Analyzing the Challenges Facing Nigerian Startups

The recent rash of Nigerian start-up deaths has founders, investors and policy watchers shaking their heads in continued disappointment in what was once touted as the beating heart of a budding tech industry on the continent. More than a dozen Nigerian tech startups have gone out of business since January 2023 until June 2024. Among the most well-known examples of startups that failed or significantly changed their direction were a crossover between systemic problems: Edukoya, Okra, and ThePeer; HerRyde, Chopnownow, and Cova; BuyCoins Pro, Quizac, and Joovlin. The startup closures in Nigeria are not simply individual cases of failure, but they indicate that something fundamental is wrong with the tech ecosystem that Nigeria needs to address to guarantee its sustainability.

Following the intelligence by Techpoint Africa: The Big Deal, in 2021, Nigerian startups accommodated the largest portion of overall startup funding programmed capitalized in Africa (over 30 per cent). However, by the mid of 2024, the situation had become moribund. Ventures, previously the brightest hopes of the Nigerian digital innovation, such as ThePeer and Okra, which are supported by Y Combinator, have started to go offline. Relatively early-stage edtech business Edukoya, which closed a $3.5 million seed round in April 2021 led by Berlin-based fund Target Global, has shuttered. The failure of these projects, particularly the fintech and edtech projects, has raised eyebrows regarding the reasons Nigerian tech startups are faltering in their development strides.

 

A Funding Crunch with Lasting Ripples

The immediate reason is one of the most obvious ones: the start-up funding pandemic. With the global tech slump in 2022 at the end of the year, all the venture capital (VC) had dried up in all the emerging markets. Nigerian startups, being very dependent on foreign inflow of VCs, were not spared. Partech Africa Tech Venture Capital Report reveals that the number of startups in Nigeria received less than half of the amount between 2022 and 2023.

Founders who had constructed burn-heavy models based upon regular fundraising rounds could no longer run their operations. A crypto exchange app, BuyCoins Pro, along with edtech app Quizac, another startup, did not manage to raise new capital and had to close operations. The poor funding environment was compounded by the unstable macroeconomic environment, Naira devaluation, inflation rates that were more than 30%, and the increase in interest rates.

This funding deficit revealed the unsustainability of start-up models that concentrated on scale rather than sustainability. The bottom line, as realized by most people, is that hypergrowth should not happen before lean operations and the generation of revenue in Nigerian startups.

 

Talent Drain and Infrastructure Constraints

In addition to the capital crisis, one other Achilles' heel has been the inefficiencies of its infrastructure, which was poor at best. Even the most promising ventures are marred by poor power supply, low broadband penetration, and poor monitoring of regulations.

Nigerian Tech startups are usually compelled to invest more in their buildings as compared to those in Europe or Asia. As an example, a food delivery startup such as chopnownow (that could be characterized by an excessive level of logistics) faced rising fuel prices and delivery inefficiencies that ate up the margins. Likewise, HerRyde, a female-centric ride-hailing service, not only have infrastructural constraints but cultural and market fit problems when it comes to providing services to non-users of the service.

This should be coupled with the growing talent drain. As Japa (emigration) trends continue picking up pace, Nigeria has lost a good portion of their tech-talent to destinations such as the UK, Canada, and Germany. What we have ended up with is an achievement vacuum that now costs early-stage startups just too much money to hire and retain experienced developers, product managers, and growth marketers.

Regarding its closure, Okra, a company that referred to itself as the mission to bring Africa to Plaid, mentioned the ecosystem challenges and structural inefficiencies as some of the reasons behind its decision. Although it constructed the infrastructure to support API-based financial services, the regulatory uncertainty hampered the possibility of scaling and garnering regular B2B customers.

Likewise, Cova, an application that collects and manages personal financial information, faced problems when it was not able to sustain both user confidence and momentum as fears over data misuse and compliance ambiguity rose. The peer-to-peer fintech service ThePeer was forced to close too, demonstrating problems with infrastructural and market preparedness.

 

Market Fit and Monetisation Issues

The tech startups in Nigeria have been charged with creating solutions where there are no problems. The failure to raise the anticipated startup capital of Edukoya despite building hype at a young age shows how edtech is facing the difficulty of being ready to enter the market even when the technology itself seems promising. Although the aim of the platform was to disrupt learning amongst African students, some of the parents were unwilling or unable to access digital learning resources because they were still strained economically, as well as because of the cultural obsession with physical classrooms.

Similarly, Joovlin, a B2B payment infrastructure firm, struggled to do so when the competition was stiff and customers did not show much loyalty. The middle-ground Nigerian consumer is majorly focused on low prices and trust, a factor that most of the startups did not think ahead in its interpretation.

What was the problem at its base? Instead of product-market fit, customer retention, and reasonable monetization approaches, startups are focusing on vanity metrics and investor-based growth KPIs. A startup that has weak fundamentals despite high-intensity marketing and seed capital will end up crumbling down.

 

Misplaced shareholder Expectations

Another factor that has contributed largely is the discrepancy between market expectations of investors and the realities with respect to growth in Nigeria. Most of the startups financed themselves with an estimation that was not pegged on operational, economic, and regulatory shocks. With deteriorating macroeconomic conditions, investors retreated or demanded replacement pivots that ventured further into focusing on weak business models.

Some investors did not offer post-investment support or reasonable due diligence, and this is a part of the story of the large number of startups that have closed in Nigeria. A few Nigerian fintech insolvencies were caused by having unrealistic deadlines imposed on their founders regarding their deadline to become profitable or to expand into the market.

 

Learnings of the Fallout

1. Sustainable growth versus hypergrowth: There is no more room in the Nigerian technology ecosystem to continue the unsustainable growth. It is not a business model or fundraising.

2. Market Readiness, User behavior and Cultural Dynamics: The cases of Edukoya, HerRyde, and ThePeer show the need to fully assess market readiness and user practices, as well as the cultural environment, before scaling.

3. Survival in the Uncertainty of the Environment: To operate in the tech ecosystem of Nigeria, one needs to be ready to be flexible and able to survive the environment. Entrepreneurs have to create shockproof models, which can absorb swings in policy, currency fluctuations, as well as dry periods in funding.

4. The Local Investors and Incubators: Local readiness ecosystems have to be enhanced. What is needed are indigenous investors and incubators who can come in to assist the startups with their local knowledge, directionally advising them and having a longer patience with the startups.

5. Interaction with Regulatory Agencies: Startups in Nigeria need to actively interact with the regulators and contribute towards the development of regulations, perhaps as essential as capital is, regulatory clarity and predictability.

 

Conclusion

The Nigerian startup failures witnessed over the last 18 months present a lesson that the scenario in the world of startups in emerging markets is unpredictable. Okra, Edukoya, and Chopnownow were not just casualties of ill implementation, but they were ensnared in the web of macroeconomic lulls, infrastructural bottlenecks, regulatory ambiguity, and a funding winter that led to shotgun marriages.

The Nigerian tech ecosystem needs to grow to survive. Such evolution has to accept the move to local solutions that are rooted in reality, constructed by teams attuned to the terrain and supported by investors with long-term stamina. They should shift their stories from chasing unicorn status to creating sustainable business entities, resolving actual challenges and providing sustained value.

Shutdowns of startups in Nigeria are traumatizing, but they provide clarity. Awareness of the fact that the construction of a successful tech business here is not a sprint, but a marathon, and only the one who are ready to endure the distance will get to the finish line.