Are African Startups Overvalued?

It is an incredibly exciting time to be in Nigeria’s technology startup ecosystem.

Despite widespread economic malaise, Nigeria’s Telecommunications and Information Services, the best proxy for the growth of tech-powered companies in the country, has grown by 57% since 2017, compared to overall national GDP growth of 6%. In effect, the sector has grown ten times faster than the wider economy in the last half-decade.

Yet that’s not the most impressive statistic.

In 2021, Nigeria’s startups raised $1.8 billion in venture capital (VC) funding, more than Kenya and South Africa combined ($1.4 billion). And the money keeps rolling in. In the first quarter of 2022, Nigerian startups raised $600 million, nearly double the amount raised in the whole of 2020 and 80% of the 2019 value. In fact, 2019 is the only year where Nigerian startups raised more than $600 million—the value they have raised so far in 2022.

Everyone is excited. Well, not everyone.

In the last six months, especially as many technology stocks in global public markets have tanked and Nigeria’s domestic economy continues to stall, questions have been raised about Nigeria’s tech ecosystem. Questions not about the growth or impact of startups, but about their valuations. In a hyper-positive ecosystem, it remains a fringe idea, but a few people—mainly ecosystem veterans and investors—are beginning to ask: are Nigerian startups currently overvalued?

These worries are primarily driven by notable growth in the average deal size, especially for early-stage startups. Few people (until recently, at least) query valuations for Flutterwave, Andela, and co, but eyebrows are sometimes raised when an unknown fintech raises a $1.5 million pre-seed round. Five years ago, pre-seed deals would rarely exceed $100,000.

The trend in average deal sizes provides some empirical support to this anecdotal view of deal size inflation. Looking at Partech Africa data on the continent, the average seed deal increased from $1 million in 2018 to $1.2 million in 2021, and the average Series A deal more than doubled from $4 million in 2018 to $8.8 million in 2021.

The valuation conversation is one worth having, if only because it benefits no one in the long run if founders and investors alike buried their heads in the sand. Furthermore, grappling with the issue should help adjacent ecosystem stakeholders like regulators and employees better understand the dynamics of market sizing and the underlying philosophy of startups.

But to properly answer the question, “Are Nigerian startups overvalued?” we need a better understanding of the type of answer that is possible and why the answer is important to the ecosystem.

We tackle both here...