An investor’s guide to Nigeria’s digital economy

2022 was the year of the slowdown for the African tech ecosystem.

Funding slowed down significantly in the second half, and the final total fundraising tally was only 5% higher than the 2021 figure.

Startups grappling with this reality have trimmed their employee headcount. Per data captured by layoffs.fyi and other public sources, African startups let go of approximately 1,679 staff in 2022, the highest recorded number in a single year. Even big tech firms that attempted to manage the situation in 2022 have followed suit in the first couple of weeks of 2023. The most notable is Microsoft, which announced it was letting go of 10,000 staff—about 5% of its global workforce.
 

African founders are working to slow down the speed at which they spend their capital, i.e. “burn rate”. In the same vein, investors that backed startups focusing on hypergrowth and scale are increasingly paying attention to the economic viability of their portfolio companies and those they intend to back. All these tell us that the ‘Dorime’ season that started at the twilight of COVID-19 late in 2020 is ending, and reality is beginning to set in.

As we become reminded that building a startup is hard work and much more than raising funding, one thing that requires attention is our unique market conditions.

Other countries have influenced the growth of Africa’s digital ecosystem—foreign investors and foreign-educated founders feature prominently in startups. As such, there is a tendency to import ideas and business models that have worked in these countries.

But before we do this, we need to ask ourselves if the African digital economy is the same as the markets from which we draw inspiration.

While this discussion may be considered one of those issues every player should understand, it is easy to ignore. Thus, we must emphasise it, so operators and other stakeholders have the right context when building ventures. At Stears, we have previously discussed the question of market size. This article adds to the conversation by looking at some data points that describe the digital economy, focusing on Nigeria.

Picking on a country, in this case, Nigeria, reinforces that Africa is not a single homogenous market. The other reason is that Nigeria is still one of Africa's digital economy's most attractive markets and startup ecosystems.  So the Nigerian case is a starting point for understanding the wider African ecosystem.
 

But first, caveats

This article takes a comparative approach to data analysis. We compare Nigeria to other countries using certain metrics extracted from the World Banks’ Digital Economy Framework.

However, this analysis is not meant to ‘score’ Nigeria or tell you the exact size of the digital economy but to give a snapshot in relation to other countries. The snapshot will give a sense of the current state of our digital economy and how it differs from other countries. So, the next time you hear, “oh, this idea worked in X country,” you will have the context to think about it.

The countries chosen are the United States of America (USA), India, Brazil and South Africa. The USA has arguably the most developed digital economy and is the birthplace of the current model of digital entrepreneurship, i.e. high-growth venture-backed startups. The other countries are chosen because they are all emerging markets and can be considered Nigeria’s peers.

So with that, let us jump in.
 

Not so connected

We start with internet penetration. This metric tells us the share of a population with internet access. Access to the internet is necessary for participating in the digital economy, whether consuming content, using platforms or developing digital solutions. This also matters for startups building digital solutions because consumers access these solutions through devices or platforms requiring the internet to work.

As the chart above shows, only 36% of Nigerians use the internet. This is the lowest share of the population compared to our cohort for this analysis. Internet penetration in continental peer South Africa is almost double Nigeria’s level as of 2020. However, considering Nigeria’s population, absolute figures are more than South Africa’s numbers.

Let us consider another dimension of internet access. Even when people work or reside in areas with internet coverage, their ability to pay for internet data on devices will determine whether they can connect. Fortunately, data from the Alliance for Affordable Internet (A4AI), which researches issues around this, can help us.

Using the cost of 1GB of data, which is the standard package used for measurement, we see that Nigeria does not fare so badly. After India and Brazil, its data costs are the cheapest. Cheaper internet means more people can afford mobile broadband internet on their phones. But this does not tell us the full picture; as affordability is not solely a function of price, it needs to consider income.

If I earn $50 a month in Nigeria, the data at the price shown in the chart translates to 3.5% of my income. However, if my monthly ‘take-home’ is $500, data will cost me only 0.35% of my income.

In the chart below, we can see this play out. When you compare the data prices to average income, i.e. Gross National Income (GNI) per capita, Nigeria takes the bottom spot of the five. This means that purchasing 1GB of mobile data is the most expensive in Nigeria compared to average incomes.

This picture is still faulty. Per capita GNI, as with GDP, is not an accurate measure because it can tell us the total income earned but not who earned this. it can be misleading to take this statistic wholesale, so we need to look at another statistic to complement this.

