have had to offer more equity or accept lower valuations to attract foreign investment, given the perceived currency risks.
Case Studies
Despite these challenges in Naira fluctuations, some startups have managed to scale through currency fluctuations successfully. Paystack, for instance, the Nigerian fintech startup founded in 2015, built its business in a highly volatile environment.
The founders, Shola Akinlade and Ezra Olubi, focused on building a payment infrastructure that could accommodate multiple currencies, allowing them to tap into international markets early on.
Their ability to attract foreign investment, despite the Naira’s instability, resulted from a strategic approach. By pricing some of their services in stable foreign currencies, they mitigated the impact of the Naira’s depreciation on their revenue.
Flutterwave also thrived by diversifying its revenue streams and expanding into multiple markets, reducing its reliance on the Naira.
Jumia, on the other hand, faced increased import costs, squeezing profit margins and complicating pricing strategies. Andela struggled with a rise in salary payments and operational expenses, while FarmCrowdy saw an increase in costs for agricultural inputs.
This shows that resilience and adaptability are required to succeed in Nigeria, added to strategic planning and the ability to pivot quickly in response to external pressures.
The Direct Impact: Cost Structures and Profit Margins
For startups with tight budgets, Naira fluctuations can quickly deteriorate profit margins. When the Naira depreciates and input costs rise, startups must either accept lower profits or increase prices.
Aside from import-reliant startups that have to raise costs for essential inputs, startups that utilize local resources may experience more stability in their cost structures, though they are not entirely immune to Naira fluctuations. The availability and quality of local alternatives can be limiting, making complete reliance on domestic resources challenging.
This is where the importance of “currency risk management” for startups comes in, a strategy that involves hedging against currency risks or diversifying income streams across multiple currencies to protect profit margins from exchange rate drops, as Flutterwave did.
Funding Challenges: Venture Capital and Investor Confidence
The instability of the Naira often dissuades foreign investors, who may view investments in Nigerian startups as high-risk due to the probable loss in value. This can greatly impact funding rounds and valuations, as seen in several cases where promising startups struggled to raise capital because of investor doubts over currency instability.
Startups must be able to handle the trade-offs between local and foreign funding. Local investors may offer more stability and an understanding of the market’s complications, but they often provide less capital and may have higher expectations for immediate returns.
On the other hand, foreign investors can bring high capital and global connections, but their hesitation around the Naira fluctuations can lead to tougher negotiations and more strict terms.
The Innovation Response: Adapting Business Models
In response to currency fluctuations, many startups are adopting lean business models, focusing on cost efficiency and rapid pivots to minimize financial strain. In cutting unnecessary expenses and streamlining operations, these startups aim to maintain profitability even as their input costs rise.
For instance, some startups have moved to cloud-based solutions with flexible pricing models, reducing the need for costly, upfront capital expenditures.
To overcome currency instability, some startups have developed dynamic pricing models that allow them to adjust prices based on real-time exchange rates. This strategy ensures that they can maintain profitability without alienating customers.
For example, e-commerce platforms may update product prices frequently to reflect changes in the Naira’s value, balancing the need to cover rising costs with the importance of remaining competitive in the market.
Nigerian startups can manage Naira fluctuations by diversifying revenue streams, employing financial planning tools, innovating products, and adapting business practices.
For instance, Jumia mitigates currency risk by sourcing products globally, Flutterwave uses hedging for cost predictability, and Paystack develops scalable digital solutions.
Adapting pricing and forming local partnerships, as seen with Interswitch, also helps address market challenges. These strategies can help Nigerian startups better navigate currency fluctuations and sustain growth.
