In Nigeria, the government and local VCs are helping startups weather the tech downturn

As startup ecosystems across the world reel from a funding crunch, in Nigeria — the leader in startup funding among all African nations in 2022 — the government and local investors have stepped in to offer the support the fledgling industry needs.

In March 2023, the Nigerian government partnered with the African Development Bank, the French government, and the Islamic Development Bank to launch an investment initiative worth $618 million for tech and creative startups. The government has pledged a contribution of $45 million to this initiative. Earlier that month, it also inaugurated an implementation committee for the recently signed Nigeria Startup Act. With a 10 billion naira ($21.7 million) statutory fund disbursed annually, the Act will provide a consistent funding pipeline for the local startup ecosystem.

This development came in the same week after the Nigeria Sovereign Investment Authority (NSIA), which manages the country’s sovereign wealth fund, launched a competition with a $255,000 prize to fund “early-stage tech-enabled solutions.” NSIA CEO Aminu Umar-Sadiq said in a press release that the objective was to ensure Nigerian founders could “find local, patient capital” and resources to scale their businesses while attracting other funding sources.

In October 2022, the Lagos State government, which oversees Africa’s largest startup ecosystem, announced a venture capital fund, with plans to write checks that vest beyond the typical five- to 10-year period private VCs wait to get returns.

The growing government participation could be what the Nigerian tech ecosystem needs, Eloho Omame, an early-stage startup investor and partner at TLcom Capital, told Rest of World. “Capital deployment is critical to VC outcomes — not just in the quantum of capital but the diversity of sources. Alongside commercial capital, capital from governments and public sources can play an important complementary role,” Omame said.

Peter Oriaifo, principal at Oui Capital, believes government-facilitated funding will always be a preferred capital source for startups because it is armed with context — there is a better understanding of local market conditions, how things operate, and what founders want. Still, he warns that it must be done correctly. “Since it’s not [the government’s] area of expertise, it would be good to see a fund adviser stand in the gap, to help shepherd them through the process,” Oriaifo told Rest of World.

Local VC firms’ share of investment in African startups, too, has expanded over the past year. From January to September 2022, the percentage of investments above $1 million where at least one of the investors is based on the continent, stood at 58%, compared to 36% in 2019. In Nigeria, the figure was 59%.

Some leading local investors include Ventures Platform, Ingressive Capital, Future Africa, TLcom Capital, and LoftyInc, among many others.

Ventures Platform, a pan-African VC firm founded by Kola Aina, has raised over $500 million in follow-on capital. It has at least 60 active companies in its portfolio, including prominent names like Paystack, PiggyVest, Mono, Nomba, and Reliance Health, which made Y Combinator’s 2023 list of top private African companies. Ventures Platform’s latest fund closed in December 2022 and was oversubscribed at $46 million.

Serial entrepreneur and investor Iyinoluwa Aboyeji, who co-founded unicorns Andela and Flutterwave, established Future Africa in 2020. The firm claims it has raised over $1 billion in additional capital, and deployed nearly $10 million into 85 African startups during the past two years.

TLcom, where Omame is a partner, has said it invests up to $10 million in African startups and has managed funds worth over $300 million. Omame also co-founded FirstCheck Africa with Odunayo Eweniyi, COO of local savings platform PiggyVest, to bridge the gender gap in startup funding in Africa. The firm invests up to $250,000 in early-stage rounds for female-led startups.

“Alongside commercial capital, capital from governments and public sources can play an important complementary role.”

There has also been an influx of funding from Africans who succeeded in their earlier ventures and are now reinvesting that wealth. They include Shola Akinlade, CEO of Paystack; Olugbenga Agboola, founder of Flutterwave; Victor Asemota, co-founder and director at Swifta; and Bosun Tijani, whose company, Co-Creation Hub, which is said to be Africa’s largest innovation hub, and launched a $15 million accelerator program earlier this year.

According to Samuel Okwuada, CEO and co-founder of Remedial Health, a health-tech company, local participation bridges capital streams for startups, especially in times of global volatility and the ensuing funding crunch. “The local investment community has stepped up in some ways to fill in some gaps, especially with seed-stage companies or companies needing a bridge round to help power through the hard times or scale up rapidly,” Okwuada told Rest of World.

Providing this funding shield is especially important now that the World Bank has raised concerns about a global recession in 2023 — the first time in 80 years that two global recessions will happen in a decade, following the Covid-19-induced crash in 2020.

The World Bank further stated that the recession could be triggered by international financial market stress — FTX’s collapse eroded the value of crypto assets globally, Silicon Valley Bank (SVB) has decimated global tech funding and capital, and Credit Suisse is also going through a crisis. This prediction looks increasingly likely and could have a devastating impact on startup funding.

“Similar to the global trend, venture capital funding has declined [in Nigeria] since [the second half] of 2022 — 32% year-on-year decline in Q3 and 14% year-on-year decline in Q4 2022,” Olajide Adamolekun, chief financial officer at Autochek, a car credit company, told Rest of World. “The number of deals is also declining in response to the uncertainties surrounding the global economy with the increasing interest rates.” 

The challenges and risks of investing in the country remain, whether the investment is foreign or local. According to analysts, an unstable political environment, unfriendly economic policies, and overbearing regulatory and tax burdens still discourage local investors.

“There is still significant room for improvement with the ease of doing business. There are various bottlenecks that make it difficult to run businesses seamlessly and successfully. There are also issues around taxation, volatile exchange rates, access to a reliable internet connection, as well as public, financial, and product data-sharing,” Adamolekun said.

For Okwuada, who operates in a sector with massive infrastructure deficits, the government needs to plug the gap by building better frameworks — from roads to power supply — to “give business owners and entrepreneurs one less thing to worry about, and that is always a good thing.”