Brian Waswani Odhiambo, Partner at Novastar Ventures, shares his thoughts on the Nigerian startup ecosystem, including: the current state of play, outlook for the rest of 2024 and which sectors are most interesting to investors.
How has the startup ecosystem in Nigeria, including Novastar portfolio companies, performed so far in 2024?
Performance in the first quarter of 2024 in Nigeria was a mixed bag. Currency devaluation coupled with a general slow-down in the capital markets resulted in the shutdown of some companies, while others slowed down growth and focused on profitability.
In my view, the companies that struggled faced a few challenges:
- Hadn’t found product-market fit and didn’t have, or couldn’t raise, additional capital to keep going;
- Weren’t built on solid fundamentals and when the double whammy of reduced consumer spending and currency devaluation hit, they were unable to stay afloat;
- Companies that could cut costs and focus on profitability did and became more interesting to investors, although valuations dipped to reflect company performance and a reduction in the supply of capital.
Novastar portfolio companies in Nigeria remained resilient. While a majority of our companies implemented cost-reduction measures and focused on profitability, those that needed capital were still able to raise. This was primarily a reflection of the types of companies we are invested in i.e. transformative businesses that provide basic goods and services for everyday African consumers and producers and whose demand is not immediately affected by reduced consumer spending.
Last year, investment in startups saw a drop of about 40% — referred to as the funding winter. Has this continued so far in 2024 and will investors remain interested in Nigeria?
Unsurprisingly, the funding winter has continued into 2024, especially when compared to 2021 and 2022. However, I think we will see more activity than we did last year particularly as some of the companies that restructured in 2023 go to market to raise and as some of the recently capitalized Africa-focused funds begin to deploy capital. Terms will remain investor-friendly and deal sizes will remain small.
More broadly, Nigeria is too big and important a market to ignore for any investor. Despite current headwinds, I expect investor interest to remain high in the market.
Despite the funding winter, investment for climate tech startups in Africa from the private sector is growing, with businesses raising more than $3.4 billion since 2019. What does this say about where investors are putting their money?
Lack of energy access, the need for clean energy and climate change are all big and nested challenges facing the African continent. Conversely, Africa is best placed to take advantage of its abundant resources (natural and human) to lead the charge in combating climate change while ensuring its young, growing and tech-savvy population gets access to clean energy. I expect to see even more climate deals close this year.
Investors look to sectors that are in need of innovation and disruption. Health, logistics, education and embedded finance all fit that profile with many interesting investment opportunities.
Venture debt became popular in the funding winter. What is the implication? What is your outlook on the venture debt market in 2024?
Venture-debt will continue to remain an important investment instrument as it allows companies to raise capital without having to revalue the company and also allows investors to deploy capital through a senior instrument that can be repaid but also benefit from equity-like returns. Beyond the funding winter, venture-debt has a place in the African ecosystem in the short and long term. Companies that need working capital funding or need to invest in capex usually deploy expensive equity capital to fund these needs that are better funded through a debt instrument that is structured to reflect the risk profile of the company.
What is your investment outlook for the Nigerian tech ecosystem as well as the African tech ecosystem for the rest of 2024? What sectors are of particular interest?
I believe that the megatrends in Africa (Nigeria included) are the reason to keep investing. Africa has the world’s youngest and fastest growing population, all of whom are increasingly tech savvy. We currently have the largest available arable land and the largest carbon sink in the world outside of the Amazon. Urbanization in Africa is also the fastest growing in the world. These trends present myriad investment opportunities worth considering in 2024. These include:
- Climate tech — Nigeria provides a great opportunity for disruption in the energy and agricultural industries. Most of the population is still underserved by existing energy companies and will need alternative sources of power for domestic and productive use. As the country continues to diversify, agriculture presents a big opportunity for technological disruption. We are especially interested in technologies that help make food production efficient and sustainable.
- Embedded finance — fintech in Africa still has a long way to go. Companies that are including financial services into an existing product or service e.g. supply chain companies, B2B ecommerce companies, logistics companies, energy access etc. provide a large untapped opportunity for investment.
