Nigeria's Volatile Tech Scene: Are We Building Startups or Just Plugging Leaky Hoses?
The CBN's Latest Naira Card Move: Why Most Nigerian Startups are One Memo Away From Extinction
The CBN just allowed commercial banks to start allowing international payments on their local cards, and the news was met with a lot of mixed reactions. To some younger folks who didn’t know that was possible some years ago, and for fintechs who’ve built a mammoth business providing those services, it was seen as a new light. Others criticised tech startups for always rent-seeking. However, both sides agreed that it’s bad news for founders and their investors of startups whose sole purpose is to allow people to pay for international transactions via dollar cards.
That story isn’t new; the Nigerian market is quite volatile for many startups, even the seemingly big startups aren’t immune. As an operator, this happened to me during the first wave of 2021. Virtual USD Cards accounted for about 70% of our revenue, and we were doing really great. Then, CBN clamped down heavily on us (via our proxy bank), and we lost that revenue stream with just a memo from the regulator asking our partner bank to shut down the issuance of dollar cards.
Like I usually say in SSA, most startups aren’t solving problems but plugging holes left behind by the ineptitude of our government policies and environment. So it only takes things to work properly in our society, and you begin to witness several startups and their "patient" VC capital going down the drain.
It’s the reason while evaluating startups, I focus on why the problem exists and who made the problem exist, rather than just the fancy solution a founder has come up with. Understanding the root cause of a market friction is far more critical than a superficial fix.
One of the most interesting things as a founder and operator turned VC is that you can easily point out the fluff. Seeing founders present ideas you’ve done in the past and are sure cannot work as the next big thing, and even trying to make you think you’re missing out because others write them cheques, won’t faze you a bit. If you probe further to see if they’re doing things differently, you discover that everyone is recycling the same process, product, and even customers, with no new strategy or innovation – just better branding and more outspoken, 'woke' founders. This lack of genuine differentiation is a glaring red flag for experienced eyes.
If you look at it from another angle, that’s not a problem for the startup model. Certain startup and VC models are built for the exact same purpose: to identify a problem that has a good Total Addressable Market (TAM) and can grow magnificently. Whether your revenue is generated by rent-seeking or not doesn’t matter. The goal is to block the friction, earn exponentially, scale, multiply enterprise value, and exit at home run multiples, dumping the risk on a bigger enterprise or the public. Rinse and repeat!
As great as this model seems, it can only work when three things work simultaneously: capital efficiency, short-term product-market fit, and extremely great underlying tech. Without these pillars, the entire structure becomes precarious.
Because this model focuses on exit but requires short-to-medium term growth, the enterprise shouldn’t be overvalued or even raise extremely high rounds. This is crucial for maintaining a valuation great enough to entice acquisition at a considerable price from an incumbent and to be able to generate great returns for investors and founders. In this case, founders and VCs will have to be comfortable with 5x to 10x exits, with acquisitions between $5M to $10M. This means you don’t need to be structured like an Interswitch when you’re only building a virtual card business, or get a chief of staff for a $10k MRR business. Invest your skills heavily, hire and build a great culture, and compensate employees with long-term benefits so they’re also committed to the vision. Enough of celebrity founders; rather, build celebrity startups earned by success. Focus on substance, not just perception.
If at all an exit is possible, founders need to build great tech from the beginning, modelling their technology to incumbents or bigger companies they’ve identified as potential acquirers. This means that, like Paystack being a perfect tech for Stripe, a card management startup needs to build a perfect tech for a GTB, or a retail "pay small small" tech needs to build a perfect tech that can be acquired by a PFA or big insurance firm (you get the gist). Build to standard; don’t duct-tape architecture or accumulate crazy tech debts. Technical excellence is not a luxury; it’s a prerequisite for a valuable exit.
Lastly, like with every scientific experiment, startups are hypotheses, and product-market fit is evidence of the success of that hypothesis. Hence, PMF isn’t gained after launch, but from the right ideation stage. Positioning, execution, channel of delivery, distribution mode, etc., are critical checks to confirm whether this hypothesis is right or wrong. The only way to test your hypothesis is to do research. Research and Development (R&D) is one of the least common things you see in the P&L or operations of many startups in Sub-Saharan Africa. Many founders launch into markets they have no clue how they work, why the problem they’re solving exists, who has tried it before, why they failed, why they succeeded, lessons to be learnt, etc. Does the problem exist as part of the functional engineering of the market/society they’re targeting? How does the market currently solve that problem? What behavioural issues lie with the target audience? Has there been any solution in another form? Is this problem created out of regulatory uncertainty? How does this problem fare in the hierarchy of necessity for the target audience? How much money does the target audience earn? How much revenue can be made even if they solve the problem and gain 100% market share? What technology are the target audience familiar with – how do they currently interact with such technologies? How accessible is the channel of delivering the technology, and what does it cost to deliver the technology at a cost affordable to their target audience? These and many more questions should form the basis of the hypothesis (the new idea or startup), and then answering them empirically and strategically breeds Product Market Fit – a product/service that solves the core of a problem with a scalable solution, affordable and easy to access, and adopted at scale by a niche audience or market. Without this rigorous pre-launch validation, success remains a matter of luck, not strategy.
