Economic contractions induced by the COVID-19 pandemic could have serious implications for many Nigerian startups.
A September report by Endeavor Nigeria, one of the country’s largest startup accelerators, found that nearly 80% of Nigerian startups have less than six months of cash runway left in their bank accounts. When considered alongside a 49% decrease in VC funding in Q1 2020 compared to Q2 2020, this statistic should spur Nigerian policymakers into action.
Nigeria’s economy — which now faces its worst recession in four decades — is buoyed by its startup ecosystem. For a petrostate where oil revenue constitutes over half of government revenue and more than 90% of export earnings, the drop in global crude prices will cause an estimated 2020 budget contraction of 15%. The consequences of a prolonged economic recession in Nigeria, which could last until 2023, limit the fiscal policy responses needed to keep the economy humming along. The one-dimensional nature of Nigeria’s economy, when compared to more resilient economies that can draw greater revenue from non-oil sources, should catalyze policymakers to prioritize economic diversification in the country’s recovery. One option they should heavily consider is enacting a Startup Act.
As one of Africa’s ‘Big Four’ tech hubs, where SMEs account for over 80% of all jobs and nearly half of GDP, providing relief to Nigeria’s startup sector should form a key component of the country’s recovery.
The government acted quickly in March by launching a ₦50 billion Targeted Credit Facility (TCF) to financially support individuals and SMEs through the crisis. While this helped keep some businesses afloat, it failed to distinguish fast-growing startups from all SMEs, thereby missing a critical opportunity to craft policy directly targeting the country’s innovation ecosystem — widely considered the most important driver of net job creation at home and abroad. Given their high-risk, experimental business models, startups must raise funding at a higher frequency than SMEs to expand operations and fight for market share. Amidst a backdrop of heightened uncertainty for the country’s thousands of entrepreneurs— who have already been affected by the #EndSARS protests — acknowledging and acting on this distinction is critical to improving Nigeria’s economic recovery. Investor confidence and the health of the ecosystem are on the line.
From fintech to edtech, Nigeria’s innovation ecosystem has produced some of the most promising startups on the continent. The country attracted nearly half of the total startup funding on the continent last year and Lagos is consistently ranked as one of the most valuable startup cities in the world. Nigeria’s government, on the other hand, has been slow to support the sector. While the government acknowledged the sector’s outsized importance to the country’s recovery in its June economic sustainability plan, Nigeria still ranks as the 131st worst country on the World Bank’s annual ease of doing business ranking. Despite a string of recent success stories, including Stripe’s $200+ million purchase of Paystack, outdated and complex regulations often stifle innovation — the August clampdown on e-hailing startups in Lagos being one example — and can make it less attractive to start a company when compared to other burgeoning African tech hubs. Endeavor Nigeria CEO Elohu Giban-Mbelu reiterated this point in a TechCabal interview last month:
“…the lack of clarity and the time or cost spent on lobbying efforts around policy and regulation can take away from time and cost injected into growing the business instead.”
Indeed, with an increasing exodus of software developers seeking higher pay and greater security overseas, the continent’s most valuable startup ecosystem faces challenges that extend beyond its lack of financing.
Nigeria’s startups are some of the most resilient on the continent, but government inaction risks deepening the pain by causing long-term damage to the sector.
With limited fiscal policy options on the table, now is the time for the Nigerian government to think boldly. The government could start by exploring the passage of a country-wide Startup Act, in effect mirroring what Tunisia and Senegal have each passed to become the first two African countries to do so — and what Rwanda, Kenya, Mali and over 10 other countries are reportedly also considering. Startup Acts are gaining steam on the continent, yet no reports indicate that Nigeria has followed suit.
What is included in a Startup Act and how could it benefit Nigeria’s startup ecosystem? The ideas for the Tunisia and Senegal acts each came together through a policy hackathon hosted by i4policy with hundreds of ecosystem players, including local investors, entrepreneurs and government officials over a multi-year consultative process. These bottom-up, multi-stakeholder discussions helped craft policy that improved incentives for entrepreneurs and investors. Key elements of Tunisia’s Startup Act include state salaries for up to three founders per company during the first year of operations, tax breaks, and a one-year leave period for both public and private sector employees to start a company with the right to return to their old jobs. Additional incentives encourage potential entrepreneurs to launch new ventures, including available startup grants, fast-track licenses to obtain the startup label, and increased state support for covering patent registration. Similar to Tunisia, Senegal’s version aims to help position the country as the Francophone leader in tech and entrepreneurship. Their policy includes three tax-free operational years for startups, training for youth and female entrepreneurs, and a startup registration platform on the government website. Moreover, such policies can help boost trust between young, tech-savvy entrepreneurs who often view government leaders as out-of-touch with their demands.
Two years after Tunisia’s Startup Act was passed, the country’s digital economy has flourished and the payoff has been huge.
2019 Q4 data obtained from Entrepreneurs of Tunisia (EOT), an organization formed after the Startup Act launched, shows that the country had over 165 new startups registered, 24 new co-working spaces opened, and $18.5 million fundraised — all within one year. In an April 2020 profile by WeeTracker, some Tunisian entrepreneurs expressed concerns about how the pandemic will affect business, however they largely credit the Startup Act for solving the ecosystem’s main bottlenecks and making it easier to focus on scaling their venture.
While it’s still too early to tell how Senegal’s Startup Act will take shape, the continent-wide push for enacting pro-startup legislation indicates that this could be an effective component of Nigeria’s economic recovery. Kenya and Rwanda, two leading African innovation hubs, are already making headway on their own versions; Kenya’s Startup Bill was proposed to its parliament in September and Rwanda’s Ministry of ICT and Innovation has convened stakeholders in a series of workshops to discuss theirs. And just last week, Ghana launched discussions about drafting its own bill, aided by i4policy with support from multiple partners.
Creating an enabling environment for new ventures to flourish is particularly important during economic downturns when businesses suffer and funding dries up. The recent Endeavor Nigeria report should be a wake-up call for the government to separate SMEs from startups and target them more directly by enacting a long-overdue Startup Act. September reports in local media show the lessons Nigeria can glean from Kenya’s recently published act, in addition to an initial framework proposed by the Nigerian Global Affairs Council. With so much buzz locally and across the continent for how beneficial this legislation could be, Nigeria’s government can no longer remain conspicuously absent on this key issue. Too much is at stake.