Nigeria’s startup culture has made it an African tech giant over the last decade. Year after year, it has been the top destination for startup funding in Africa. But this year is different. In the first half of 2023, it ranked fifth for funding volume, behind Kenya, Egypt, South Africa and Rwanda. It’s the first time the largest economy will get the fifth-largest slice of the pie.

According to Briter Bridges’ H1 Africa Investment Report 2023, Nigeria closed more deals (101) than any other country but didn’t raise as much volume as its peers. Kenya secured the top spot in 80 deals, while South Africa had 60. Ghana (35) and Egypt (15) were next in line.

But this funding slump doesn’t mean that Nigeria’s tech sector is becoming stagnant or any less potent. On the contrary, Nigeria’s tech sector is becoming a stronger support for its economy. According to the new Gross Domestic Product (GDP) report by the National Bureau of Statistics (NBS), Nigeria’s Information and Communication Technology (ICT) sector saw its highest growth in three years (8.6%). The sector contributed 19.54% to Nigeria’s GDP in the second quarter of 2023. Also, Nigeria’s tech ecosystem is, to a large extent, optimistic about its new Minister of Communications, Innovation, and the Digital Economy. There is plenty of hope that Bosun Tijani’s appointment will help speed up growth. Why then did the decline happen?

Notably, Nigeria is not the only country facing challenges with funding. Data from Briter Bridges shows that African startups raised $1 billion in H1 2023, much less than the $1.8 billion they raised in H1 2023 and $1.5 billion in H2 2022. “The volume of funding dropped by 26% from H2 2022 to H1 2023 and has largely been on a downward trend in 2023. The effect is that investors were shifting focus from growth-stage startups to late and early-stage ones,” the report reads. Many startups have had to shut down, while many funds have struggled to meet their target closures. Some startups, such as Chipper Cash, have also undergone massive valuation cuts this year, while others have trimmed their workforce. A few have even turned to crowdfunding as an alternative for raising equity.

One possible explanation for Nigeria’s drop in ranking is that there is more caution in the funding market. Nigeria’s currency has been on a downward spiral against the dollar, the currency in which most startups raise funding from VCs. And since most startups will receive revenue in naira, it’s difficult to report their financials in dollars. This risk heightened in June when the CBN loosened its control of the foreign exchange rates. Even Nigeria’s biggest firms were hit by this policy.

Also, it’s the first time in years that a big round is not coming from Nigeria. Startups like Flutterwave accounted for large portions of Nigeria’s funding volumes in 2021 and 2022. But that’s not the case this year.

Another possible reason is the rise in “unspecified” rounds. More startups have been announcing funding rounds without disclosing how much they raised. “This trend points to a climate where startups are dealing with the intricacies of securing capital, and a substantial majority of these unspecified deals potentially represent bridge financing aimed at sustaining operations amid these challenges,” the report reads. “This suggests that there may still be more pain to come in the following years for startups that cannot access bridge rounds of down rounds from existing investors.”

Nonetheless, African startups reached a milestone in H1 2023. Funding volumes have now crossed the $20 billion mark over the last 15 years. “This is indeed a landmark, but it comes at a time when many in the investment and innovation ecosystem are asking what the future of investing in Africa looks like.”

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