Is the Nigerian tech ecosystem on a brink of Dutch Disease?

Fintech investment in Nigerian tech has accounted for ~25% of all deals since 2018

At independence in 1960, Nigeria’s non-oil exports, which were mainly agricultural commodities and solid minerals, made up 97 per cent of Nigeria’s exports, according to reports from Nigeria Export-Import Bank, NEXIM.

Crops like cocoa, cotton, palm oil, palm kernel, groundnut and rubber were major export commodities.  

This trend would see a major dramatic shift between 1970 and 1974 when the international oil price increased from $1.27 to $11. This period saw Nigeria’s non-oil export drop from 43 per cent to an abysmal 7 per cent.

This ensuing Dutch Disease led to movement of resources out of the non-oil sector, contributing to its neglect and lack of investments in the erstwhile export sectors, particularly value-added export.

It is estimated that Nigeria has lost about $10 billion, about N3.6 trillion, in export opportunities in crops like Cocoa, Oil Palm, Cotton and Groundnut over the past five decades.

Although the government had tried to correct this imbalance over the past 20 years by investing in agriculture, the exigencies of maintaining a humongous federal government has made it impossible.

As at 2018, Nigeria’s non-oil sector only accounts for just about 5 to 7 per cent of exports by value.

Although, export values of other agricultural sub-sectors like shea, ginger, cassava, yam, sweet potato, cowpeas and pineapple continue to rise, Nigeria has been unable to benefit despite being one of the highest producers of those commodities in the world.

Any keen observer of the Nigerian tech startup ecosystem would have the justifiable suspicion that the sector, just like the Nigerian economy, is slipping into some kind of Dutch disease.

Although one cannot say categorically if this term could apply to a specific sector, it is hard to find a better word to describe the unravelling obsession with fintech investments in the tech ecosystem.

The investment reports on tech scene over the past three years show a significant but disturbing progression in the imbalance in volume and value of investment into fintech.

Starting in 2018 when the total value of investment into the African tech ecosystem was $1.163B, Nigeria accounted for $348M, out of which fintech startups accounted for 50 per cent of total funding. Other startups shared the remaining 50 per cent, with B2B & tech adoption, online & mobile commerce accounting for 30.4 per cent and 19.6 per cent respectively, as per a Partech Partners analysis.

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According to a sector analysis on funding report in 2019, fintech accounted for 54.5 per cent, while B2B & tech adoption accounted for 16.1 per cent, with online & mobile commerce accounting for 29.3 per cent.

As a matter of fact, for that year, total funding going to fintech in Africa was 41 per cent and 62 per cent of Nigeria’s $747M total rounds was in fintech.

Except Egypt, fintech accounted for more than 30 per cent of funding in all top four African countries – Nigeria, Egypt, Kenya and South Africa.

In 2020, total value of funding stood at $1.43B in 359 deals, a +44 per cent year on year growth. However, compared to 2019, it represents -29 per cent drop year on year.

The dynamics of the year’s activity showed a dramatic shift in number of disclosures as only 52 per cent of deals were fully disclosed in 2020 compared to 70 per cent in 2019. This is a drastic drop from 2019 and represents 72 per cent of the funding vs 90 per cent of the funding that was disclosed fully in 2019.

Of the disclosed equity rounds, Nigeria leads with $307M (21 per cent of total equity funding), followed by Kenya with $305M. Top four countries attracted 80 per cent of equity volume, with sector analysis showing that fintech accounted for 25 per cent of the total 356 deals.

This fintech share was a significant drop from the value of investment two years’ prior. However, it still represented a much higher volume compared to other sectors such as agritech – 13 per cent, enterprise – 11 per cent, offgrid tech – 10 per cent, E/M/S/Commerce – 7 per cent and majority of other verticals which accounted for less than 10 per cent in share of equity.

With all these statistics, investors seem to be sending one message – that if tech investment is attractive, fintech investment is the Holy Grail. The acquisition of the payment processor, Paystack by Stripe for $200M in October 2020 reinforced this message. Since the acquisition of Paystack, the interest in the Nigerian tech ecosystem has skyrocketed, with the value of investment within the first three months of 2021 already surpassing that of the entire 2020, with fintech investment undoubtedly leading the pack.

The craze for fintech investment has also quadrupled after Flutterwave raised $170 million in the north of a billion-dollar valuation. Although other startups in other verticals have also secured funding such as the messaging service Termii’s $1.4M and delivery startup, Kwik’s $1.7M pre-series A round, they are small sums compared to Flutterwaves’ $170M series C or Kuda’s $25M Series A rounds.
Overall, investors’ sentiments remain bullish towards fintech in a way that portends a threat to a balanced growth of the tech ecosystem.

It is not likely that this trend will slow down anytime soon. Unfortunately, this is not what authorities can legislate. The onus, therefore, lies on the players across several verticals of the Nigerian tech to convince investors to spread their seed, as Techpoint founder, Adewale Yusuf suggested in that opening tweet. The danger is that if this trend continues beyond 2021, it might begin to appear that the only investment-worthy in Nigerian tech is that on a fintech.