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A tale of 7 Startups that have failed in Nigeria

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In Nigeria’s technology and startup community lies several dead ideas and concepts— from the ones that failed to take off fully to the ones that could not scale and innovate soon enough to stay ahead of new trends.

Studies from the United Nations Industrial Development Organization’s Investment and Technology Promotion Office in Nigeria show that only 20% of SMEs manage to survive in Nigeria.

“Although everybody in Nigeria desires to become an entrepreneur, only 40% of the dreamers get to start, but no more than 20% survive.”

In just one week, several media platforms are already awash with stories of failed startups. No doubt, startups in Nigeria have to fight against so many harsh economic factors that one would be right to conclude that the business climate is conducive for failure. Some of these factors were highlighted in the 2016 World Bank Enterprise survey, which surveyed over 2000 Nigerian small businesses and outlined the biggest obstacles to doing business in Nigeria.

Here are some startups that have bitten the dust in recent times.

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GoMyWay

Less than 2 years into its operations, the ridesharing platform announced in September 2017, that it would be shutting down.  Citing lack of resources to run the business, the shareholders/Investors came to a conclusion to shut down operations.

Perhaps, the biggest reason GoMyWay could not monetise its platform is the fact that some of the users tried to circumvent it. This is same for most platforms; once the users on the 2 sides have contact, there is an incentive to always take transactions off the platform.  Both parties would just reach a private agreement on time and place of pick-up every day. The platform was thus reduced to a place for an introduction.

Efritin.com

The classified ads platform also recently announced that it was shutting down its operations. Nils Hammar, Saltside Technologies founder and CEO, revealed that it was because the platform didn’t generate desired returns on investment (ROI); hence, the decision to scale back on its investments in Nigeria.  He also noted the high cost of data and internet use as a major hindrance to the business.

In addition to Hammer’s points, there is the age-long problem of the high cost of doing business in the country. The platform eventually bit the dust in October 2017, barely 16 months into its operations.

Showroom.ng

The platform came on board with the aim of making millionaires of up to 100,000 Nigerian carpenters and try it did. The showroom platform for carpenters to display their works and get connected to customers also shut down business. After 12 years of hustling, CEO, Sheriff Shittu, announced in 2016 that it was closing up shop.

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The inability to scale on its operations dealt a big blow to this promising platform.

Easy taxi

Easy taxi was one of the first Rocket Internet hordes to launch in Africa in 2013.The platform which began operations in Brazil connects taxi drivers and passengers; it has over 1.5million app downloads and 45,000 taxi drivers on its platform. Despite an additional funding of over $10million from Rocket International for its expansion into Asia and Africa, the news of its exit from the African market came as a surprise to many.

The co-founder on the Nigerian side, Bankole Cardoso, stepped down in April 2016 and the business packed up. Reports had it that the startup was looking to focus on its Latin America market.

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Konga

Konga made entry into the Nigerian market in 2012 and was one of the biggest e-commerce players in the country. 2 months after laying off over 60% of its workforce, the embattled e-commerce platform last week announced that it had been acquired by Zinox, a local tech firm which manufactures and distributes computers and manages data center infrastructure. This sees Zinox take over Konga’s assets including its online mall.

The cash-for-equity deal was reportedly higher than the $10 million price that has been widely reported. Zinox will buy out ownership stakes from Naspers and Kinnevik who are major investors in the e-commerce platform.

Camplus

The startup, whose mission was to connect students and student entrepreneurs across Africa through e-commerce, was founded by David Edet in 2016. It had a promising start and made more than N4 million in sales revenue in just a month after launch.

According to David, the downfall of Camplus was imminent as “the recession prices and the high cost of running the business in Nigeria was such a hard blow.”

Olx

This classified ads platform also announced that it was shutting down its operations in Nigeria and other African countries last week, barely 3 years after entry into the Nigerian market. Naspers, former major shareholders of Konga which it divested to Zinox Technologies recently, said it has made a decision to consolidate its business operations in Nigeria.

According to Naspers CEO, Bob Van Dijk, Naspers plans to accelerate the “path to profitability” of its e-commerce businesses and sees a potential for initial public offerings of companies in its portfolio.

Major reasons why these startups fail

Lack of market need

If there’s no need or demand for the products and services you are providing, then your startup won’t be around for long.  In fact, most startups fail due to lack of market demand. It is necessary that the startup is centred on satisfying particular needs that people have in order to ensure that the offering has an existent market.

Mismanagement of Funds

Mismanagement of funds for startups ranges from mixing personal and business funds, to giving too much credit to customers based on sentiments. The more debt a business has, the higher the risk of it folding up.

Poor customer service

Poor customer service is the easiest way to lose customers. Professionalism and customer service etiquette must not be compromised for anything. Treat the customers well and they will be willing to come back and also refer the platform to others.