You, my dearest reader, be the judge: how many startups in our clime tick the boxes above?
There are a lot of problems to be solved in Africa, and this is one of the reasons driving the confidence of the few bets from the West. But how much money will be burned to achieve results, and how can there be a re-engineering of the vast entrepreneurs to solve core problems or even encourage capital allocators to back people solving core problems when they’re living in a society where there is no coherent government policy or a resemblance of planning for the future? How do you get a founder whose only shot at breaking out of poverty is his bet on his startup? How much patience will he have to solve real problems without the distraction of hunger? How do you get a young founder to not try to measure up with the illusion of "big manism" ravaging our culture, or encourage employees to commit to excellence as against the "anyhowness" or "manage it like that" culture of service? These are deep systemic challenges that impact the very fabric of entrepreneurship.
My dearest readers, you’d agree with me that it’s almost a Sisyphean task to outperform your macroeconomic environment. Hence, the work of every founder striving to create solutions to bridge gaps and reduce frictions in a macroeconomic environment like ours is one of the most difficult jobs, as it takes its emotional, physical, and social toll on anyone who dares to take on the role. This means VC investors need to do much more than provide capital. There’s a need to do more on their platform management/portfolio support by providing strategic support, especially with research, market entry, and financial advisory ("CFO as a service"). The responsibility extends beyond the cheque.
A Framework for VCs to Identify Enduring Solutions
For VCs looking to back startups that solve "real problems" rather than temporary "holes," a robust evaluation framework is paramount. This framework goes beyond typical market size and team assessments, delving into the resilience of the problem and its solution against external shocks, particularly regulatory shifts common in markets like Nigeria.
1. Problem Deep Dive & Root Cause Analysis:
Is the problem a symptom or a systemic issue?
Symptom: A problem arising directly from a current policy, regulation, or market inefficiency that could be easily reversed. (e.g., providing virtual dollar cards solely because local cards couldn't do international payments).
Systemic Issue: A problem rooted in fundamental infrastructural gaps, deep-seated behavioural patterns, or long-term market failures, irrespective of current policy. (e.g., lack of reliable power, access to affordable healthcare, efficient logistics for informal trade).
Who created the problem?
If the government or a specific policy directly created it, assess the likelihood of that policy being reversed or improved. The CBN's move on local cards is a prime example.
What are the enduring pain points? Even if a regulatory "hole" is plugged, do underlying, persistent pain points remain? For instance, while local cards now work internationally, the fundamental issue of FX scarcity and volatile exchange rates for Nigerian businesses and individuals might persist, creating a need for more robust FX management solutions.
2. Solution Resilience & Adaptability to Policy Changes:
Policy Sensitivity Mapping: Identify all direct and indirect regulatory touchpoints for the startup's operations. What specific policies, present or future, could impact the business? Categorise policies into:
Enabling: Policies that support the business.
Neutral: Policies with little direct impact.
Constraining/Prohibitive: Policies that could significantly harm or halt operations.
Scenario Planning: Force founders to articulate how their business model would adapt to various regulatory scenarios (e.g., stricter FX controls, new licensing requirements, increased taxes, or the introduction of incumbent solutions).
Example: If a fintech relies heavily on low-cost cross-border payments due to a specific regulatory arbitrage, how would they compete if that arbitrage disappears or a major bank launches a similar service at scale?
Diversification of Value Proposition: Does the startup have multiple, independent value propositions, or is it a single-point solution vulnerable to a single policy change?
Proprietary Technology & IP: How defensible is the solution? Is it easily replicable by incumbents or other startups if the regulatory environment shifts? Strong underlying technology (as advocated earlier) provides a moat. Stress test the technology and understand how exactly it works to prove it is not just another wrapper of another business.
