How Nigerian startups can handle rising inflation and operational costs in 2023

·
January 31, 2023
·
8 min read

Subscribe to Fintech Today

Fintech Today is a bi-weekly newsletter focused on the fintech industry in Africa. Subscribe to stay up to date with the latest funding stories, acquisitions, and developments in the space.
Fintech Today

Give it a try, you can unsubscribe anytime. Privacy Policy.

During one of my mindless scrollings on Twitter, which I’m trying to limit, don’t judge, a tweet from Doctor Neto, CEO of Wellahealth, really caught my attention.

“Startup is 1% inspiration and 99% perspiration. That’s in rational markets. In Nigeria, it’s 1 % inspiration, 100% perspiration and 200% God abeg! 😭.”

If you’ve ever tried to run a business in Nigeria, no matter how small — I’m talking occasional gig small — you’d realise the weight of the doctor’s statement. As more Africans enter tech, either as entrepreneurs or intrapreneurs, we’ll likely see more startups springing up by the day.

However, looking at current macroeconomic trends, all signs point to one major scare — starting and running a startup will become more expensive in 2023.

Advertisement

Asides from customers, those who have the audacity to run a startup should anticipate heat in some critical areas and prepare well against them this year.

Why do we think that, you ask? Two major reasons: Nigeria’s economy and the current global VC landscape.

Nigeria’s economy

Inflation in Nigeria 2022

In 2022, inflation in Nigeria rose for 10 straight months to hit 21%, 162.5% higher than the projected global average of 8%. Per the NBS, currency devaluation and rising production costs contributed to this trend in 2022.

Depleting foreign reserves and Nigeria’s rising demand for the dollar contributed to the naira falling by 6.1% on the official market and by 32% on the black market. This wouldn’t be much of an issue if you didn’t have to jump through hoops to get dollars at official prices. Even banks direct you to the black market when you want to open a domiciliary account.

The funding landscape

The startup fairytale of the past few years hit a roadblock in 2022 as the Russia-Ukraine War, COVID-19 blues, and its ensuing economic uncertainty caused a slowdown in startup funding.

After the record-breaking 2021, analysts expected African startup funding to shoot the roof the following year. However, conservative estimates peg funding numbers below that of 2021, and the best estimates shoot just a little above.

When the funding climate was “less tough” in recent years, startups could outspend the country’s crazy inflation numbers, but few startups can afford to do that right now. If you’re still not convinced, let’s look at the areas we expect costs to go up for startups.

  The key startup costs that could increase in 2023

Advertisement

The type of company you run determines where you spend the most money. In six months, companies like Airtel spent 19% of their revenue ($489 million) on technology to keep their service running, compared to 4.5% ($57 million) on sales and advertising.

This contrasts with Jumia, which spent 36% of its revenue ($38.4 million) on advertising and 26% ($28 million) on developing its technology.

However, some components are common to nearly every startup.

Salaries

counting naira cash 2

The global talent market is facing a weird shake-up. Tech companies laid off over 150,000 workers in 2022, but some, like Meta and Amazon, among others, are still hiring. With the rise of remote work, the competition for senior talent in Africa could take an interesting turn.

Chibuzo Ihentuge-Eric. Head, People & Culture, Bankly, argues that there will be increased demand for experienced employees who do not come cheap and also rehiring for staff that exited in 2022.

“Inflation and high cost of living place great demand on existing salaries leading to employees asking for increments. Also, an increased standard of living encourages employees to look for alternative gigs; this sometimes reduces productivity time for across the companies.” 

Ihnetuge-Eric explains that after H2 2022 performance appraisals, her company’s 2023 budget contains bigger salaries. She also insists that even well-meaning companies and startups that don’t get involved in talent won’t be spared by Nigeria’s rising inflation.

“With reference to the japa (immigration) saga, recruitment is more expensive than maintaining existing staff; this influences salaries upwards.”

Salaries are just one part of the consideration; Other employee benefits will likely cost more. Popular fitness centres and most health insurance providers recently increased their fees, and Bolt trips seem higher now on average following fuel scarcity issues.

Those in the business of giving devices to employees will also bear the brunt of currency devaluations. The M2 Macbook pro below arguably costs ₦400k ($885) more than it should if Nigerians could pay for stuff online at official exchange rates.

Simple Colorful Pie Chart Infographics 9

What to do?  

Bankly’s head of people points out that utilization reports show employees do not use some of these benefits. She insists companies can pull the plug on some of these subscriptions if it persists.

Ihentuge-Eric advises founders to be honest about the company’s financial state to employees, and it will help reduce the pressure of demands.

“Look for other means of compensating staff: Flexible working structure, Collaborations with other companies that could favour employees in exchange for services, Birthday Off days.”

If you want to run a startup in 2023, you should think about this while anticipating that funding will be more difficult to come by. Don’t let a lean bank account give you a pep talk; heed now.

Rent, utilities, and equipment

Photo by Medsile via Iwaria

For those running office spaces, rent and utilities could form a major expense in 2023. In January 2023, the Nigerian government approved electricity tariff hikes by a range of 5% – 275% that will take effect in February of the same year.

Diesel prices increased by 200% last year, resulting in a knock-on effect on rent and prices of goods and services nationwide. For those running physical offices, this will be a key consideration.

If you’re going to buy mostly imported office equipment, you’ll have to contend with skyrocketing prices.