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Fikayo has a degree in computer science with economics from Obafemi Awolowo University. ITIL v3 in IT service management. An alumnus of Daystar Leadership Academy. Prior to joining Nairametrics had stinct in Project management, Telecommunications among others. Also training in Consulting and Investment banking from Edubridge Academy. He has very keen interest in Politics, Agri-business, private equity and global economics. He loves travelling and watching football. You can contact him via [email protected]

1 Comment

1 Comment

  1. ClientsAttraction

    November 2, 2018 at 9:00 pm

    I noticed that all the companies have one thing in common. Lack of consistent revenue and ofcourse profit. Those of us in marketing always say, profit is king.

    Let’s face it, no single business can survive without consistent revenue inflow. It doesnt matter where the company is located and the more businesses learn how to drive more revenue than focus on vanity metrics, the better for startups.

    I see alot of businesses focus on ’empty’ metrics instead of focusing on the most important thing-revenue.

    A client of ours (before we took them on) spent over 40 million naira on their business setup but were only willing to spend less than 500K on marketing.

    When it became clear to them that the business was about going under, they ran to us for help. Revenue is the main thing. Profit is key.

    Johnson Emmanuel

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Julius Berger’s rebound contingent on full economic bounce back

Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions.

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Expatriates

Due to the COVID-19 pandemic as well as the economic impact of the measures put in place to slow the spread of it, many industries have experienced slower growth. The construction industry was not left out. According to reports by GlobalData, the construction output growth forecast for Sub-Saharan Africa (SSA) has been revised to 2.3%, down from the previous projection of 3.3% (as of mid-April) and 6.0% in the pre-COVID-19 case (Q4 2019 update).

The reason for the contraction was noted by GlobalData to be as a result of the global slowdown and the outbreak of COVID-19 in the region. Other factors responsible include economic headwinds such as inflation, spending cuts, widening fiscal slippages, suspension of certain projects and more that could disrupt the construction sector. This contraction is projected to be 4.3% in South and Southeast Asia while France is expected to shrink by 9.4% in 2020.

Leading Construction Company, Julius Berger, had foreseen the contraction in the industry and commenced efforts to mitigate its impact and cushion the blow. One of such efforts was the reduction in dividend pay-out. After initially announcing a dividend pay-out of N2.75K per 50K share for the financial year ended December 31, 2019 and a bonus of 1 (one) new share for every existing 5 (five) shares held, the company eventually recommended a final cash dividend pay-out of N2.00K per 50k share.

READ ALSO: Lafarge Africa is cutting it all out

It noted that the Group had “carefully considered the emerging social, operational, financial and economic impact of the COVID 19 pandemic, the outlook for Nigeria for the financial year 2020, and the impact on the business and cash flows of the Group.”

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The company’s fears have been confirmed by its recent financials which, among other negatives, showed huge foreign exchange losses of N3.102 billion in the first half of 2020.

Q2 was the hardest

Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions. With companies and nations alike revising scheduled capital expenses as a result of the shrinkages in product demand (owing to global quarantine measures), uncertainties around supply logistics as well as supply of materials, the company had gotten hit. Q1 had its own issues, but Q2 birthed a new dimension of challenges for the company.

Revenue was down 33% from N68.9 billion in Q2 2019 to N46.1 billion in 2020. There was also a huge loss in profit after tax of around 200% from a profit of N2.3 billion in Q2 2019 to a loss of N2.3 billion and this can be attributed to lower revenue, and increased losses from the company’s many investments.

Exchange difference on translation of foreign operations for the quarter alone increased by 227% to N1.4 billion in Q2 2020 from N438.5 million in the comparative quarter.

READ ALSO: Petrol importation drops by 512 million litres in 3 months

Outlook for the company and for investors

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The disruptions the construction industry is currently experiencing is expected to continue for the medium-long term. Reports by Beroe Inc., a procurement intelligence firm, reveal major concerns that companies in the industry will witness profits being hurt and may even incur losses on a number of projects.

Companies having worldwide supply chains could see tier 2 and tier 3 suppliers highly affected by disruptions related to the pandemic. Worse off, it explains that construction materials like “steel, wood, plaster, aluminum, glazed partition systems, cement and cementitious products, paints, HVAC equipment, electrical equipment, and light fixtures from China are expected to be delayed.”

For the company, cost-cutting has never been more important. While there are a series of strategies it could explore to augment the challenges, its growth right now depends largely on the speed of global economic recovery. This is because both the company’s input needs as well as its output in terms of the recommencement of projects, depends on the speed with which business as usual commences and the amount of time it takes for the industry to find a new balance for its operations.

