Godwin Emefiele is the man for the job

As startup funding slows down, investors will make a flight to quality

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A slowdown in the startup world

The second quarter of 2022 kicked off with predictions of a bear market. After almost two years of a global bull market that saw tech stocks hit all-time highs, many people had a sneaky feeling that a correction was coming. But if there’s anything we’ve learned, an unsustainable situation can last a lot longer than you might envisage. 

In 2021, VC funds were up to their necks in cash and couldn’t sign cheques fast enough; Tiger Global, for instance, funded more than 60 companies in the first quarter of 2021. And in the early months of 2022, there were no signs of a slowdown. Today, all of the signs point to the inevitability of a bear market. 

VC funds are advising their portfolio companies to be super conservative with cash and public companies are not left out of the shocks. Q1 Earnings reports for Netflix, Amazon and Lyft have been disappointing. Tiger Global, one of the most bullish VC firms around, has signalled a pullback from big private tech deals.

Layoffs and hiring freezes are now the order of the day as startups try to extend their runway and correct the overhiring a few were guilty of in the last two years. Amazon, for instance, admitted in its Q1 earnings report that it was overstaffed. While it is unlikely that Amazon will resort to layoffs, companies like Robinhood, Better.com and Cameo have collectively laid off over 1,000 people. 

Are these layoffs predictive of what could happen in the Nigerian tech ecosystem? Chijioke Dozie, the CEO of Carbon, thinks that it’s unlikely we see layoffs right away. He told me, “I think we are a few cycles away from seeing layoffs in any real way. For the early-stage startups that have been funded, they have enough cash reserves. They will be fine. However, what you might see is a reduction in Startups spending indiscriminately to achieve growth because they are unsure of the funding environment.”

Chijioke’s stance is simple and sensible and is pinned on the importance of business fundamentals. Startups with the right business model will win in the long run in our markets as we don't have unlimited capital.

Adedeji Olowe, the founder of Lendsqr shares this view. For him, the present conversations about layoffs aren’t surprising. Instead, he sees today’s reality as part of a boom and bust cycle.  In the last couple of years, we’ve been in a cycle where VCs have been pumping cash into startups, hoping for early exits. With so much cash in play, VCs have made investments in some startups with poor business fundamentals. TL;DR: Some good money has been chasing quite a few bad ideas. 

According to Adedeji Olowe, “A correction happens once the economic fundamentals start misbehaving, and the capital that was once readily available is moved to safer assets like Treasury and other gilt-edge investments. With not as much money to play with, VCs get jittery. They then ask their portfolio companies to sit up. But companies that are undisciplined or with bad fundamentals struggle and die slowly or suddenly.”

“What will likely happen next is another 2 – 3 years of belt-tightening. The disciplined shops or those with good fundamentals survive and become the next behemoths. Good exits happen. LPs come rushing back because the return on the VC investments would be better than the solid, safe but poor return on Treasury Bills. This starts another cycle with excessive cash that causes the same misbehaviour. Rinse. Repeat.”

What do Nigeria-based VCs think? Olumide Soyombo, who was first famous for angel investing in over 20 startups before starting his own VC fund, believes that the market frothiness will also affect Nigerian startups. “Although there’s a bit of a lag before the Nigerian market feels it, it will affect everyone.”

Yet, for him, the upside is that the present situation will see early-stage startups receive more attention than ever before. “Early-stage ventures can be backed locally, you can raise $300k from a local player today.” But it’s not all sunshine and roses for these early-stage startups because they will now need to focus on product-market fit and positive unit economics earlier than before. 

While Soyombo’s Voltron Capital is still focusing on early-stage startups, others like Ventures Capital and Ingressive are reportedly refining their investment thesis. Their new thinking is to back startups early and back them again in later stages. Say you backed Paystack pre-YC, and went on to back them in later stages, your return profile will be different from a fund that only participated in an early funding round. So this model of backing early and again could provide super returns for instance.

In the end, for Soyombo, it comes down to fundamentals. “Some of the fundamentals will come back to the forefront; there’s no more room for “I’ll turn on revenue later.” Yet he admits that even with solid unit economics, startups may see some reluctance when they try to raise their next round because of market realities.  

“In some downturns like this, some interesting companies get built and some serious thinking gets done. For investors, there’s a flight to quality; they look for the quality guys who can take advantage of the market.”

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And there we have it, with Nigeria on the brink, governance is pretty much over until 2023. Five ministers in the Buhari administration and the Vice President have now thrown their hats in the ring in the hopes of becoming Nigeria’s next President. What’s a little matter of the fact that these ministers should have resigned? After all, these little legalities should not stand in the way of saving Nigeria.

It’s tempting to continue with sarcasm here, but Nigeria and Nigerian politics is where sarcasm comes to die. For months, we’ve joked about Godwin Emefiele, Nigeria’s Central Bank Governor, running for President. It was easy to swat these reports away because there was no way there could be any truth to it right?

Oh well, that’s where we’re wrong. Prime Business broke the news today that Godwin Emefiele has picked up the Presidential nomination form of the All Progressives Congress (APC). This is the same Emefiele about whom Global Finance wrote: “In many aspects, the volatility of the Naira is synonymous with the reign of Emefiele, which since 2014 has been characterized by rising inflation and tremors in the banking industry.”

The same Emefiele under whose leadership, the CBN has become more opaque and was even caught on tape discussing a N500 billion cover up at the apex bank. His time as CBN governor has been characterised by rising inflation, unconstitutional loans to the FG through Ways and Means Advances, and the pursuit of agricultural policies that have worsened food inflation.

It’s difficult to understand how we got here. One minute, we were pretty sure that Emefiele’s disastrous time as CBN governor would mean a silent exit from the CBN at the end of his tenure. Today, we’re talking about the same man effectively running for the office of the President of Nigeria without even resigning from what should be a nonpartisan position.

So there we have it people; I can’t even bother with sarcasm anymore. We might as well go on with this absurdity and say—nay, insist— that Godwin Emefiele is the best man for the job. As one APC bigwig once tweeted; “Ipade di primaries!” (Please do well to ask your Yoruba friends for a translation!

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Edited by: Alexander Onukwue

See you on Sunday!