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IN THIS ISSUE

• 3 Risks Of Investing In Nigeria’s Tech Sector And How To Navigate Them

DEEPTHINK

3 Risks Of Investing In Nigeria’s Tech Sector And How To Navigate Them

Nigeria’s tech ecosystem has exploded onto the global stage. With unicorns like Moniepoint, Flutterwave and Paystack making headlines. Venture capital funding to Nigerian startups reached $1.2 billion in 2022, making it the continent’s most funded tech hub.

But beneath the success stories lies a complex investment landscape riddled with unique challenges that can make or break your portfolio. While the opportunities are massive, the risks are equally significant – and often misunderstood by diaspora investors.

In this article, we analyse some of the most common investment risks and share practical tips to mitigate them.

1. Regulatory Uncertainty And Policy Volatility

Nigeria’s regulatory environment changes fast. From foreign exchange restrictions to sudden policy reversals, the government’s approach to tech regulation remains unpredictable and this has posed as a significant risk for many investors. One of the most recent cases of this was the Central Bank of Nigeria’s (CBN) sudden ban on cryptocurrency transactions in 2021, which blindsided fintech investors.

To mitigate such challenges, investors must:

• Establish relationships with local legal experts who understand both technology and Nigerian regulatory trends.

• Develop regulatory scenarios: optimistic, realistic, and pessimistic. And stress-test your investment plan against each scenario. If the business model only works in the optimistic scenario, reconsider. You can also consider using convertible instruments that can adapt to regulatory changes rather than fixed equity stakes that lock you into specific business models.

• Avoid concentrating investments in sectors facing active regulatory scrutiny. For instance, you’re heavily invested in fintech, balance with healthtech or edtech investments that face different regulatory landscapes.

2. Infrastructure Deficits And Operational Bottlenecks

Nigeria’s infrastructure challenges go far beyond unreliable electricity. The ecosystem suffers from inadequate internet penetration in some urban and rural areas, inconsistent payment infrastructure, and logistics networks that struggle with last-mile delivery across diverse geographical terrain.

Unfortunately, many Nigerian startups build brilliant solutions for infrastructure-rich environments, then struggle to scale in infrastructure-poor realities. A food delivery app that works perfectly in Victoria Island for instance, may completely fail in secondary cities where addresses don’t exist and mobile money adoption is low.

How do you mitigate against this risk? By:

• Conducting infrastructure-first due diligence. Visit operations in both tier-1 and tier-2 cities. Test the product yourself in low-connectivity environments. If the startup’s solution requires infrastructure that doesn’t exist in 70% of their target market, the scalability story needs serious scrutiny.

• Favouring business models that work around infrastructure constraints. For instance, software solutions that leverage existing infrastructure (like mobile money) often scale better than those requiring new infrastructure deployment.

• Look for founding teams with deep operational experience in Nigeria’s challenging environment. Teams that have successfully navigated infrastructure constraints in previous ventures bring invaluable institutional knowledge.

• Account for the hidden costs of infrastructure workarounds in your valuations. That logistics startup may need to build its own last-mile network. The fintech app may need backup power systems. These aren’t optional nice-to-haves – they’re survival requirements that should be reflected in your valuation models.

3. Currency Volatility And Capital Flight Restrictions

Naira has lost over 60% of its value against the USD in the past five years. But currency depreciation is just one piece of a complex puzzle that includes multiple exchange rates, forex scarcity, and restrictions on international transfers that can trap your capital indefinitely.

A startup you invested in may be showing 300% growth in Naira revenue but is actually declining in USD terms. Currency volatility makes it nearly impossible to accurately track real performance, compare valuations, or plan exit strategies.

Here is how to manage these risks:

• Structure investments with natural currency hedges. And favour companies with USD revenue streams (export-focused businesses, international service providers) or those whose costs and revenues are both in Naira.

• Don’t rely solely on international exits, they rarely happen. Instead develop relationships with local acquirers, consider secondary market options, and structure deals with multiple exit pathways. Some of the best returns have come from local strategic acquisitions rather than international exits.

• Consider investment vehicles that can hold multiple currencies, reducing forced conversion at unfavourable rates. And track CBN policy announcements, government fiscal positions, and oil price trends that drive currency policy.

Action Steps

Investing in Nigeria’s tech sector has a lot of opportunities for significant returns but only investors who are able to effectively mitigate against the risks would repeat the rewards.

Get actionable insights on any tech sector before going forward with your investment.

You can’t always avoid risks, but you can mitigate them with adequate research and market intelligence.

Let us do that for you today!

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