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READ MORE: The “new normal” in business and economy

For investors, however, this presents a long term opportunity. Julius Berger currently trades at N15.05, falling 44.26% just within the last 3 months. The share price is also on the downside of its 52-week range (N14.42 and 22.92) and its price-to-book ratio of 0.6331 shows that the stock is undervalued.

While the company’s EPS is currently low at N2.52, investors who are willing to wait the time could find a gem in the stock particularly with the increased infrastructural needs born out of the population expansion which is taking place in many parts of the world in the years to come.

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Total Nigeria caught in the oil demand and lockdown saga

In Q1 2020, the company had recorded a revenue drop of 9.3% to N70.2 billion compared to Q1 2019.

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Total Nigeria caught in the oil demand and lockdown saga

The year 2020 was supposed to be a good one for the global oil and gas industry. Save for the unprecedented fangs of the Covid-19 pandemic, the IEA had forecasted in February that the global oil demand would grow by 825,000 barrels a day in 2020. On the contrary, lockdown measures restraining travel and other economic activities to contain the pandemic in many parts of the world had global oil demand down around 90,000 barrels a day from 2019. While the upstream sector had a direct hit owing to this reduced demand, the impact of the pandemic on the downstream oil industry caused the price of crude oil to fall significantly in a short period of time. GlobalData had forecasted that the energy sector would face downward earnings revisions of 208% in 2020.

READ MORE: Analysis: Total Nigeria needs a financial overhaul

With the pandemic leading to a slowdown in a wide range of business and personal travel, even gasoline demand had reduced and this has led to inventory challenges in both the distribution network as well as the refineries. In Nigeria, following the challenges of the pandemic, the federal government deregulated the downstream sector of the oil industry through the removal of fuel subsidy. While it presents a level playing field for the downstream oil private sector, it didn’t take long before companies like Total Nigeria plc. started caving into the overall reduction in inventory from the reduced demand for oil products in Q2 2020. Consequently, the company witnessed a 45% reduction in inventories from N33.6 billion as at 31st December 2019 to N18.5 at the end of Q2 2020.

READ ALSO: Nigeria’s Foreign Trade hits N9.18 trillion in Q3, as non-oil export rose by 374.5%

How the exogenous shocks affected an already ailing Total Nigeria

The success or failure of any organization depends on both the macroeconomic environment as well as the operations of the company itself. For Total Nigeria, the timing for the crisis had been off as it too had operational challenges to deal with. In Q1 2020, the company had recorded a revenue drop of 9.3% to N70.2 billion compared to Q1 2019. While the headwinds of the pandemic might have played a small role in the decline at least in the latter part of the quarter, the loss after tax of N163 million it had recorded was 65.6% better than the loss after tax of the  comparative quarter – a testament of the series of operational challenges it had from huge loans to raging expenses. While the company had set off on a strategic trajectory deploying a series of initiatives around cost efficiency, process optimization, as well as a significant reduction of working capital requirement and finance costs, Q2 had its own troubles waiting.

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Restrictions in the oil market had led to weaknesses across product lines. Total revenue fell by as much as 50% from N73 billion in Q2 2019 to N36.5 billion in Q2 2020. Revenues from petroleum products had contracted by 55.7% while lubricant sales also fell by 26.7% in the quarter. Across the company’s core business sectors comprising Networks, General Trade, and Aviation, revenue from aviation experienced the most decline, falling by 83.0%. Its performance can be predominantly attributed to the fall in demand owing to strict lockdown measures even in major Nigerian cities.

READ MORE: Five oil majors reduce value of their assets by $50 billion in Q2

Outlook

The outcome of the company’s internal and external challenges is a loss after tax of N373.9 million from N604 million in Q2 2019 – an alarming drop of 161.9%. However, its strategic intent is also visible. Net cash balance was a negative N19.6 billion at the end of the quarter, compared to negative N41.8 billion a year ago. Finance costs also declined by 76.1% to N830.3 million as the company sought to reduce its leverage position. In the same vein, borrowings came at N31.0 billion in Q2 2020 as opposed to the N39.9 billion in Q2 2019. Yet, the success of the company in the immediate future is somewhat bleak.

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This is because of the conditions of the oil market and overall economic landscape which is set to take a few years before returning to the norm as well as the financial and operational position of the company. That said, its earnings per share (EPS) of N4.37 and its price-to-earnings ratio of 18.12, reveal that the company has a good potential to make a rebound. However, it could take a few years. Hence, investors must be willing to wait for the long term. With its share price of N79.10 at the far bottom of its 52-week range of N78 and N129.50, it’s a great time to purchase its shares if you are willing to wait the long term.

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Implications of CBN’s latest devaluation and FX unification

This move portends significant implications for Nigeria’s public and private sector.

