Is The Nigerian Tech Ecosystem On A Brink of Dutch Disease?
Nigeria Independence
When Nigeria gained independence in 1960, non-oil exports, agricultural commodities and solid minerals accounted for 97 percent of total exports, according to NEXIM reports.
Cocoa, cotton, palm oil, palm kernel, groundnut, and rubber were significant export crops. Between 1970 and 1974, when the international oil price increased from $1.27 to $11, this trend experienced a significant dramatic shift. Nigeria's non-oil exports fell from 43% to a pitiful 7% during this period.
This ensuing Dutch Disease resulted in a diversion of resources away from the non-oil sector, contributing to its neglect and lack of investment in formerly export-oriented sectors, most notably value-added export.
Over the last five decades, Nigeria is estimated to have lost approximately $10 billion, or approximately N3.6 trillion, in export opportunities for crops such as cocoa, oil palm, cotton, and groundnut.
Although the government attempted to correct this imbalance over the last two decades by investing in agriculture, the constraints of maintaining a colossal federal government rendered this impossible.
As of 2018, Nigeria's non-oil sector accounted for about 5% to 7% of total exports. While the export values of other agricultural commodities such as shea, ginger, cassava, yam, sweet potato, cowpeas, and pineapple continue to rise, Nigeria has been unable to benefit despite being one of the world's largest producers of those commodities.
Succumbing to Dutch disease
Any astute observer of Nigeria's tech startup ecosystem would be justified in suspecting that the sector, like the Nigerian economy, is succumbing to Dutch disease.
Although one cannot categorically apply to a particular sector, it is difficult to think of a more apt term to describe the tech ecosystem's unraveling obsession with fintech investments.
Tech Investments
The investment reports on the tech scene over the last three years indicate a significant but troubling increase in the disparity between the volume and value of fintech investment.
Nigeria received $348 million in investment in the African tech ecosystem in 2018, when the total value of the investment was $1.163 billion, with fintech startups receiving 50% of total funding. Other startups accounted for the remaining 50%, with B2B & technology adoption accounting for 30.4 percent, online & mobile commerce accounting for 19.6 percent, according to a Partech Partners analysis.
Fintech accounted for 54.5 percent of funding in 2019, while B2B & technology adoption accounted for 16.1 percent, and online & mobile commerce accounted for 29.3 percent.
Indeed, fintech received 41% of total funding in Africa that year, and 62% of Nigeria's $747 million in total rounds were in fintech.
Except for Egypt, fintech accounted for more than 30% of funding in Africa's top four countries – Nigeria, Egypt, Kenya, and South Africa.
In 2020, the total value of funding will reach $1.43 billion across 359 transactions, representing a +44 percent year-on-year increase. However, when compared to 2019, it represents a -29% year-over-year decline.
The year's activity revealed a dramatic shift in the number of disclosures, with only 52% of deals fully disclosed in 2020 compared to 70% in 2019. It is a significant decrease from 2019 levels and represents 72% of funding, compared to 90% of funding disclosed fully in 2019.
Nigeria leads the disclosed equity rounds with $307 million (21% of total equity funding), followed by Kenya with $305 million. The top four countries accounted for 80% of equity volume, with fintech accounting for 25% of 356 deals.
This fintech share represented a significant decline in value from two years ago. However, it represented a significantly higher volume than other sectors such as agritech – 13%, enterprise – 11%, off-grid technology – 10%, E/M/S/Commerce – 7%, and most other verticals – which accounted for less than 10% of equity.
With these statistics, investors appear to be communicating a single message: if technology investment is attractive, fintech investment is the Holy Grail. Stripe's acquisition of Paystack for $200 million in October 2020 reaffirmed this message. Since Paystack's acquisition, interest in Nigeria's tech ecosystem has soared, with investment in the first three months of 2021 already exceeding that of the entire year 2020, with fintech investment unquestionably leading the charge.
Fintech Investment Quadrupled
Fintech investment has quadrupled in popularity since Flutterwave raised $170 million at a valuation nearing a billion dollars. While other startups in other verticals have raised funding as well, such as messaging service Termii's $1.4 million Series C round and delivery startup Kwik's $1.7 million pre-series A round, these are relatively small sums in comparison to Flutterwaves' $170 million series C or Kuda's $25 million Series A rounds.
Overall, investor sentiment toward fintech remains bullish, posing a threat to the tech ecosystem's balanced growth.
It is unlikely to reverse anytime soon. Regrettably, authorities cannot legislate this. As Techpoint founder Adewale Yusuf suggested in that opening tweet, the onus is on players across multiple verticals of Nigerian technology to convince investors to spread their seed. The risk is that if this trend continues beyond 2021, it may appear as though the only investment opportunity in Nigerian technology is in fintech.
IT Courses and Certification
Fintech - Financial Technology Course and Certificate
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