For this purpose, we can consult the Internet Poverty Index, which the World Data Lab compiles—creators of the World Poverty Clock that perennially ranks Nigeria as the poverty capital of the World. This Index measures how many people in a country and globally can afford a minimum package of mobile internet, i.e., 1GB at 10Mbps download speed. If you want to learn more about this, you can read Stears' analysis.

Luckily, this time, Nigeria is outperformed by several countries, one of which is also part of this cohort—South Africa. 47% of Nigerians are internet poor, compared to 63% in South Africa. But when we look at absolute numbers, as the chart below shows, Nigeria takes first place for the number of internet-poor people. About 103 million people are internet poor in Nigeria.

If you have been paying attention until now, you can understand the large proportion of digitally excluded Nigerians. 

We can wrap this up by looking at an important dimension of digital access: devices. Even if the internet becomes ubiquitous and cheap, if people do not have the appropriate devices, typically a smartphone, they will be unable to access the internet or be reached by startups building mobile apps.

Identifying the number of smartphone users is quite complex. You would find people typically going with mobile penetration rate, which measures the number of active telephone connections per 100 inhabitants in a population. In Nigeria, for instance, this figure is 117% implying that we have more phone connections than people. If you think this is inaccurate, it is not; recall that a person can have more than one SIM card, and all these will be counted in the data.

In this case, Newzoo, a market research and analytics firm focused on gaming, media and telecomms platforms, has captured the data.

As the chart above shows, Nigeria has the lowest share of people using smartphones among this cohort. This figure is not far from the estimate of a survey by A4AI on smartphone ownership in Nigeria—44%. Even if we use this, Nigeria still ranks lower than other countries being compared.

So in terms of access to and usage of the internet, Nigeria’s digital economy does not perform well compared to the USA’s and other major emerging economies. Before we discuss what this means, let us look at another dimension—how people pay.
 

Dependent on cash

Digital financial services are a vital pillar of the digital economy. Afterall, commerce or transactions are only possible when people can pay for goods and services, and if people cannot or do not pay digitally, then we cannot have a true ‘digital’ economy. To reiterate, digital financial services are the foundation on which digital transactions or commerce are built, and digital transactions are an indispensable component of the digital economy.

As the chart shows, Nigerians love to pay with cash for transactions. About 63% of payments made at a point of sale were done using cash, the highest among the sample countries. It is even much higher than the global average of 18% per the report. Note that this data looks at payments made at a physical point of sale, so it is understandable that cash may dominate. The chart below shows how Nigerians pay for ecommerce transactions.

It turns out that Cash on Delivery (CoD) is the second most popular payment method. At 20%, it is 2x the share of ecommerce payments settled by CoD in South Africa. This preference for cash persists when completing ecommerce transactions. This data is from 2021, and efforts by the Central Bank and Nigeria between 2022 and 2023 to create a cashless economy such as the naira redesign and withdrawal limits, may drive us closer. However, considering Nigeria’s informal sector is large, I would say we are still a ways off from this.

Now that you have seen the data, it is time to discuss what it means.

What does it mean?

One thing that stands out is that a purely digital distribution approach cannot work in Nigeria. This is particularly important for startups with a Business to Consumer (B2C) model.

Nigeria’s circa 200 million population is touted by startups as a potential market. Still, with more than 60% of the population not using the internet or using it infrequently, it is impossible to connect with them solely digitally. At the same time, the data tells us that mobile apps are not the answer, especially considering the share of Nigerians who use smartphones.

Finally, as the comparative analysis shows, the success of a digital mobile or PC platform like Netflix in the US does not automatically translate to success in the Nigerian market. As you can see, the USA has achieved what the investors at DFS labs call digital ubiquity—people being connected and living their lives online. Also, South Africa is up there with Nigeria as the top two most vibrant digital economies in Africa and performs as badly as Nigeria compared to other emerging countries. This tells us that Nigerian startups cannot escape by expanding to other markets.

But it is not all bad news. The situation means there are opportunities for innovation. Still, it will require startups to adopt a hybrid approach—using technology as an enabler to improve the efficiency of physical processes and reach more people. We have already seen this in using agent networks to distribute digital financial services, off-grid energy and agricultural technology. 

But achieving this will require innovation, paying attention to market realities and patience on the part of founders and their investors.