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Implications of CBN's latest devaluation and FX unification, current account deficit, IMF, COVID-19, CBN OMO ban could give stocks a much-needed boost , CBN’s N132.56 billion T-bills auction records oversubscription by 327% , Nigeria pays $1.09 billion to service external debt in 9 months , Implications of the new CBN stance on treasury bill sale to individuals, Digital technology and blockchain altering conventional banking models - Emefiele  , Increasing food prices might erase chances of CBN cutting interest rate   , Customer complaint against excess/unauthorized charges hits 1, 612 - CBN , CBN moves to reduce cassava derivatives import worth $600 million  , Invest in infrastructural development - CBN Governor admonishes investors , Credit to government declines, as Credit to private sector hits N25.8 trillion, CBN sets N10 billion minimum capital for Mortgage firms, CBN sets N10 billion minimum capital for Mortgage firms , Why you should be worried about the latest drop in external reserves, CBN, Alert: CBN issues N847.4 billion treasury bills for Q1 2020 , PMI: Nigeria’s manufacturing sector gains momentum in November, CBN warns high foreign credits could collapse Nigeria’s economy, predicts high poverty, MPC Member, BVN, Fitch, Foreign excchange (Forex), Overnight rates crash after CBN’s N1.4 trillion deduction, Nigeria’s foreign reserves hit $36.57 billion; Emefiele keeps his word on defending the naira, CBN to support maize farmers, projects 12.5 million metric tons in 18 months

The CBN devalued the naira by 5% at the end of last week, adjusting the official exchange rate to N380/$1  in a major move aimed at unifying the multiple exchange rate windows.

Whilst no official confirmation was issued by the apex bank, its website displayed the buying rate of N379/$1 and selling rate of N380/$1. Nigeria is clearly in a new exchange rate territory.

This move portends significant implications for Nigeria’s public and private sectors. Since March when the CBN last depreciated from N307/$1 to N360/$1, there have been calls for further depreciation to at least close the gap between the official CBN rate and the more market-friendly NAFEX exchange rate. The NAFEX rate has traded between N385-390 in recent weeks.

READ MORE: Manufacturing sector in Nigeria and the reality of a “new normal”

Government Finances

For the federal government, devaluing the naira solves two major issues:

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  • Firstly, it increases the amount available to share from the Federal Allocation (FAAC) between the FG and States.
  • Oil proceeds, which is a major source of revenue sharing for the government is deposited at the CBN and then converted to naira using the official exchange rate of N360/$1. The CBN’s latest devaluation suggests more money for the government as the conversion rate is now N379/$1.
  • Government taxes that are priced in forex but converted to naira also stand to gain a major earnings boost.
  • Custom duties, petroleum profit taxes, and other charges will now be converted at an exchange rate of N379/$1 or whatever new rate the CBN chooses, assuming it will work within the NAFEX band.
  • A second issue the solves is the condition precedent towards obtaining a $3 billion world bank loan. The government applied for a world bank loan as part of its N2.3 trillion stimulus expected to be injected into the economy.
  • It is understood that a unification of the exchange rate is critical to the disbursement of the loan.

Whilst these are positives, the government will record cost escalations for some if not all of its capital projects and expenditure. From vehicle purchases to furniture and fittings we should expect a spike except the contracts are fixed-priced.

READ ALSO: Explained: CBN’s powers to seize bank account of criminals

Private Sector

The impact of the latest devaluation will also be significant for the private sector.

  • While the private sector has recorded its own devaluation via the NAFEX and more recently the SMIS window, the impact of the CBN’s latest move will still be felt.
  • Most private pubic partnership projects, contracts are priced using the CBN official exchange rate. The price will now change to N379/$1 at the least.
  • The latest move could also lead to a reopening of forex sale to BDC’s which the CBN suspended in March as the Covid-19 pandemic ensued.
  • Sectors such as Power, Downstream Oil and Gas where the government has control over pricing will be significantly affected by the new price.
  • An example if fuel prices. With the exchange rate devalued again, fuel prices might increase if the impact of the exchange rate is reflected in the pricing template.

READ MORE: Expert simplifies FIRS’ newly-introduced stamp duty

NAFEX versus Official Rate

It is not clear how the latest round of devaluation affects the NAFEX rate and other separate rates currently in use by the CBN. Whilst the disparity has been closed somewhat, we still do not know if these windows will be retained or if we will just have two major exchange rate windows, the BDC and the NAFEX.

Most critics of the CBN’s forex policy prefer a uniform exchange rate that is floating or under a managed float system. The difference is that the CBN intervenes occasionally to ensure the exchange rate trades within its preferred band. It does this even if it means burning through its thin reserves.

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We expect a string of circulars in the coming days which will perhaps douse some of the confusion providing needed clarity to the exchange rate situation.

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