3. Market Fundamentals & Behavioural Stickiness:
Problem Hierarchy of Necessity: How critical is the problem being solved for the target audience? Is it a "nice-to-have" or a "must-have"? Solutions addressing Maslow's hierarchy of needs (food, shelter, security, basic financial access) tend to be more resilient.
Existing Alternatives & Their Inadequacies: How do people solve the problem currently? What are the inherent limitations or costs (monetary, time, effort) of these existing solutions, irrespective of policy?
Behavioural Change Required: How much behavioural change does the solution demand from users? Solutions that integrate seamlessly into existing habits or require minimal behavioural shifts tend to have higher adoption and stickiness, making them less susceptible to external shocks.
4. Data-Driven Insights:
Regulatory Impact Case Studies: Look for historical data on how similar policy changes (e.g., the 2021 virtual dollar card ban, changes in crypto regulations) have impacted startups in Nigeria and other volatile markets. Studies show that regulatory and bureaucratic challenges are among the top reasons for startup failure in Africa. For instance, data from Pitchbook (as of 2024) indicates a significant drop in funded tech startups in Africa, partly due to the broader VC downturn but also reflecting underlying market complexities and regulatory uncertainties.
Market Share Resilience: For existing startups, analyse revenue and market share trends following policy shifts. Did they pivot successfully, or did their business falter?
Customer Retention Rates: High, sustained customer retention, even amidst market turbulence, can signal that the problem being solved is fundamental and the solution is deeply embedded in user behaviour.
How Founders Can Build for Long-Term Resilience
Founders, the burden of proof is on you to demonstrate your idea isn't just a temporary patch.
1. Embrace Radical Problem Discovery (Not Just Solution Building):
"Fall in Love with the Problem, Not Your Solution": As Innovate Africa Fund emphasises, true innovation comes from deeply understanding the "wicked problems" that persist regardless of temporary market conditions.
Ethnographic Research: Go beyond surveys. Spend time with your target users in their natural environment. Understand their daily struggles, informal workarounds, and unarticulated needs. For instance, if you're building a logistics solution, spend days with informal traders understanding their entire supply chain, not just the delivery part.
Competitive Analysis with a Regulatory Lens: Don't just analyse direct competitors. Understand how incumbents (traditional banks, large corporations) solve similar problems and how they leverage or are constrained by regulation. This helps you identify blind spots or areas where systemic inefficiencies truly lie.
Regulatory Foresight: Engage with industry associations, regulatory bodies (where possible), and legal experts early. Understand the spirit of existing regulations and potential future policy directions. Instead of reacting, try to anticipate. Is the CBN's directive on local cards a one-off, or part of a broader strategy to localise financial services? Your understanding of this determines the resilience of your solution.
2. Develop a Multi-Layered Value Proposition:
Core Problem, Multiple Solutions: While your initial product might address a regulatory "hole," ensure your long-term vision extends to addressing the underlying, systemic issue from multiple angles.
Example: If your initial success came from providing dollar cards (plugging a hole), your long-term strategy could evolve to include:
Efficient local FX hedging tools: Addressing the volatility of the local currency for businesses.
Seamless international payment infrastructure for businesses: Beyond cards, enabling direct bank transfers or B2B payments that solve for speed, cost, and compliance, irrespective of retail card policies.
Financial literacy and advisory for cross-border trade: Empowering users with knowledge to navigate complex international transactions.
Build a Moat Beyond Price or Convenience: In a volatile market, price advantage can quickly erode. Focus on building network effects, strong brand loyalty, proprietary technology that is hard to replicate, or unique data insights that make your solution indispensable.
3. Stress-Test Your Business Model:
"Pre-Mortem" Exercise: Gather your team and advisors and imagine your startup has failed due to a policy change. Work backward to identify all the plausible reasons why. This helps uncover vulnerabilities you might not have considered.
Scenario-Based Financial Modelling: Create financial projections that account for various regulatory shocks. What happens to your revenue if a key policy changes? What if transaction fees are capped? What if a major competitor with government backing enters the market? This helps build financial resilience and plan for contingencies.
Maintain Lean Operations: Especially in the early stages, minimise unnecessary overhead. The ability to pivot quickly and survive lean times is critical when facing unexpected policy shifts. A "chief of staff who tends to only the CEO of a $5k MRR business" is not just fluff; it's a liability in a market that demands capital efficiency.
By adopting these frameworks, both VCs and founders can shift the focus from chasing fleeting opportunities to building robust, impactful companies that can withstand the unique challenges of the SSA market and truly contribute to solving its enduring problems.