When asked what he hoped to accomplish in his first 100 days in office, then-presidential candidate, Bola Ahmed Tinubu, famously said, "hit the ground running."
Since getting sworn in on the 29th of May 2023, he's done exactly that with a raft of polarising reforms. After announcing an end to the subsidy regime, his attention turned to the Central Bank of Nigeria (CBN).
First Godwin Emefiele, the former CBN governor, was suspended. Then came the unification of the exchange rate. Under Muhammadu Buhari, Nigeria operated a fixed exchange rate regime that made it difficult for many who owned businesses in the country to get foreign exchange.
The country will now operate a floating exchange rate regime allowing market forces to determine the value of the naira.
The exchange rate unification has been met with both approval and some healthy scepticism. Such a major decision is bound to impact several areas of the economy.
We've explored how it could affect workers in Nigeria and some of the ways startups could be affected. For this article, we examine the possible impacts on venture capital investments in Nigeria.
Nigeria has benefited immensely from Africa's startup innovation boom, becoming the continent's top destination for venture capital investments. In 2022, startups operating in the country raised $959 million when venture capital investments were slowing down globally.
That slump has continued into 2023 with Nigerian startups raising a little more than $100 million as of May 2023. Like many African countries, most of Nigeria's startup funding comes from outside the continent and any changes in the business environment can affect investor activity.
Increased investor activity and investor confidence
News of the unification of the exchange rate has been met with joy by many investors, with increased interest in the Eurobond market following the announcement. For venture capitalists investing in Nigeria, it is a welcome development for some reasons.
Marvin Coleby, Founder and CEO of Raise, believes the policy will stimulate investor interest in the country as they can potentially earn higher returns. This would make more capital accessible to startups when venture capital investments in the country is dwindling. However, he adds that getting the full benefit of this policy will depend on its implementation.
"Venture capital investors seek a stable macroeconomic environment with consistent policies and transparent regulations. Economic stability, coupled with effective management of inflation and fiscal discipline, can contribute to a conducive investment climate."
Businesses operating in the country have always struggled to access forex when they need to send funds out, often getting it at the black market rate. However, investors expect the repatriation of funds to get easier with this change in the system.
In August 2022, for instance, Emirates suspended its Nigerian operations because its funds were trapped in the country. With a unified exchange rate, such incidents are less likely to occur and investors can also exit their investments easily.
"For foreign investors, it should encourage them to come in since it looks like repatriation of funds will be easier with a single rate, and other recent policies. It's just finding startups that can deliver on such increased expectations that is harder now," Babatunde Akin-Moses, Founder and CEO of Sycamore adds.
Fiyin Ogunlesi, Chief of Staff at Oui Capital adds that while foreign investors assess currency risks, they will not easily be put off.
"The Nigerian market exists with high growth potential and will be difficult to [ignore] within the tech scene. Signals and reforms from the new government to genuinely attract foreign investments will determine how aggressive this set of investors are."
What will happen to startups that plan to raise capital?
Investors are not the only ones affected by macroeconomic conditions, startups looking to raise money may also be affected. But for startups that raised using the official rate, a floating exchange rate is a game-changer.
"The truth is that many startups at least have an internal benchmark with the parallel market. Many investors are aware of the multiple exchange rate regime as well, so this is not necessarily catching anyone unawares," says Fisayo Durojaye, General Partner at Ancestors Advisory, who has been on investor calls where they insist on seeing startup numbers in naira.
Akin-Moses explains that startups can also raise less money in dollar terms since it is now more valuable in naira. However, he adds that it will now be harder to return investments.
"Before, you needed to make ₦460m to return $1m. Now you need to make about ₦770m to return the same thing."
Ogunlesi adds that a combination of a venture capital funding slowdown and the naira floating could make it harder for startups, including those looking to raise capital.
"Do the current FX dynamics affect your strategic positioning as a company in terms of running day-to-day activities? Investors would like to have clarity around what drives the consumer to your product and what inputs you need to deliver quality to your customers."
Currency volatility could devalue investments
A floating currency regime will encourage investor activity, but currency volatility remains a concern as it could reduce the expected returns for investors.
"While a depreciating Naira may enhance the value of investments when repatriated, currency volatility can also introduce risks and uncertainties that affect overall investment performance. Investors will need to carefully assess and manage currency risks as part of their investment strategy," Coleby submits.
For Durojaye, the devaluation of investments is not foreign to investors and founders in the Nigerian startup ecosystem. With some investors encouraging geographical expansion to hedge against devaluation, he cautions that other African countries have similar economic challenges.
"The most veritable way to protect their investment is to invest in high growth startups that will outpace both inflation and currency devaluation," he says.
Ogunlesi adds that portfolio diversification is crucial for investors on the continent. This could take the form of investing in different countries or in different verticals. But when doing this, she cautions that investors must understand the relationship, if any, between the markets or sectors they invest in as one event in a sector/market could affect others.
It's still early days but history suggests that floating a currency could be a catalyst for investments in a country. However, implementation is where everything is determined and how the CBN proceeds will determine if Nigeria reaps the benefits of this decision.