What’s that? You don’t run an office? You’re not left out.

Advertisement

Internet, server, and cloud costs

MS Datacentre
]A data centre

Internet, server, and cloud costs are major considerations for any company; chances are, you’ll spend on cloud tools like workspaces and video conferencing. Depending on your company, this may or may not apply to you. But let me get down to the basics.

The Nigerian government infused a 5% excise tax on calls, sms, and data, which means you’ll be paying more to use the Internet in 2023.

Since dollar scarcity has limited the amount you can spend on foreign stores, domain names, web servers, and cloud services will likely cost more if you don’t pay in your local currency.

Even if you pay cloud costs with local providers, there are still issues.

I reached out to our good friends at MainOne, one of Africa’s major data centre providers, and they rightly point out that inflation, currency devaluation, high diesel costs and electricity tariffs, are impacting the costs of running their business.

“Data Centres are required to be available 100%, so higher energy costs and high costs of importing mechanical and electrical equipment have impacted the cost of operations. We have a similar experience on the networking side of the business as well.”

Diesel and petrol costs

The company insists it will continue improving cost efficiencies and value for customers across its data centres and network operations. However, there are concerns that higher costs will keep data centres and cloud services out of reach for most businesses.

MainOne is adamant that while cloud and data centre costs might increase, it will still be cheaper than maintaining these servers in-house.

Toba Obaniyi, CEO of Whogohost, one of Nigeria’s largest domain and DNS hosting providers, agrees that the cloud is better than no cloud. But he is more optimistic and anticipates a decline in infrastructure costs for Nigerian businesses as more cloud computing options become available.

“AI tools would undoubtedly increase productivity and save time and money, allowing businesses to find faster ways to develop more unique market solutions. I also believe there would be a greater number of cloud and edge computing options available locally for businesses, preventing them from incurring additional expenses due to, fluctuating foreign exchange rates.”

 What to do?  

MainOne reveals that they’ve tried to reduce their reliance on diesel by embracing more environmentally friendly energy solutions that reduce both costs and their carbon footprint.

“Our Data Centres are strategically located close to sources of grid power, and we have invested in partnerships with local power distribution companies to build direct connections to the grid. This ensures high public power availability over and above the norm and reduces the utilisation of diesel-fuelled power generation.”  

Obaniyi is big on using the cloud to reduce costs for startup operations.

“Typically, on-premises infrastructure is costly. To reduce costs, businesses should consider cloud solutions and colocation whenever possible. I would also recommend that businesses use Software-as-a-Service (SaaS) alternatives to expensive licenses, as this would ensure that their costs are more evenly distributed.”

Obaniyi explains that founders should invest in infrastructure that enables scaling on demand, as you’d only pay for what you use.

“Companies should also review their codebase and ensure that their applications are efficient and require less infrastructure to run. This is a fantastic opportunity to compare with local cloud options to identify cost-effective alternatives.”

Marketing and other expenses

pexels nappy 936137

A decent chunk of the money most startups make goes back to advertising platforms like Google, Meta, and Twitter. These platforms offer sophisticated advertising that’s attractive to result-oriented marketers, but those in Nigeria will have to deal with the monster of the FX black market when paying for these services.

Though several startups are springing up to help tackle this problem, current government restrictions mean you’ll be paying 64% higher than if you were using official rates.

In addition, you can expect every other professional to become more expensive to engage; think legal, HR, sales, and accounting.

It’s possible that Nigeria pulls a shocker and things improve, but expectations are the thieves of joy.   

Creative ways to drive down costs, such as looking for naira alternatives to services you use, striking strategic partnerships, and, most importantly, making money, are some of the solutions.

In conclusion

Like startups have always done when faced with dire straits, adaptation will be key going into the new year. Whogohost’s Obaniyi advises startup founders to examine all their expenses and compare them to the value they contribute to the organisation before making any decision.

“Global technology companies are currently reducing their workforces because this is typically the simplest course of action. Here are some questions to consider:

“Would it also be less expensive to move all of your employees to remote work and rent a less expensive office space? Should some of these extravagant benefits and bonuses for staff be reviewed? Should the size of the team be evaluated?”

Several investors anticipate that 2023 will be tough, and only startups providing real value will survive. Some experts even believe that this period will produce a unicorn.

“The focus should be on growth, and everything that does not contribute to this primary objective should be reviewed. This is an ideal time for startups to return to the core of their customer value proposition.”

Wish you a cost-free 2023.

Journalist feasting on tech, business, and policies. Looking to chat? Catch up with me, @eruskkii, on Twitter or send a mail to emmanuel@techpoint.africa
Journalist feasting on tech, business, and policies. Looking to chat? Catch up with me, @eruskkii, on Twitter or send a mail to emmanuel@techpoint.africa
Subscribe To Techpoint Digest
This is A daily 5-minute roundup of happenings in African and global tech, sent directly to your email inbox, between 5 a.m. and 7 a.m (WAT) every week day!
Digest Subscription

Give it a try, you can unsubscribe anytime. Privacy Policy.

Journalist feasting on tech, business, and policies. Looking to chat? Catch up with me, @eruskkii, on Twitter or send a mail to emmanuel@techpoint.africa

Other Stories

43b, Emina Cres, Allen, Ikeja.

 Techpremier Media Limited. All rights reserved
magnifiercrossmenu